As investors, we are often required to make calls about how certain industry dynamics or market factors will play out. For example, investors in the early 2000’s were faced with early stage e-commerce companies, and had to make an informed guess about whether people would be willing to transact for goods and service on the internet.
But sometimes, the amount of unknown factors are far fewer. And investing decisions when these unknowns are fewer are much simpler. Fact: the proportion of people in retirement relative to the rest of the population will grow substantially over the next decade.
The Australian Government forecasts the number of retirees in the country is expected to grow to 4.3 million. That is almost 40% more than current numbers.
Aged care operators are among the most stable way to get exposure to this generational change, and the three on this list are strongly positioned.
Aveo Group (ASX: AOG) flies under the radar as it is not a “pure play” retirement accommodation provider. However, management has signalled that the retirement business will receive increasing focus going forward.
This was demonstrated by the major purchase of Freedom Aged Care. The purchase adds over 1,000 units in 15 locations Australia-wide to the Aveo portfolio. In addition, the acquisition, along with other business realignments, allows Aveo to sell more value-added services such as care and support services for residents in its facilities. Broker forecasts for the full year are around $75 million profit, and the share price has proved volatile over the last year.
Regis Healthcare Ltd (ASX: REG) is more well known among those who follow aged care stocks, as it has been a strong performer since its IPO. Its recent half year results did little to hurt its reputation, with earnings growing 15% on a revenue rise of 12%.
The company has over 6,000 beds spread across 47 locations. The company has an ongoing process of expanding its portfolio of beds in a capital-light manner, by making better use of existing space in its facilities.
Importantly, the company has no debt on its balance sheet, which means it can commit to large greenfield spending on brand new facilities if it chooses to. Some commentators might argue that having no debt in a low-interest rate environment means the company has a “lazy” balance sheet that is not taking advantage of growth opportunities.
Japara Healthcare Ltd (ASX: JHC) has had a more volatile existence in its short time as a publically traded company, trading below its IPO price, before recovering strongly in recent times.
Its recent results revealed a rise in first half profit of 10.2%. Like Regis, Japara has also been acquisitive, having outlaid almost $80 million on expanding its capacity by 587 beds in Queensland and New South Wales. This purchase allowed the company to affirm its full year outlook.
In total, Japara has just under 4,500 beds located in 43 properties. Japara also has a strong geographical concentration, with a high proportion of properties in Victoria. However, this concentration might also represent a risk, as a more diversified portfolio of property assets is generally more desirable to smooth out headwinds that might affect a particular part of the portfolio.
The compulsory superannuation system was established, in large part, to help fund retirement costs, and one of the most substantial costs in retirement is care and accommodation. Companies like the three in the list above are strongly leveraged to this need. Of the three, Regis looks to have the most flexibility to scale up its operations quickly, largely due to its conservative balance sheet, and the discipline showed to date by management in allocating capital.
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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.