Should you care about Aged Care?

By: Tobias Newton Octagon Asset Management.

We think the key drivers for the sector have improved dramatically in recent quarters and see several tailwinds, listed below (in no particular order).

• Sector gearing has peaked, with interest burdens set to fall and cash flow improving
• Ballooning operating costs are finally being addressed by management across the sector
• Disclosures have improved allowing greater visibility into possible financial outcomes for investors
• Operating margins in care appear to have bottomed out
• Development is moderating, with Capex expected to fall and competition to ease.
• The NZ housing market has stabilised and on the back of recent OCR cuts is expected to rise.

Whilst these fundamentals have all improved, valuations remain low and current price to net tangible assets (NTA) multiples are between -1.0 and -1.5 standard deviations below their 10-year trend.  All names in the sector are trading well below independently assessed book values and balance sheet repair is underway. This scenario is quite rare and suggests scope for gains as the NZ housing market begins to improve.

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