Japara (JHC) equity research initiation report - riding the silver tsunami - finding shareholder value in aged care

Wilson HTM Equities Research – Japara Healthcare Limited
Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read
in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an
explanation of recommendations can be found at the end of this document.
08 October 2014
JAPARA HEALTHCARE LIMITED (JHC)
ACTION & RECOMMENDATION
We initiate coverage on Japara Healthcare with a BUY recommendation
and $2.77 price target. We estimate Japara has up to ~60% EPS upside
over three years from: 1) the deployment of ~A$142m in increased
accommodation bonds into value-adding acquisitions; and 2) extra
services revenue. Japara is well placed to achieve its medium-term
goal of 5,000 beds (versus 3,408 currently). The sector benefits from an
ageing population underpinning demand combined with supply limited
by government regulations. There will be increased private investment
opportunity as the number of beds is forecast to increase by 45% to
265,000 by 2022 and more aged care stocks list on the ASX.
Riding the silver tsunami – finding shareholder value in aged care
InitiatingCoverage
Upside in the new legislative regime
The Living Longer, Living Better aged care sector reforms
commenced 1 July 2014.
We estimate there is 30-60% EPS upside over three years as
Japara deploys an additional A$142m of accommodation bonds
(“RADs”) from FY15-17F in new acquisitions. None of this upside is
in our base case valuation.
Another potential upside is extra services revenue. Japara can now
offer extra lifestyle services to its entire 3,408 beds (compared with
the previous legal maximum of 15% of all beds).
Acquisition upside in a fragmented sector
The highly fragmented sector provides significant consolidation
opportunities for corporatised operators. Japara is the sector’s
fifth-largest private operator, yet its 3,408 beds comprise only about
2% market share. High occupancy rates reflect attractive
supply-demand balance.
The sector’s average 92.3% reflects the strong demand of an
ageing population combined with supply currently limited by the
federal government’s release of approved places.
Fairly priced given the growth potential
 We believe Japara is fairly priced given its medium-term growth
potential. A $2.35 share price implies a FY15F PE of 20x on $30m
NPAT (ie FY15F guidance adjusted for Whelan acquisition).
12m Target Price (AUD) $2.77
Share Price @ 08-Oct-14 (AUD) $2.37
Fcst 12m Capital Return 17.1%
Fcst 12m Dividend Yield 4.9%
12m Total S’holder Return 22.0%
George Gabriel
george.gabriel@wilsonhtm.com.au
Tel. +61 3 9640 9999
12m Share Price Performance
1m 6m 12m
Abs. Return (%) 4.9
Rel. Return (%) 9.5
WHTM Return Re-Investment Matrix
Return
High Cash Generator ChampionLow
Challenged Potential
Low High
Re-Investment
WHTM Risk Assessment
Low Med High Spec
Share
Price
Risk
Business
Risk
Year-End June (AUD) FY14A FY15E FY16E FY17E FY18E
NPAT Rep ($m) 22.4 30.0 35.4 39.0 43.5
NPAT Norm ($m) 22.4 30.0 35.4 39.0 43.5
Consensus NPAT ($m) 27.5 29.0 33.0 34.3
EPS Norm (cps) 8.5 11.4 13.5 14.8 16.5
EPS Growth (%) 34 18 10 12
P/E Norm (x) 27.9 20.8 17.6 16.0 14.3
EV/EBITDA (x) 14.6 11.9 10.0 9.0 7.8
FCF Yield (%) 4.3 17.5 10.6 12.3 9.5
DPS (cps) 0.0 11.4 13.5 14.8 16.5
Dividend Yield (%) 0.0 4.8 5.7 6.2 7.0
Franking (%) 100 100 100 100 100
Source: Company data, WHTM estimates, S&P Capital IQ
Key Changes Before After Var %
NPAT: FY15 30.0
Norm FY16 35.4
($m) FY17 39.0
EPS: FY15 11.4
Norm FY16 13.5
(cps) FY17 14.8
DPS: FY15 11.4
(cps) FY16 13.5
FY17 14.8
Price Target: 2.77
Rec: BUY
Mkt Cap: $623m Enterprise Value: $611m Shares: 263m Sold Short: 2.2 ASX 300 Wgt: 0.0% Median T’over/Day: $1.0m
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Sep-13 Jan-14 May-14 Sep-14
$ JHC XSI Rebased

08 October 2014
Health Care Equipment & Services
