He called the top, now he’s calling the bottom
I clearly recall Ben Griffiths, Portfolio Manager at Eley Griffiths Group, calling the top for aged care stocks at Livewire Live back in 2016. Popular names like Estia Health, Regis Healthcare, and Japara Healthcare were all coming off a good run. Investors had done well and were feeling confident. Ben is no stranger to a contrarian view though and came out swinging at the thematic.
He said that investors had become complacent and went on to make a compelling bear case. The very next day, all three stocks had a sharp leg down, and a few months later they fell off a cliff and have been in the toilet ever since.
So, it was like déjà vu when Ben started talking about Aged Care stocks at this year’s Livewire Live, except this time he was calling the bottom and made a strong case for buying back in.
Image: Ben Griffiths presenting at Livewire Live 2019
The 2016 bear case
As a quick recap, when Ben spoke at Livewire Live 2016, his thesis was based on a likely government cap on aged care spending, over-leverage of the companies’ balance sheets, the stage of the property and bonding cycles, and competition over assets reducing the accretion from acquisitions. He summarised to say that:
“We think it’s one part of the market that the market has fallen in love with. We’ve fallen out of love with it, and have done something about it.”
That was in late May 2016, and the share prices all fell the next day then struggled over the next few weeks. But in late August, the government issued a report which set the share prices into freefall, as this chart from that period displays.
Fast-forward to today
In Ben’s talk last week at Livewire Live 2019, he pointed out the thesis had played out largely as expected, and showed a chart of how the aged care stocks (in red, as a group) had underperformed the Small Ords (blue) by a margin of around 70% over the intervening three years.
Today the industry is under severe stress as Ben’s next chart neatly articulated.
Profit before tax margins (grey line) falling sharply
Return on Assets (red line) is falling
The number of providers (black bars) down from ~1,000 to ~850.
The 2019 bull case
To summarise Ben's thesis for buying these stocks back today:
- The Royal Commission will bring in structural reforms, regulation change and the government may have to revisit the funding packages.
M&A and consolidation may occur off the back of this, and Ben said he has “a hunch right now that private equity is busy looking at the space"
- Valuation is compelling with the stocks now trading at “scorched earth valuations”, below even their replacement costs.
- The demographic trends are supportive with the growth in the key demographic rising (red) poised to outgrow the number of beds (light grey).
When the time comes to buy, you won't want to...
Ben concludes to say that:
“I'm reminded of an old market maxim that says, when the time comes to buy, you won't want to. You can't find a single person today that speaks favourably about these stocks, these are fallen angels. We believe the Royal Commission will provide the perfect point where you'll start to see a line of sight to recovery in this sector and we believe there are dollars to be made for patient investors who are happy to ride through the repair process.”
You can see his 3-minute presentation here
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