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George Gabriel
Principal
Bletchley Park Capital
164 High St Prahran VIC 3181
We hosted the AGED CARE, HEALTH SERVICES AND RETIRMENT VILLAGES
conference in Sydney on 27 October, 2014.
We hosted presentations by a number of leading aged care sector thought leaders and
operators.
Key insights are:
GOVERNMENT POLICY
1. Government policy in support of the aged care sector is entirely bi-partisan.
The reason is that the sector requires another 80,000 places over the next 10
years, estimated to cost ~$21bn.
The funding model which the Government has settled upon is the Refundable
Accommodation Deposit (also called “RAD” , previously called
“accommodation Bonds”).
2. Sector consolidation increases the sector’s lobbying power.
The NZ experience is instructive.
This will likely reduce the risk of unforseen changes such as the recent
dementia and payroll tax changes.
REFUNDABLE ACCOMODATION DEPOSITS (RADs)
3. RADs have proven to be a stable funding source over time.
RADs have existed since the introduction of the Aged Care Act in 1997.
The Federal Government guarantees RAD repayment if there are any losses.
Total Government pay out on the RAD guarantee is ~$20m, less than 1% of
the total RAD pool of $14.2 billion.
During the Global Financial Crisis, Japara Healthcare Ltd (JHC) actually had
an increase in its RAD pool. JHC believe that this is because its RAD/local
house price ratio of 50% is low and the absolute value of its RADs is also low
($264k per RAD in FY14, FY15F prospectus $283k).
BUSINESS MODELS
4. A range of business models are possible.
Some operators focus on high care, some on luxury extra services, premium
location, varying RAD levels, ageing in place etc
Operating company/property company structures have had mixed experience.
NZ operators tend to be integrated RV-AC models.
5. Integrated Retirement Village-Aged Care business models are a feature of the New
Zealand operators.
George Gabriel
Principal
Bletchley Park Capital
164 High St Prahran VIC 3181
Retirement village operators need aged care, but aged care does not need
retirement villages.
Ingenia (INA) advised that it was developed strategies to provide onsite health
care services to its RV residents, to extend resident stay. Residents who have
health issues tend to move to aged care facilities.
6. Listed Australian aged care stocks could potentially re-rate in the medium term if they
transition to integrated RV-AC business models.
WHTM research has previously identified that the listed NZ operators (RYM
and SNZ) trade at relative valuation premia relative to pure aged care
operators.
Refer page 16, Table 5 of WHTM initiation report, “Riding the silver tsunami:
finding shareholder value in aged care”, dated 8 October 2014.
RYM trades on 22.5x FY15F EV/EBITDA; SNZ 17.4x; REG 13.4x and JHC
12.4x.
CONSOLIDATION
7. The sector will continue to consolidate over many years.
All panel members agreed that consolidation would be a long term feature of
the Australian aged care sector.
One panel member expects consolidation over the next 10-15 years. Another
panel member said that large operators may in fact consolidate with one
another. Eventually, there may 5 or 6 large players in the sector and smaller
players around that.
Our analysis confirms that the sector is highly fragmented, with ~950 potential
consolidation targets. Table 1.
JHC only needs 3-4 acquisitions per year to achieve its growth objectives.
TABLE 1: TOTAL NUMBER OF POTENTIAL CONSOLIDATION TARGETS
8. Greenfield and brownfield skills are an important hedge against private market M&A
pricing risk.
George Gabriel
Principal
Bletchley Park Capital
164 High St Prahran VIC 3181
HUMAN RESOURCES
9. Human resources remain a sector challenge.
Business models are emerging to address this challenge, eg
i. AZV – integrated software/hardware nurse call management systems
ii. SVA – adult incontinence management systems
10. Aged care could become an export sector for Australia.
Trained staff could use their skills overseas, particularly in Asia, as Australia
is ageing faster than Asia.
Operators could expand overseas in the medium term.
