Regis Healthcare (REG) - Short-changed by short-sighted policy

Regis Healthcare provides residential aged-care services in Australia, including ageing-in-place, respite care, specialist dementia care, and palliative care services through operation of aged care homes. Regis Healthcare was founded in 1994 and is based in Camberwell in Melbourne.

‍

Regis Healthcare provided a trading update where it set FY26 underlying operating earnings (EBITDA) guidance at $130–135 million, circa 7%below Ord Minnett’s prior forecasts at the midpoint of the range. The key update relates to the net impact of recent federal government funding changes, with a headline 4.7% increase in Australian National Aged Care Classification (AN-ACC) expenditure translating to a year-on-year (YoY) funding increase of 2.6% for Regis, based on changes to individual resident funding classes. This is below Ord Minnett’s forecast growth in staff costs of 5% YoY, with the associated margin dilution more than offsetting the hotelling supplement boost of $6.55 per day. We note that the federal government’s decision to pull back on care funding comes at a time when: 1) the median EBITDA margin of the sector is 8.2%, and 30% of providers are making a loss at the profit before tax (PBT) level; 2) the oldest baby boomers are turning 80 next year, with the sector’s demand pool forecast to double by 2041; and, 3) there are circa 2,500 people in public hospital beds waiting for a residential care placement, which equates to blocking an estimated 880,000 bed days at more than five times the cost of residential aged care.

‍

Absent any further changes to AN-ACC funding in FY26, we expect development pipelines to slow, as already foreshadowed by Regis, and more providers to exit the industry. Our EBITDA forecasts reduce 6-7% medium-term and our target price falls to $8.50 from $9.00. Notwithstanding near-term pressure on Regis’s multiple from downgrades and speculation over index changes, were main positive on the longer-term outlook and maintain our Buy recommendation.

‍