Regis Healthcare (ASX:REG) is back in focus after stating that the Australian Government's 2.55% increase in aged care funding will not keep pace with sector cost inflation, coinciding with a 25% decline in its share price.
At the current share price of A$4.30, Regis Healthcare has seen sharp selling pressure, with the share price down around 31% over the past month and the 1 year total shareholder return declining about 43%. However, the 3 and 5 year total shareholder returns of 89% and 131% still point to a much stronger longer term journey. Recent news, including the latest funding update, full year results, a higher franked dividend, an active acquisition pipeline and a new CFO, has now been reframed by the market through the lens of rising sector costs and perceived funding risk. This helps explain why recent momentum has faded.
Capitalize on the funding and cost pressures highlighted by Regis Healthcare by scanning for aged care and healthcare operators with stronger financial cushions using our hand picked list of solid balance sheet and fundamentals (21 results).Bulls will argue the selloff has pushed Regis Healthcare too far from its recent fundamentals. Bears will focus on funding pressure and rising costs. Which side does the valuation now lean toward as the market reprices the stock?
Preferred P/E of 23.3x: Is it justified?
On the latest data, Regis Healthcare trades on a P/E of 23.3x, while also screening as undervalued on several internal checks at the current A$4.30 share price. That combination puts the focus on whether the current earnings multiple is pricing in the right balance of risks and growth.
The P/E ratio compares what investors pay for each dollar of current earnings. For a company like Regis Healthcare, which operates residential aged care, home care and retirement living in Australia, this is a common way for the market to weigh earnings power against sector specific issues such as funding, staffing costs and capital intensity.
The company screens as good value when that 23.3x P/E is compared to an estimated fair P/E of 30.6x and also when set beside a peer average of 29.6x. Those reference points suggest the market is applying a lower multiple than both a modelled fair level and similar healthcare operators. This is despite forecasts currently pointing to earnings growth of 13.23% per year and revenue growth of 7.3% per year.
However, the same checks highlight important trade offs. Regis Healthcare is described as expensive versus the broader Global Healthcare industry P/E average of 19.6x. There are also balance sheet and quality flags, including negative shareholders equity, higher risk funding sources via external borrowing, and dividends of 4.37% that are not well covered by earnings. Taken together, the stock looks cheaper than some direct peers on a P/E basis but not cheap relative to the wider industry and its own financial structure.
Explore the SWS fair ratio for Regis Healthcare
Result: Price-to-Earnings of 23.3x (UNDERVALUED)
However, there are still clear risks for Regis Healthcare if aged care funding lags cost pressures, or if balance sheet weaknesses restrict flexibility when conditions tighten.
Find out about the key risks to this Regis Healthcare narrative.
Another view on Regis Healthcare using our DCF model
The P/E work suggests Regis Healthcare looks inexpensive relative to its fair ratio and peers. Yet our DCF model points to something even starker. At A$4.30, REG is trading around 63.5% below an estimated future cash flow value of A$11.77. Which signal should matter more for you?
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Regis Healthcare for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 11 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
If this mix of pressure and potential around Regis Healthcare leaves you unsure, that is a useful signal to check the numbers for yourself and act while sentiment is still resetting. To balance the concerns and the upside case, review the 4 key rewards and 3 important warning signs.
Looking for more investment ideas beyond Regis Healthcare?
If Regis Healthcare has sharpened your focus on funding strength and valuation, use this momentum to broaden your watchlist before other investors move first.
- Target stability by scanning resilient companies with lower risk profiles through our focused 14 resilient stocks with low risk scores.
- Hunt for quality at a reasonable price by reviewing our curated 11 high quality undervalued stocks.
- Strengthen your income ideas by assessing companies on our yield focused 8 dividend fortresses.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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