Between COVID and government changes to the regulation and funding of the Aged Care sector, Regis Healthcare has more than enough on its plate. The company has stoically managed its core business through a very trying time.
The good news is REG enjoyed an increased occupancy rate of 89.3% and positive jaws for the first time since FY16, a similar theme to Estia Healthcare. The Government revenue per occupied bed per day increase of 6% was above the staff costs per occupied bed per day (+3%) as the $10 daily fee supplement was implemented from 1 July 2021.
The 1H22 result otherwise had mixed news. Group revenue increased 4% to $396 million with Government revenue up 3% to $260 million. Residents revenue increased 4% to $100 million. Net RAD inflows of $47 million were accompanied by a 5% increase in RAD prices to $480k. But enduring COVID conditions (Omicron) plagued operating costs and processes affecting staff costs in particular. REG incurred COVID related costs of $4.5 million in 1H22 with only partial offset from government grants.
Staff expenses represent 71% of group revenue from services.
REG CEO Dr Linda Mellors expressed frustration at the uncertainty of the Government funding environment. Dr Mellor said: “It is very disappointing that the most pressing policy and funding responses to address the aged care sector’s known challenges have not yet been addressed, leaving the most difficult environment the sector has witnessed in a generation.” With the Federal election fast approaching, the timeline for sector funding and implementation will likely be delayed and possibly adjusted if there is a change of government.
Net operating cashflow in 1H22 was $126.7 million, helped along by the increased RAD inflow. REG repaid $42.5 million of debt so that net debt at 31 December 2021 was $60.8 million, less than half its previous level.
Investment view
REG is an active participant in the Government’s reform agenda for the aged care sector, but the current legislation before the Parliament may not get passed before the election intervenes. The important detail underpinning it could be delayed well into 1H23f or beyond. The Bill includes key provisions relating to funding, worker screening, codes of conduct, governance, RADS and the expansion of IHPA’s functions.
This uncertainty is enough to justify a Hold recommendation on REG until some clarity is achieved on sector legislation and regulation.
Risks to investment view
Government sector reform is the key investment risk for the industry. Occupancy and associated revenues might be affected by changes in demand or competition.
Recommendation
We have retained our Hold recommendation.
