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Opportunities In An Ageing Population
BY JOHN ABERNETHY - 25/09/2014 | VIEW MORE ARTICLES BY JOHN ABERNETHY

An ageing population is a major demographic and economic issue affecting most advanced economies around the world and Australia is no exception. In today's Investing Report, we highlight eight stocks we believe are best placed to benefit.

Many investors may have seen the strong debut from residential aged care operator, Japara Healthcare (ASX:JHC), in mid April. The stock closed its first day at $2.70, some 35 per cent above its $2 listing price.

The excitement Japara generated reflects the market’s belief that Australia’s ageing population and the retirement of the great wave of baby boomers is creating major investment opportunities.

There is no doubt that an ageing population is one of the biggest trends that is evolving in Australia over the next thirty or so years. According to the ABS, the proportion of 65-year olds and older will rise from 14 per cent to 22 per cent by 2061.

The trend throws up significant challenges for Governments, including greater demand on the public purse through higher spending on the likes of pensions and healthcare. But Clime agrees it will also create opportunities for companies and investors.

Cashed up boomers

There has been much focus on the boomers’ lack of superannuation savings, but significant wealth is tied up in their homes and investment properties outside super. As they move from work to leisure, they’ll increasingly spend that wealth on travel, restaurants, retail and entertainment. That should benefit the likes of travel operators such as Flight Centre and Webjet, and even travel insurer, Cover-More.

But retirees are also expected to live longer, which does increase ‘longevity risk’—the risk retirees will out live their savings. That creates opportunities for financial services providers to come up with innovative products to provide income streams through the likes of annuity products, which Challenger is growing strongly.

Retirees’ living arrangements will also change; they’ll increasingly move into retirement villages, but then shift into residential aged care when their ability to look after themselves falls. That will see an increase in demand for residential aged care, which has underpinned the enthusiasm for the likes of Japara shares.

Perhaps the greatest demand will be on medical services, which will increase the need for pharmaceuticals, testing, hospitals and individual healthcare needs. Deloitte Access Economics, for example, estimates that the number of Australians living with dementia will quadruple by 2050.

Strong valuations

It should be noted, however, that Japara now trades at $2.32, significantly down on that big first day, which again perhaps reflects the fact that tapping into this trend must be weighed against fundamental valuations.

Buying a thematic is dangerous if due regard to underlying value is ignored.

Ageing-related stocks are currently divided between recently listed or relisted stocks such as Japara and Healthscope, and more established players, particularly the private hospital and medical centre operators such as Ramsay and Sonic. The latter are trading significantly above value, in part due to the higher market, but also reflecting investors’ keenness to ride the ageing population trend.

Given that Clime believes that it is best for investors to wait for a correction and a return of prices to closer to value before taking opportunities.

But below are the eight stocks we believe are best placed to benefit from Australia’s ageing population:

1. Challenger Limited (ASX:CGF)

As mentioned, one of the major challenges facing Australia’s retirees and aging population is provision of income streams during retirement. Most Australians take their superannuation in a lump sum rather than as annuities, which provide ongoing income payments over a period of time. Challenger’s Life segment offers fixed rate retirement and superannuation products, which is growing strongly and will continued to do so. In the most recent half annuity sales growth was 38 per cent to $1.5 billion. At $7.24, the stock is trading significantly above our valuation of $5.04.

2. Japara Healthcare (ASX:JHC)

Japara Healthcare owns operates residential aged care facilities. It has 35 facilities and 4 retirement complexes throughout Victoria, South Australia, NSW and Tasmania. As noted, the company listed on the ASX in April and surged 35 per cent from its listing price of $2.48 to $2.70, but has since settled back to $2.32. The company is highly dependent on government funding but the ageing population will continue to drive demand for its offering.At the moment there are just over 420,000 Australians aged of 85, or 2 per cent of the population; that’s expected to more than double to 5 per cent by 2061.

3. Healthscope Limited (ASX:HSO)

Healthscope is Australia’s second-largest private hospital operator. It operates 41 hospitals. But it also has a big pathology business with 578 collection centres, 69 labs and 46 medical centres. The company will benefit from higher demand from retirees for medical services. The company originally floated on the ASX in 1994, but was bought and taken private by private equity players TPG and The Carlyle Group in 2010 and recently returned to the market in a $3.6 billion listing.

4. Primary Health Care Limited (ASX:PRY)

Primary Health Care is another play on increasing demand for medical services from an older population. The company operates medical centres as well as health technology, pathology and diagnostic imaging services. The stock, however, has been trading significantly above our valuation of about $3.73.

5. Ramsay Health Care Limited (ASX:RHC)

RHC is the largest operator of private hospitals in Australia and one of the leading operators of private hospitals in the UK and France. The company is placed to benefit from increasing private health insurance membership and an ageing population. The stock at $50.94 is trading significantly above our valuation of $36.02.

6. Sonic Healthcare Limited (ASX:SHL)

Sonic Healthcare operates in three segments: pathology, radiology and corporate office functions/medical centre operations. The company provides medical diagnostics, laboratory and radiology services to medical practitioners, hospitals, community health services, and their collective patients. It also operates Australia’s largest network of primary care medical centres – Independent Practitioner Network – as well as other healthcare businesses. At $17.37 the company is trading well above our valuation of $10.85.

7. Fleetwood (ASX:FWD)

Fleetwood should benefit from the trend for grey nomads to buy caravans, which the company makes, and set off around Australia. But the company also makes mobile homes for areas near mines. As the company says, it covers resources, recreation and retirement. Unfortunately, its accommodation business has been hit by the cooling of the resources boom.

8. InvoCare Limited (ASX:IVC)

InvoCare is the largest funeral, cemetery and crematorium industry operator in Australia, New Zealand and Singapore. It operates national brands such as White Lady and is well placed to benefit from an increase in the aging population which the company says will increase the death rate by one per cent a year. The death rate is expected to increase to 2.7 per cent in 2033. At $11.05, Invocare is trading well above our valuation.

Shares prices, valuations as at 24 September 2014.


View More Articles By John Abernethy

Gain further insights from John Abernethy and his team of analysts, register for Clime's weekly Investing Report.

John Abernethy is the Chief Investment Officer (CIO), Executive Director of Clime Investment Management (Clime Group) and Chairman of Clime Capital Limited.



 

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