Despite uncertainty following the
-Federal government response a key catalyst for listed operators
-Payment of a RAD to deliver material boost to income
-Government funding provides revenue boost of around 1%
-RADs to provide more comfort to investors on property returns
While broadly agreeing fundamental changes to the industry were required, the two Royal Commissioners undertaking the review into aged care, Briggs and Pagone, were clearly at odds on no fewer than 30% of recommendations they made.
Briggs and Pagone were clearly singing from different hymn sheets on issues relating to governance. While Pagone recommended the creation of a body that is fully independent from the government, Briggs believes reforming existing institutions would deliver reform more quickly and effectively than moving to an independent model.
At this stage,
Both commissioners are in agreeance on refundable accommodation deposits (RAD) being phased out to be replaced with an alternative resident-funded accommodation payment.
Recommendation 142 suggests the phasing out of RADs for new residents by
Assuming 142 proceeds, Jarden notes resident RAD payers would then be required to pay a daily accommodation payment. The net effect is providers would likely see a material boost to accommodation income and in Jarden's view, would provide more comfort to investors on property returns.
The government is expected to provide a comprehensive response to the
However, given the level of disagreement between Briggs and Pagone, the government has been gifted sufficient 'wriggle room' with which to cherry pick the measures it wishes to adopt.
If the recent commentary distancing it from an aged care tax levy is any proxy, the government looks likely to disclose its positioning progressively on these key issues between April and May.
Recommendation 144 is for the introduction of a levy of 1% of taxable personal income, suggested to commence
The government response: A catalyst for listed operators
While the government's future commitment to aged care hinges a lot on its response to the
Overall, Macquarie considers the government response to the Final Report a key catalyst for listed operators.
As a case in point, funding recommendations from the final report included the matching of aged care subsidy indexation to wage inflation/CPI (Recommendation 110), to negate the negative operating jaws (expense growth rate exceeds income growth rate) for providing care.
While indexation measures clearly aim to align revenue growth more closely with cost growth, Macquarie notes, employee cost growth has outpaced government funding in recent years.
Recommendation 112 is to increase the Basic Daily Care Fee (BDF) by
But given the uncertainty of the recommendations being implemented by the federal government, Jarden makes no earnings per share (EPS) adjustments to forecasts. Given the two funding recommendations aim to offset rising industry costs and create a sustainable environment for providers, the broker believes there's a high probability the recommendations will be accepted.
Adding to Industry costs is likely to increase with minimum qualifications and time standards. As a case in point, recommendations 78 and 86 suggest mandatory minimum qualification for personal care workers and minimum staff time standard for residential care, respectively.
Jarden notes, although costs are likely to be a result of minimum standards, given the recommendation to index subsidies in line with wage growth, they should be matched with funding.
Meanwhile, while recommendation 68, which calls for the universal adoption of digital technology, may be another driver of additional costs, Jarden suspects the impact on listed providers would be minimal, given they're already been investing in digital operating models.
Jarden has Buy ratings on
However, the broker notes, there's a key risk to the companies' investment thesis if final report recommendations and outcomes do not meet expectations for returns to meet costs of capital for investment in the residential aged care sector.
Jarden's 12 month projected returns for
Minimum staff time
Recommendation 86 also proposes minimum staff time for residents, through the engagement of registered/enrolled nurses and personal care workers for at least 200 minutes per day for the average resident, with at least 40 minutes of that time from a registered nurse (RN).
While the current industry benchmarks indicate around 200 minutes of direct care per resident per day, the composition of current staffing may differ to minimum standards under recommendations in the final report.
In assessing the potential financial impacts of additional funding, Macquarie assumes care management is included within RN staffing, allied health is excluded from the overall calculation, and an average hourly wage of around
Based on these assumptions, Macquarie estimates additional costs associated with minimum staffing requirements would offset a large proportion (around 70%) of the
Based on the broker's estimates, a
In relation to indexation, Macquarie sees positive valuation implications for all listed operators. The broker expects a 2.5% annual increase in the aged care funding instrument (ACFI) from FY22 (versus its base case at 2.0% and holding all else equal).
Macquarie is expecting to see a discounted cash flow (DCF) valuation uplifts of 22%, 50%, and 26% for Estia (price target
Within the sector, Macquarie's preference remains with
Circuit breaker for sector funding
Meanwhile, the government in its initial response to Briggs and Pagone's final report has already announced additional funding of
Instead of coinciding support efforts with its review of the final report later in the year, the government's immediate one-off payments are intended to go some way to restabilising the sector and ensuring services are maintained.
The funding on offer equates to around
In light of additional government funding, the latest occupancy trends, government revenue indexation of 2.5% from FY22 onwards, and the FY22
In the short-term,
Overall, listed aged care stocks look relatively well positioned to leverage an improving (baby-boomer led) demand profile over the next decade. However,
Based on
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