The Federal Government has this week flagged changes to how it funds residential aged care, with Jarden analysts saying the changes will be a tailwind for the sector.
More specifically, the Jarden team has singled out Regis Healthcare Ltd (ASX: REG) as a beneficiary of the changes, and the team has a bullish share price target on the company, which we'll get to later.
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Simplifying the system
So, what has been announced?
Health Minister Mark Butler said on Wednesday that the government would be pumping another $3 billion into delivering more aged care beds, more packages and better care for older Australians.
Mr Butler said in a statement:
At the heart of the Labor Government's reforms has always stood a commitment to provide dignified, quality care to every older Australian, no matter their means. This $3 billion investment builds on our commitment to deliver more beds, more packages and better care for older Australians, to ensure they get the support they deserve.
Jarden said this regarding the sector more broadly, in its research note released on Thursday:
The Aged Care Sector in Australia has been challenged with a growing supply-demand imbalance as the baby boomer generation reaches an age where residential care intensifies and supply remains stagnant, given the inadequate funding environment. This has seen occupancy hit record levels and providers faced with shifting resident mix away from concessional residents to drive an improvement in returns. As a precursor to the Federal Budget, Health Minister Mark Butler announced some changes to help address the funding gap for concessional residents and incentivise the industry to build more beds to address a chronic shortage.
Jarden said it appeared the $3 billion came about in part through a planned reduction in private health insurance rebates for the elderly.
The government's changes announced this week were in response to the Independent Review of Residential Aged Care Accommodation Pricing also released this week. This is pertinent to Regis, as it affects the government reimbursement the company receives for its concessional residents, among other changes.
The new system which Mr Butler announced and which picked up on the recommendations of the pricing review, will involve a $ 5-per-resident-per-day increase for concessional residents, as well as restructuring the current tiered payments system.
Jarden said it expected the changes to deliver about $7 million per annum in pre-tax earnings uplift for Regis, translating into a 6.5% upgrade to consensus net profit estimates.
Soft loans on the way
Another recommendation of the pricing review was to make $2 billion in interest-free loans available for 10 years to new developments.
Jarden said this is "clearly an attractive funding option for Regis with its existing pipeline likely to qualify for this funding, considering the government will prioritise providers who have development approval, appointed a qualified builder and have construction finance already''.
Jarden has an $8.50 price target on Regis shares compared with the current price of $6.80, which was up 12.6% on Thursday.
Regis was valued at $1.82 billion at the close of trade on Wednesday. The company delivered an 18% jump in revenue in its most recently half year report.
