Why is the Regis Healthcare share price down in the past 6 months?

The Regis Healthcare Ltd (ASX: REG) share price is down 6% over the past six months, compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rise of nearly 2%, despite the apparent tailwinds of an aging population.

So what’s going on?

After all, the aged care facility operator recently reported 12% growth in revenues to $236.6 million, and 15% growth in net profit to $28.3 million for the first half of the 2016 financial year (FY16).

Perhaps it was the company’s announcement that the second half of FY16 would be in line with the first half – i.e. no growth. That’s due to a number of factors, including:

  1. Higher labour costs
  2. Closure of the Regis Park facility in Western Australia for redevelopment, and
  3. Higher depreciation charges due to increased development activity.

Regis is spending between $50 and $70 million in the second half on the construction of a number of new development projects, after spending $70 million in the first half. Regis has roughly an additional 1,000 new places under development. While that may mean no growth in the short term, it should mean increased revenues over the medium to long-term.

Regis now has over 5,000 operational places across 47 facilities, with 1,273 planned new places, with 658 under construction.

DAPs and RADs

Aged care operators also have an additional driver of income beyond just the Daily Accommodation Payment (DAP). When a resident moves into the accommodation, they can also opt to pay a Refundable Accommodation Deposit (RAD) rather than a DAP, or a combination of both.

When the care recipient dies or care ceases for any other reason, the RAD is repaid. But until that time, operators like Regis, Japara Healthcare Ltd (ASX: JHC) and Aveo Group (ASX: AOG) get to utilise those funds – much like insurance companies get to utilise premium payments until they are required to make payouts.

As RADs are paid out, they are generally (not always) replaced shortly after by RADs of higher value (not always the case). This has the effect of increasing the company’s cash flow. Regis had an additional ~$70 million of incoming cashflow in 2015 thanks to this effect.

Foolish takeaway

Despite appearances, companies operating in the aged care sector are highly complex, and can rely on government subsidies for some of their income. Like the pathology and imaging sectors recently found out when the government slashed funding to those sectors, regulatory risk is high for aged care providers.

Unless Foolish investors have a comprehensive understanding of the sector and the company’s operations, companies like Regis might be best avoided.

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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

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.

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