Japara Healthcare Limited
Wilson HTM Equities Research – Japara Healthcare Limited 2
PRICE TARGET
Valuation
Discounted Cash Flow 2.94
EV/EBITDA multiple 2.71
PE multiple 2.51
Weighted average 2.77
Price target 2.77
INTERIMS ($m)
Half-yr (AUD) Dec 13 Jun 14 Dec 14 Jun 15
1HA 2HA 1HE 2HE
Sales
Revenue
132.7 108.6 146.2 119.6
EBITDA 23.1 18.9 28.3 23.1
EBIT 18.1 14.8 23.9 19.6
Net Profit 12.3 10.1 16.5 13.5
Norm. EPS 4.7 3.8 6.3 5.1
EBIT/Sales
(%)
13.6 13.6 16.4 16.4
Dividend (c) 0.0 0.0 6.3 5.1
Franking (%) 0.0 0.0 0.0 0.0
FINANCIAL STABILITY
Year-end June (AUD) FY14A FY15E FY16E
Net Debt -12.3 -52.1 -82.9
Net Debt / Equity (%) <0 <0 <0
Net Debt / EV (%) <0 <0 <0
Current Ratio (x) 2.8 2.5 2.4
Interest Cover (x) 34.2 69.3 20.0
Adj. Cash Int. Cover (x) 38.8 >99 31.6
Debt / CashFlow (x) 0.0 0.1 0.2
Net Debt (cash) / share
($)
<0 <0 <0
NTA / share ($) 2.0 2.0 2.0
Book Value / share ($) 2.0 2.0 2.0
Payout Ratio (%) 0 100 100
Adj. Payout Ratio (%) 0 28 53
EPS RECONCILIATION ($m)
FY14A FY15E
Rep. Norm
.
Rep. Norm
.Sales Revenue 241 241 266 266
EBIT 32.9 32.9 43.5 43.5
Net Profit 22.4 22.4 30.0 30.0
Notional Earn. 0.0 0.0 0.0 0.0
Pref./Conv. Div. 0.0 0.0 0.0 0.0
Profit for EPS 22.4 22.4 30.0 30.0
Diluted Shrs(m) 263 263 263 263
Diluted EPS (c) 8.5 8.5 11.4 11.4
KEY ASSUMPTIONS
Year-end June (AUD) FY14A FY15E FY16E FY17E FY18E
Revenue Growth (%) 10.2 10.8 8.7 10.6
EBIT Growth (%) 32.2 22.3 12.6 17.0
NPAT Growth (%) 34.2 17.9 10.1 11.6
EPS Growth (%) 34.2 17.9 10.1 11.6
EBIT / Sales (%) 16.1 17.8 18.4 19.5
Tax Rate (%) 30.0 30.0 30.0 30.0
ROA (%) 5.0 5.9 6.4 7.3
ROE (%) 5.8 6.9 7.6 8.5
PROFIT & LOSS ($m)
Sales Revenue 241.3 265.9 294.7 320.3 354.4
EBITDA 41.9 51.4 61.3 68.2 78.6
Depn & Amort 9.0 7.9 8.1 8.2 8.4
EBIT 32.9 43.5 53.2 59.9 70.1
Net Interest Expense 1.0 0.6 2.7 4.2 8.0
Tax 9.6 12.9 15.2 16.7 18.7
Minorities / pref divs 0.0 0.0 0.0 0.0 0.0
Equity accounted NPAT 0.0 0.0 0.0 0.0 0.0
Net Profit pre Sig. Items 22.4 30.0 35.4 39.0 43.5
Abn’s / Ext’s / Signif. 0.0 0.0 0.0 0.0 0.0
Reported Net Profit 22.4 30.0 35.4 39.0 43.5
CASH FLOW ($m)
EBITDA 41.9 51.4 61.3 68.2 78.6
Interest & Tax -9.1 -12.0 -16.8 -20.9 -26.6
Working Cap / Other 8.3 76.6 29.2 37.7 16.4
Operating Cash Flow 41.2 116.1 73.7 84.9 68.3
Maintenance Capex -14.4 -6.8 -7.5 -8.1 -9.0
Free Cash Flow 26.8 109.3 66.3 76.8 59.3
Dividends Paid 0.0 -30.0 -35.4 -39.0 -43.5
Growth Capex 0.0 0.0 0.0 0.0 0.0
Invest. / Disposals 0.0 -39.5 0.0 0.0 0.0
Other Inv. Flows 0.0 0.0 0.0 0.0 0.0
Cash Flow Pre Financing 26.8 39.8 30.9 37.8 15.8
Funded by Equity 0.0 0.0 0.0 0.0 0.0
Funded by Debt 0.0 0.0 0.0 0.0 0.0
Funded by Cash -26.8 -39.8 -30.9 -37.8 -15.8
BALANCE SHEET SUMMARY ($m)
Cash 28.1 67.9 98.7 136.6 152.4
Current Receivables 7.1 0.0 0.0 0.0 0.0
Current Inventories 0.0 0.0 0.0 0.0 0.0
Net PPE 340.8 379.1 378.5 378.4 379.0
Investments 23.3 23.3 23.3 23.3 23.3
Intangibles / Capitalised 393.2 393.2 393.2 393.2 393.2
Other 7.5 7.5 7.5 7.5 7.5
Total Assets 800.0 871.0 901.3 939.0 955.4
Current Payables 15.4 7.6 8.5 9.2 10.2
Total Debt 15.8 15.8 15.8 15.8 15.8
Other Liabilities 254.8 333.6 363.0 400.0 415.4
Total Liabilities 286.0 357.0 387.3 425.0 441.4
Minorities / Convertibles 0.0 0.0 0.0 0.0 0.0
Shareholder Equity 514.0 514.0 514.0 514.0 514.0
Total Funds Employed 529.8 529.8 529.8 529.8 529.8
RETURNS
FY14A FY15E FY16E FY17E
ROE (%) 8.5 5.8 6.9 7.6
ROIC (%) 9.0 6.3 8.3 10.2

08 October 2014
Table of contents
Key investment considerations .................................................................................. 4
High growth, fragmented sector................................................................................. 6
Aged care is growing quickly.................................................................................. 6
High occupancy rates reflect supply-demand imbalance ...................................... 6
