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Japara Healthcare shares sink on $292 million loss

ASX aged care shares

The Japara Healthcare Ltd (ASX: JHC) share price has fallen more than 4% today after the aged care provider revealed a $292 million loss. The loss was a result of a large impairment charge, combined with higher expenses and lower occupancy rates. 

What does Japara Healthcare do?

Japara Healthcare owns, operates, and develops aged care facilities. One of Australia’s largest aged care providers, Japara has more than 4,000 people in its care and more than 5,000 staff caring for them. The company’s aged care portfolio comprises 50 homes across five states and 180 independent living units co-located with five of its aged care homes. 

What did the company report? 

Japara reported statutory revenue of $427.5 million, a 6.9% increase on FY19. This was mainly due to increased development earnings and increased revenue per resident. Average occupancy was 92.2% in FY20, weaker than anticipated due to the impacts of the COVID-19 pandemic. Four of Japara’s 21 metropolitan Melbourne homes have active coronavirus outbreaks affecting residents and staff.

The trend of increasing resident numbers over the first nine months of FY20 was impacted by the pandemic from April onwards. At 30 June 2020 the company reported 4,102 residents, but this had fallen to 3,977 residents by 21 August 2020. 

Japara says it is difficult to quantify the ongoing financial impact of COVID-19 given uncertainties around its future prevalence and the success of measures to control its spread. Indirect impacts include reduced occupancy due to limitations on tours and reduced consumer preference to enter residential aged care. Direct COVID-19 related costs incurred in FY20 were ~$1 million, with spending on infection control measures and protective equipment. 

Japara’s recurring EBITDA fell 24.1% in FY20 to $36.9 million largely due to lower occupancy and cost inflation greater than revenue inflation. A non-cash impairment of $291.9 million was incurred due to an impairment in goodwill. This led to a statutory net loss of $292.1 million for the year, attributed to the impairment, lower occupancy, and higher staff and other costs.

This compares to a profit of $16.4 million in FY19. No final dividend was declared and Japara ended the financial year with net debt of $190.7 million. 

Declines in occupancy have resulted in an oversupply of places, causing challenges in maintaining resident numbers at older style homes. Growth in the potential resident cohort has been offset by declining utilisation rates. This has resulted in net place additions exceeding annual increases in residents in recent years. Revenue and cost growth imbalance and declining occupancy has seen the aged care sector show decreasing EBITDA and margin from operations. 

What is the outlook for Japara Healthcare? 

Japara Health’s guidance remains suspended as cost and revenue implication from COVID-19 remain uncertain. Recently completed developments are expected to contribute to FY21 EBITDA, but interest and depreciation expenses are also expected to increase.

Delivery of developments under construction is expected to add ~250 new places in FY21, but decisions on future developments have been deferred until the impacts of the pandemic and economic outlook is more certain. 

The Japara Healthcare share price slumped 4.2% to 0.46 cents at the time of writing.

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Motley Fool contributor Kate O'Brien 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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