2 quality companies in the aged care sector

Credit: GotCredit

Aged care is a sector hated by many investors currently.

The dramas surrounding Estia Health Ltd (ASX: EHE), Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) has seen their share prices tumble 64%, 41% and 31% respectively so far this year.

The main impact is cuts to the Aged Care Funding Instrument (ACFI) – with the government concerned that funding to the sector is not leading to the right outcomes. In other words, better care for our elderly, more places and a host of other benefits.

We’ve written about this before, but it seems the incentives to provide aged care have been abused by some – not unlike the incentives provided to the vocational education sector, and to other parts of the economy where the government provides funding including pathology, diagnostic imaging and general healthcare.

But there are two companies providing products and services for older Australians that could be worthy of adding to your watchlist.

Eureka Group Holdings Ltd (ASX: EGH)

Eureka provides low-cost rental accommodation and services to retirees who are reliant on the government pension and rent assistance. The company owns 25 retirement villages with 34 villages under management and has partnered with not-for-profit company Blue Care to offer in-home care packages to residents. Eureka is growing primarily through acquisition and expects to add 8-12 villages in the next 12 months. Potential investors need to be aware that Eureka has substantial forward tax losses, which means current profits are inflated by not having to pay any tax.

Lifestyle Communities Limited (ASX: LIC)

Lifestyle Communities operates slightly differently, offering working, semi-retired and retired people over the age of 50 accommodation. Residents in the company’s 11 villages own their own home and lease the land from the company. Lifestyle currently has 2,445 home sites under management or development across 13 sites – with 6 sold out, 4 under construction and another 3 in development. The company has a strong pipeline of homes for sale and yet to be settled and expects “a material increase in profit in FY2017”, after reporting a net profit of $20.6 million in FY2016. At the current share price of $3.94, Lifestyle is trading on a trailing P/E of 19.9x, but may be worthy of further research.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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