Fragmented sector ................................................................................................. 7
Revenue model .......................................................................................................... 8
ACFI revenues ...................................................................................................... 8
Resident contributions............................................................................................ 8
New revenue lines.................................................................................................. 9
Value-adding, top quartile operator.......................................................................... 10
Accommodation payments....................................................................................... 12
Overview .............................................................................................................. 12
Accounting............................................................................................................ 13
Valuation .................................................................................................................. 14
Blended valuation................................................................................................. 14
EV/EBITDA valuation ........................................................................................... 14
Comparable companies valuation........................................................................ 15
RAD valuation impact........................................................................................... 16
Earnings outlook ...................................................................................................... 17
Guidance.............................................................................................................. 17
ACFI revenue ....................................................................................................... 18
Occupancy ........................................................................................................... 18
Brownfields........................................................................................................... 19
Acquisitions .......................................................................................................... 19
Regulatory change ............................................................................................... 19
Margins................................................................................................................. 20
Japara business overview........................................................................................ 21
Business overview ............................................................................................... 21
Board and management........................................................................................... 22
Risks......................................................................................................................... 24
Downside risks ......................................................................................................24
Upside risks...........................................................................................................25

08 October 2014
Key investment considerations
Upside from the new legislative regime. The new Living Longer, Living Better
regulatory regime, applicable from 1 July 2014, creates multiple upsides for Japara
Healthcare. Most of this upside is not currently in our base case valuation:
Accommodation bond (“RAD”) upside – we estimate there is 30-60% EPS
upside over three years as Japara invests an additional A$142m of refundable
accommodation bonds (“RADs”) from FY15-17F in new acquisitions. None of
this upside is in our base case valuation. The catalysts required to include this
