The Japara Healthcare Ltd (ASX: JHC) share price fell 7% to $1.87 this morning after the company released its annual results. Here's what you need to know:
- Revenue rose 11% to $362 million
- Net profit after tax fell 2% to $30 million
- Earnings per share of 11.22 cents (11.54 cents in 2016)
- Dividends of 11.25 cents per share (11.50 cents in 2016)
- Net debt of $20 million
- Outlook for 2018 EBITDA to be in line or slightly above 2017
- EBITDA expected to grow again from 2019 as developments complete and fee indexing resumes
So what?
The aged care industry has been under pressure, namely from caps on government fees, as well as investigations that have considered accusations of various companies overcharging or not providing the correct standard of care for residents.
These issues notwithstanding, Japara managed to maintain occupancy at a solid 94.6% and increased the fees it charged to residents by 8%, while government subsidies remained effectively flat. Despite the robust performance, profits fell primarily due to higher depreciation expenses.
Now what?
Japara management has guided for minimal growth for 2018, and in my opinion the company will struggle to generate meaningful growth outside of development and indexed fees. It certainly seems unlikely that Japara will be able to continue lifting bed fees by 8% per annum, especially not with residents increasing movingly to the DAP (Daily Accommodation Payment) model.
Additionally, the migration from the RAD (refundable accommodation deposit; a large up-front deposit given to Japara from which fees are deducted) to the DAP (a daily fee paid by the resident) is expected to put increasing pressure on Japara's balance sheet.
It's not inconceivable for another $100 million or more in resident funds to change from RAD to DAP payments over the next few years, which could have the double-whammy of increasing residents' price sensitivity (reducing Japara's ability to increase fees), as well as removing a key source of interest-free funding for Japara (RADs are treated as an interest-free loan from the resident to Japara). This may lead to higher bank debt and/or reduced development or acquisition activity.
So while Japara doesn't look overly expensive, in my opinion it is unlikely to be a huge winner, for these reasons.
