The takeover bid of the Regis Healthcare Ltd (ASX: REG) share price triggered a re-rating with JP Morgan upgrading the sector to “buy”.
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The takeover bid didn’t only send the Regis Healthcare Ltd (ASX: REG) share price soaring. It triggered a re-rating among its peers with at least one leading broker upgrading the whole sector.
Takeover bid triggers rally in ASX aged care stocks
In contrast, the S&P/ASX 200 Index (Index:^AXJO) is trading 0.2% higher after reversing its morning loss.
It seems opportunistic suitors may be scouring for targets ahead of the aged care Royal Commission’s final report next February.
ASX aged care sector gets an upgrade
“While the recommendations and the resulting Govt policy and funding decisions are uncertain we believe it is reasonable to assume FY21 will be a low point,” said JP Morgan.
“We believe investors should consider building a position in the sector now despite the continuing uncertainty.”
Based on this belief and the prospects for mergers and acquisitions (M&As), the broker upgraded its recommendation on the Japara share price and Estia share price to “overweight” (or “buy).
Royal Commission’s final report not a big risk
What’s more, the release of the Royal Commission’s findings may hold some positives for the aged care sector.
Given that around 60% of aged care facilities are running at a loss, the Royal Commission is likely to recommend increased government funding for the sector.
This doesn’t mean there aren’t risks. The biggest is increased regulation, which JP Morgan warns may offset the benefits from increased funding.
Risk-reward starting to look appealing
However, the broker doesn’t believe this is a key risk as regulators will not want new rules to lead to poor care outcomes.
Two other risks to the sector also looks to be easing. These are occupancy and property price risks.
“Falling occupancy has been a key challenge over the last year. While pressure remains, we believe it has likely bottomed given the non-discretionary nature of the demand and reduced negative media coverage,” said JP Morgan.
“Concerns over the impact of a drop in residential property prices have also receded as asset prices have stabilised and the pandemic has been well managed in Australia.”
Further, the ongoing rotation into value stocks may provide an extra tailwind for the sector.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.