Japara: Priced for perfection

The retirement and aged-care industry is a capital sink hole, as barriers to entry are low and providing patient care and building new facilities is extremely expensive. That hasn't stopped the share price of aged-care provider Japara Healthcare from increasing 25% since listing recently at $2.00 on 17 April.

As we explained a decade ago in the special report Cashing in on the retirement boom, rising demand for healthcare services as Australia's population ages doesn't mean there are easy ways to cash in on the stockmarket. Despite producing above-average profit margins, a history of acquiring underperforming aged care facilities and quickly making them more profitable and restrictions on the number of aged care facilities, Japara's return on equity is a measly 4.6%.

Investors are clearly focused on the company's growth plans, though. Japara intends to increase the number of places it offers from 3,131 to 5,000. Despite the history of poor returns in this sector, Japara has become a darling stock and currently trades on a price-to-tangible-book value of 5.3 and a breathtaking enterprise value-to-earnings before interest and tax multiple of 26. Note the recent federal budget was net neutral for Japara.

With limited cash on the balance sheet, grand expansion plans and the aim of paying out all profits as dividends, we expect Japara will be raising capital as it progresses, which is partly why it listed. Japara is unlikely to pique our interest at the best of times, but with a sky-high valuation we recommend you AVOID Japara.