ASX aged care share prices have been hammered in an otherwise strong day for the Australian share market, as both the S&P/ASX200 and the All Ordinaries Index closing 0.5% higher at 5,879.6 and 5941.2 points, respectively.
The Japara Healthcare Limited (ASX: JHC) share price fell 5.35% to $1.15 per share, whilst fellow aged care providers fared no better. Estia Health Limited’s (ASX: EHE) share price fell 4.91% while Regis Healthcare Limited’s (ASX: REG) share price dropped 2.85% with the declines ensuring the sector ended the week on a sour note. All three companies entered the market following the 2014 Aged Care Reform Changes and investors have seen nothing but negative returns from Japara (-57.2%) and Estia (-52.1%) fairing even worse than Regis (-31.9%) since listing.
The key driver behind today’s share price collapses was the start of the Royal Commission into Aged Care Quality and Safety, announced by Prime Minister Scott Morrison in October 2018. The royal commission kicked off with an extraordinary admission that only 4% of aged care providers have provided information to the inquiry, which sets the tone for further lashings by commissioners Richard Tracey QC and Lynelle Briggs.
Whilst some may think that Australia’s ageing population and high barriers to entry in the sector would make aged care ripe for the growth stock picking, the reality has been that regulatory risk and highly leveraged operating models have made the sector far from an attractive buy in recent times. If the Financial Services Royal Commission is anything to go by, I wouldn’t expect the additional scrutiny to work wonders for these three share prices.
I don’t think this is the end of the pain for these aged care stocks. The aged care royal commission is just getting underway and I would expect the bad news to keep rolling in as the commissioners deep dive into years of questionable practices and emotionally-charged hearings dominate fundamentals. While you could argue this presents an opportunity to pick up these stocks on the cheap over the next few months, I believe the long-term viability of these aged care business models remains uncertain.
In these times, I still favour information technology stocks such as Appen Limited (ASX: APX) as a growth alternative.
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Motley Fool contributor Lachlan Hall holds no positions in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen 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.