Why Regis Healthcare Ltd (ASX:REG) shares plunged 11% lower today

In late morning trade the Regis Healthcare Ltd (ASX: REG) share price has bounced back from a heavy decline and is down just over 2% to $3.48.

At one stage the aged care operator’s shares were down as much as 11% to $3.17.

Why did Regis Healthcare’s shares plunge lower?

This morning Regis released its full year results and posted a 5% increase in revenue to $594.4 million but a 7% decline in net profit after tax of $56.9 million.

Revenue growth was achieved despite the industry-wide residential aged care Federal Government funding cuts and indexation freeze. The driver of this growth was a $2 increase in revenue per occupied bed day to $283, the Presbyterian Care Tasmania acquisition, and new facilities.

The top line growth didn’t make it down to the bottom line due to increases in staff costs from EBA escalations, increases in expenses due to changes to the ACFI funding instrument, and expenses related to the ramp up of new facilities. While cost management initiatives were undertaken, it was not enough to offset the rise in expenses.

Net RAD cashflow of $63 million was achieved in FY 2018, with the majority of new non-supported residents still choosing to pay a RAD over a DAP3 or a combination RAD/DAP payment. The average incoming RAD increased to $467.9k compared with $455.6k for FY17.

The Regis board declared a fully franked final dividend of 8.65 cents per share, which represents 100% of reported NPAT. This dividend is payable on September 26.

Looking ahead, management expects FY 2019 EBITDA to be in line with its normalised result of $117.1 million this year. Although management expects an increased contribution from its Facilities and the Presbyterian Care Tasmania Facilities to become earnings accretive, headwinds from funding cuts and higher expenses are expected to offset this.

Should you invest?

While I think that Regis Healthcare and its industry rivals Estia Health Ltd (ASX: EHE) and Japara Healthcare Ltd (ASX: JHC) are well positioned to profit from Australia’s ageing populations, unfavourable changes to funding and regulations continues to stifle their growth.

I’m not convinced that much will change in this regard in the coming years, which could mean they continue to deliver mixed results for some time to come.

In light of this, I would prefer to gain exposure to the ageing population thematic through hearing solutions company Cochlear Limited (ASX: COH).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. 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 Scott Phillips.

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