Shares of ASX-listed aged care operators have slumped between 16 to 21 per cent after the federal government issued new guidelines on charging of some fees.
Shares in the three largest ASX-listed aged care operators have slumped following new guidelines by the federal government for charging certain service fees from residential aged care customers.
Shares in Estia Health, Japara Healthcare and Regis Healthcare all slid more than 10 per cent on Monday after analysts sharply downgraded price targets on the stocks.
Australia's Department of Health on Friday outlined several payments that would not be permissible under aged care legislation in future, including fees that do not provide a direct benefit to the resident, or where the services are part of the normal operation of an aged care home.
"The department is aware that an increasing number of providers have been charging, or proposing to charge additional services fees, including 'capital refurbishment fees', 'asset replacement contributions' and similar other fees," it warned.
Analysts estimate that the major operators in the sector currently charge fees of $15 a day under the guise of similar capital charges, and the new guidelines are likely to directly impact earnings.
"A layman's reading of the department of health guidance and the referenced legislation clearly suggests these types of fees are not permissible under legislation. As a result, we are removing them from our Regis, Estia and Japara earnings forecasts," Bank of America Merrill Lynch analyst William Dunlop said in a client note.
The brokerage slashed its 12 month price target on Estia Health to $2.75 a share from $3.35, on Regis to $3.70 a share from $4.30, and to $1.90 a share for Japara from $2.30 now.
Aged care operators have been under pressure to offset funding cuts by the federal government, which currently pays a fixed daily amount per resident plus extra funding for residents who require more attention. The government had outlined a $1.8 billion funding cut and increased scrutiny for the sector in the 2016/17 budget.
Estia, the largest operator in the sector, last week missed guidance on net profit and earnings. Shares in the company have since slumped more than 50 per cent on concerns of weaker earnings and increased debt on account of recent acquisitions.
David Bryant, chief executive at Australian Unity Investments said there had been a perception that everyone operating in the aged care and retirement living sector will be successful but said "nothing can be further from the truth".
"One of the reasons why the listed operators are facing this challenging situation is they have to take a profit maximisation motive, which may require different priorities and approach," he said.
Australian Unity operates retirement facilities across NSW, Victoria and Queensland and also invests in the sector through its Healthcare Property Trust.
It currently operates around 700 beds but Mr Bryant said its business works on taking a deposit from residents, unlike the daily fees model for the listed operators.
Estia shares closed down 11.8 per cent at $2.78 on Monday while Japara dropped 14.7 per cent to $1.74 and Regis Healthcare finished down 16.7 per cent at $3.70.