Aged care is about to get ripped apart but this investor sees ‘great opportunity’
Aged care is on the nose with pretty much everyone, to the point where the government has set up a Royal Commission to investigate problems of abuse and neglect in homes.
And investors aren’t too keen either: all four of the ASX’s key listed aged care stocks, Estia Health (ASX:EHE), Japara (ASX:JHC), Regis Healthcare (ASX:REG) and Aveo Group (AOG), are down significantly over the last 12 months.
But despite the bad news, the thin margins, and difficulties in turning a demographic boom into a profit, Paul Thorley, senior director at Greenwich Capital Partners, still reckons this is very much a growth industry.
Greenwich recently released a white paper documenting research into the aged care sector, including the in-home aged care sector.
Mr Thorley says the aged care market and in-home care in particular is about to go through a monumental shift, as Australia’s ageing population becomes increasingly tech-savvy, but investors will have to look outside the traditional listed stocks for their winners.
What led to this latest research? Why aged care?
About 18 months ago we started looking through the healthcare sector and what aspects of it could represent good investments in the future.
And what we came to quite quickly was the aged care, in-home care and disability care market.
By 2040, the proportion of the Australian population over the age of 65 will increase by 5 per cent to account for 20 per cent of the population, whilst those over 85 will increase from 2.8 per cent to 6 per cent of the population by 2040.
Furthermore, it is expected government spending in age care will increase from 1 per cent of GDP to 1.6 per cent by 2040. So because of these factors, we see it as a sector that is going to be a bit more stable, thanks to government policy.
How do the well-documented problems in the sector factor into this?
It was quite interesting actually because the call for the Royal Commission happened during the time we were researching.
It pointed to all of the challenges in residential care. And what that told us is that there are lot of opportunities going forward.
It is a sector that is ripe for disruption, plenty of things will need to change and there is going to be more scrutiny and a bigger focus on compliance, not unlike what we’ve seen with the Royal Commission into the banking sector.
So things are going to go in that direction and we are going to see more announcements in the coming weeks and months and years.
It will shift away from block funding and control in the hands of not-for-profits, for example, to a more consumer-directed level and standard of care.
It has all the characteristics of disruption and is obviously a huge growth market in terms of demographics. People are living longer, there is more money going into the sector, there are more diseases and illnesses, it is a perfect storm. Picking the right business to invest in could lead to strong performance over 20 years or longer.
What should potential investors be on the lookout for?
Let me be clear, it is certainly not going to be easy!
You’re going to need to be very selective about what you are investing in because the whole market has opened up and as generations become savvier with technology that is only going to speed things up.
There are a handful of service providers in most cities that are starting to gain momentum and they are growing very fast by doing it in an Uber style. They’re targeting the right areas with the right network of carers and senior negotiators and are managing to on-board new customers.
Software and tech players are growing incredibly fast. They are helping to create efficiency through scheduling, rostering of carers, monitoring of patients, billing, linking to government services, back office admin efficiency improvements.
What does the future look like?
There are clearly going to be a few winners. There has to be, to provide the level of care that we need for our aged or disabled population.
I think companies that are connecting two or three different asset classes in the aged care space are interesting. Some are providing primary care, with GPs specifically assigned to patients. Others are providing secondary types of care, such as physio.
Others are doing telehealth, which is helping outreach to patients in regional areas.
With all these factors coming together it represents great opportunity. It will be classic scale. There will be plenty of M&A. And the best companies are going to be acquired by larger players. That would be my future vision.