A former CEO of a building-materials company once told me he did the “crane test” on his way into the Melbourne CBD each day. Lots of cranes on the skyline meant lots of property construction and building-materials demand. And a happy CEO on the way to work.
I find myself doing the same with retirement villages. By my count, at least five will be constructed in my suburb and surrounding ones in the next 18 months. A few have opened and some are more like massive apartment blocks than small villages.
Basing investment decisions on anecdotes is, of course, dangerous. But all this media talk about the growing ageing population is unfolding before our eyes. Industries that are leveraged to the ageing population have an incredible tailwind.
There will be a 4.3 million Australians aged 65-84 by 2024-25, or another 1.2 million on today’s figures, predicts the Federal Government’s 2015 Intergenerational Report. An extra 100,000 people aged 85 or over are expected within a decade.
Think about that forecast: another 1.2 million people will be in, or hopefully heading towards, full- or semi-retirement. In time, they will think about a retirement village, in-home care, or aged-care accommodation – and it will all happen within a decade.
There will be 7 million
Yes, Treasury’s recent forecasting record does not inspire confidence. But with more medical breakthroughs likely, the risks on longevity are to the upside as people live longer. It’s no surprise that retirement village operators are racing to build facilities.
Investment megatrends, by their nature, are well known in markets. Still, investors often underestimate their strength or duration and their effect on companies that are in a sweet spot. Look at the boom in inbound Asian tourism – a trend this column has reported on for years. Stocks exposed to growth in Chinese tourism are flying.
The challenge with megatrends is buying stocks at an appropriate price. The market often gets ahead of itself in the early part of the trend with crazy valuations, loses interest, and then plays catch-up as the trend reasserts itself. Tech stocks are an example.
Regis and Japara worth watching
Residential aged-care operators Regis Healthcare and Japara Healthcare look more interesting after share-price falls.
Regis listed on ASX in October 2014 through a $485 million Initial Public Offering (IPO). Its $3.65 issued shares rallied to $6.52 last year, before retreating to $5.18.
Chart 1: Regis Healthcare
Regis reported a 12 per cent gain in revenue to $236.6 million in the first half of FY16, and a 15 per cent rise in after-tax net profit to $28.3 million – a result that beat market expectations and was a good effort overall. Its second-half earnings guidance was also ahead of the consensus.
Regis now has 47 facilities and 6,012 places for aged-care residents. Two projects in its pipeline will contribute another 102 places and Regis says it “continues to be active in positioning itself for substantial growth from greenfield developments”. Its property development pipeline has expanded by 35 per cent to another 1,273 aged-care places.
Regis has no net debt and plenty of scope to acquire aged-care operators or quicken its development program as demand for aged care increases. The balance sheet is impressive given Regis spent $75 million in the first half on capital expenditure and paid out all of its cash earnings as a dividends. It is always a good sign when companies are funding growth through surplus cash flow rather than borrowing or issuing equity.
Five of 10 brokers that cover Regis have a buy recommendation and five a hold. A median price target of $5.85 suggests the company is undervalued at the current price. I favour The Bull’s view on Regis: it is doing everything right to capitalise on the aged-care opportunity.
Japara on track
Japara Healthcare also has long-term appeal at the current price. It raised $450 million through an IPO in April 2014. Its $2 issued shares hit a 52-week high of $3.45 last year but have since retreated to $3.11.
Chart 2: Japara Healthcare
Source: The Bull
Like Regis, Japara is superbly leveraged to the ageing population through its retirement facilities. It reported a 2.5 per cent increase in first-half FY16 profit to $16.2 million – slightly ahead of the consensus forecast. Also, like Regis, Japara is well run and its earnings result had few surprises: its operational performance is on track.
Eight of 11 brokers who cover Japara have a buy recommendation, two have a hold and one has a sell. A median share-price target of $3.30 suggests the company is almost fully valued. Japara can do better than the market expects in the next few years given organic growth in aged-care property demand and an increasing contribution from its development pipeline.
Japara is not cheap: the forecast Price Earnings (PE) multiple is 22 times, consensus analyst estimates show. But it deserves a valuation premium given its growth outlook and exposure to one of the great long-term trends: rising demand for aged-care facilities.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 3, 2016.