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Should Regis Healthcare shares be on your long term buy list?

After being smacked down along with other companies in the sector in 2018 following the announcement of a royal commission into aged-care facilities, the Regis Healthcare Limited (ASX: REG) share price has recovered slightly in 2019.

If we see positive results from the inquest and a boost in federal funding along with the growing ageing population, the Regis share price could soon be a long term, buy-to-hold option.

Effect of the royal commission

In 2018 the federal government announced a royal commission into Aged Care Quality and Safety. The inquest follows complaints around facilities and numerous allegations of aged care residents being mistreated. Although the inquest did not single out Regis Healthcare, the reliability of the sector suffered. Analysts expect the royal commission to have a negative impact on the decision making of individuals and their families considering a move into aged care homes.

Regis declared weak occupancy rates across the industry which was made worse by home-care packages provided by the federal government that help the elderly stay at home. The aged care sector relies heavily on government funding and is facing more headwinds in the form of the increasing cost of care and a labour shortage. There are approximately 240,000 elderly who live in aged care facilities and another 84,000 who rely on home-care packages. This segment is earmarked to grow substantially in the future given the ageing Australian population.

Mediocre earnings

Earlier this year Regis reported half-year earnings which reflected the effects of the royal commission. The half-year report outlined an underlying NPAT of $24.7 million and a 12% fall in net profit of $24.4 million after considering the $307,000 spent on the royal commission.

Regis reported EBITDA of $56.7 million, which was below market expectations and down 7% from the previous year. Refundable accommodation deposits (RAD) were a highlight of the report with receipts of $72 million for the half year, a 15% increase from 2018.

Federal election

In February the federal government announced a one-off funding package of $320 million to help improve the services for the aged care residents. With the federal election looming, the labour shortage and low wages of aged care workers also come into focus. If elected, Labor is considering extending its proposed $10 billion wage supplement for the childcare industry to the aged care sector.

Is the Regis Healthcare share price a buy?

The royal commission is scheduled to deliver an interim report in October of 2019. The interim findings could suggest whether the commission recommends further funding into aged. Despite the negative sentiment around the sector, Regis has remained steady as reflected by a modest increase in RAD levels, whilst also maintaining positive cashflow. The results of the royal commission could also work in favour of Regis as current and future residents might opt for more reputable providers.

The ageing population will see the aged care sector grow and government funding seems likely to increase. However, I would recommend waiting until the whole inquest is finished before buying shares in Regis.

Although I wouldn’t buy shares in Regis at the moment I am keeping it on a watchlist along with fellow providers listed on the ASX, Japara Healthcare Ltd (ASX: JHC) and Estia Health Ltd (ASX: EHE).

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. 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 Scott Phillips.

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