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Royal commission into aged care: fears scrutiny will hurt stocks

Emma Rapaport  |  11 Oct 2018Text size  Decrease  Increase  |  
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Aged Care Patient

The royal commission into patient abuse in the aged care industry has some equity analysts fleeing stocks in the sector while others say the potential fallout is limited. 

In an interview with Morningstar, Saxo Capital Markets, Australian markets strategist Eleanor Creagh warned the business models of residential aged care operators like Japara Healthcare (ASX: JHC) and Estia Health (ASX: EHE) are fairly weak and are set to get weaker.

"Almost every Australian will have a member of family or close relative or friend that is in aged care or will need to be at some point," Creagh said.

"I think as we start to see the news unfold from the royal commission, as we have with the banking commission, it's really going to pull on people's heart strings. From a sentiment point of view, I think the risk reward is too great for retail investors. I wouldn't be touching the sector."

Prime Minister Scott Morrison announced the inquiry in mid-September following reports of widespread neglect, abuse and negligence in nursing homes and other aged care facilities across Australia.

Creagh says increased scrutiny could crimp costs in the aged care industry.

"I think one of the biggest risks the aged sector royal commission could bring about would be increasing costs into the aged care sector - increased staff costs and the removal of government revenue streams," Creagh said. "From that basis I think the regulatory risk is too great at the moment."

However, others are more upbeat. Analysts from UBS say while they don't discount reputational risks for Japara, Estia and Regis Healthcare (ASX: REG), on balance they view the potential financial hurt from the royal commission as limited.

"Given its current financial state and the ongoing need to attract private capital to the sector, any material cost impositions would need to be met with additional government funding and/or deregulation of basic daily resident fees," UBS analyst Tom Godfrey and associate analyst Denny Chen said in a note issued late September.

UBS says occupancy is unlikely to be significantly affected because there are limited alternative options for the residential care population.

"In fact, we see the potential for consumers (with the decision maker typically a child of the resident) to conduct additional due diligence during this period, and ultimately favour providers with the track records of Regis, Estia and Japara."

The commission will run for 18 months – nearly five months longer than the banking inquiry – and will provide an interim report by the end of October next year, and a final report by the of April 2020.

Delivering the terms on reference on Tuesday, the Prime Minister thanked the more than 5100 Australians who made submissions and announced the appointment of former Western Australian Supreme Court judge Joseph McGrath and former Medicare CEO Lynelle Briggs as commissioners.

Key terms of reference include:

  • Quality and safety including the extent of substandard care
  • How to best deliver care services to people with disabilities residing in aged care facilities including younger people.
  • How to best deliver care to the increasing number of Australians living with dementia
  • The future challenges and opportunities for delivering accessible, affordable and high-quality aged care services, including people’s desire to remain living at home as they age, and aged care in rural, regional and remote Australia
  • What the government, the aged care sector, Australian families and the wider community can do to strengthen care services to ensure quality and safety
  • How to allow people greater choice, control and independence and how to improve engagement with families and carers
  • How to best deliver sustainable aged care services through innovative care and investment in the aged care workforce and infrastructure


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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

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