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Is it time to top up your holdings of these 3 aged care shares?

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The share prices of aged care providers Regis Healthcare Ltd (ASX: REG), Estia Health Ltd (ASX: EHE) and Japara Healthcare Ltd (ASX: JHC) have all been hammered this week after the Federal Government announced plans for a royal commission into the sector.

Since Monday shares in Regis Healthcare have shed 17% of their value, while Estia Health is down 19% and Japara has plummeted over 21%. Shares in all three companies are now on the cusp of recording new 52 week lows.

On the face of it, it sounds like horrible news for investors. A royal commission could reveal all sorts of failures by companies in the industry. An investigative report that aired on ABC’s Four Corners program has already shown that some providers don’t have the funding to serve high-quality food to many elderly, vulnerable Australians in aged care. And a royal commission could uncover many worse stories of neglect.

The royal commission into the banking industry has rocked that sector. AMP Limited (ASX: AMP) has been hit the hardest, with its share price plummeting almost 40% this year. But the big four banks haven’t gotten out unscathed either. The share prices of Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) have both dropped about 10%, while National Australia Bank Ltd. (ASX: NAB) is down close to 6% and Australia and New Zealand Banking Group (ASX: ANZ), the best performing of the big four, has shed about 2% of its value.

The problem is the risk posed to companies’ bottom line from the implementation costs of any new regulations. This will no doubt tighten margins in an already tough industry. But it could also force the government to increase funding to the industry in order to improve care quality and boost staffing levels.

So where is the silver lining in all this?

All three of Regis, Estia and Japara reported solid financial results for FY18. Regis reported NPAT of $53.9 million against total revenues of over $594 million, with normalised EBITDA $117 million. Estia pulled in $547 million in operating revenues for FY18, with EBITDA up 4.1% to $90.1 million and NPAT up 1.1% to $41.2 million. And Japara boosted total revenues by 3% to $373.2 million, although EBITDA and net profit both declined, by 15.8% and 21.5% respectively, following investments in growing the business via acquisitions and refurbishments.

Prior to the announcement of the royal commission, both Japara and Estia anticipated mid-single-digit percentage growth in EBITDA for FY19 – Regis expected EBITDA growth to be roughly flat on FY18. All three companies currently have a healthy dividend yield of between 5% and 6%. Regis and Estia both paid out all their reported FY18 NPAT to shareholders as dividends, while Japara paid out 88% of its net profit, retaining some earnings to cover the significant investments made in growing the business in FY18.

This type of growth isn’t exactly going to light up the market. But it is still solid, and those hefty dividend payout ratios show that management respects their shareholders.

Plus, the long-term prospects for the industry are still strong, even withstanding the tumult of a royal commission. Demand for aged care services is expected to grow as the baby boomer generation rolls into old age.

And it’s also worth pointing out that the aged care industry is very different to the banking and finance sector. New digital fintech companies targeting millennials, such as Afterpay Touch Group Ltd (ASX: APT) or microcap fund manager RAIZ Invest Ltd (ASX: RZI), among many others, are disrupting the finance industry and are offering viable alternatives to traditional forms of banking.

Foolish takeaway:

It may take some time for the dust to settle, but smart investors (who have a healthy appetite for risk) could look at the recent sharp drops in these companies’ share prices and think it might be time to start accumulating.

History often shows that it pays to be a contrarian in these situations – it may even turn out that the big winners might be those investors who topped up their holdings in the big four banks over the period of the banking royal commission.

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As of 2.11.2020

Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO and National Australia Bank Limited. 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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