upside in our base case valuation are: good momentum in RAD inflows from
1 July 2014; and continuing acquisition value-add.
Extra services fee upside – the extent of upside in extra services revenue will
not be known for up to 12 months. Our base case currently assumes additional
extra services revenue of ~$3.2m in FY15F, at a 10% bed penetration ratio and
40% gross margin. Previously, extra services could only be offered to a
maximum of 15% of beds. Japara can now offer extra services to all beds.
Japara is rolling out its “My Choices” extra services offering from October 2014
to the remaining ~2,800 beds.
Daily accommodation payment (DAP) upside – there is upside to our base
case numbers if the DAP/RAD mix exceeds the forecast 38/62% mix (Japara’s
prospectus forecasts). From 1 July 2014, residents have the choice of paying a
DAP instead of a RAD. Our base case assumes Japara will generate an
additional DAP revenue of ~$3.4m in FY15F. DAPs are expected to average
~$51 per resident, per day in FY15F.
JHC has significant upside
potential from the new legislative
regime, applicable from 1 July
We estimate up to 50% EPS
upside over 3 years from
deployment of increased
refundable accommodation
deposits (RADs) into acquisitions
It is too early to tell how much
upside there will be from provision
of “My Choices” extra services
Acquisition upside – Japara’s strategy is to increase its number of beds to
5,000 in the medium term through a combination of acquisitions and brownfield
expansion. Japara has a track record of adding value by acquiring smaller
operators and applying Japara’s established systems and processes (in
facilities, human resources, cost management and corporate governance). The
sector is ripe for consolidation given:
- it is highly fragmented;
- large variability in profit between operators (not-for-profit operators generate
an average EBITDA per resident of A$8,176 versus a for-profit industry
average of $13,121 and Japara’s $21,408 (FY13));
- scalability of systems; and
- emergence of corporatised business models to replace “cottage industry”
operators.
JHC’s strategy is to grow to
5,000 beds over the medium
term through acquisitions and
brownfield development
Brownfield development upside – brownfield developments (ie an extension
of existing facilities) are expected to add another 500 beds over the next four
years. Our base case valuation currently includes brownfields projects as per
prospectus forecasts.
Brownfields are a key growth
strategy
Valuing RADs – in our enterprise value (EV) calculation, we do not include
RADs as debt because we assume that RADs remain a perpetual component of
the capital structure. In our discounted cash flow (DCF) valuation, we include
the change in RAD as a change in working capital which flows through to free
cash flow to equity (similar to a “working capital release”) because an increase
in RAD balances would in fact replace working expenditure.
RADs are not included as debt in
EV calculations. In the DCF
valuation, change in RAD is
included as a change in working
capital which impacts FCFE

08 October 2014
Highly fragmented sector – the sector is highly fragmented, with 65% of
operators being single-facility operators and the top 10 operators accounting for
~17% of the sector’s 180,000 total beds. Japara is sector’s fifth largest, with
3,408 beds comprising ~2% market share. About 58% of places are managed
by not-for-profit operators.
JHC is the sector’s 5th-largest
operator, and yet only has 2%
market share
FY15F guidance has been reaffirmed – Japara has reaffirmed guidance of
A$48.9m EBITDA and A$27.7m NPAT. Adjusting for the Whelan acquisition on
August 2014 implies a FY15F PE of 20x on $30m NPAT (share price of $2.35,
FY15F EBITDA guidance of $50.3m and NPAT of $30.0m).
20x FY15F PE multiple is implied
by adjusted FY15F NPAT
guidance
100% dividend payout ratio – Japara’s 100% of NPAT dividend payout ratio is
supported by accommodation bond funding. Japara’s FY15F dividend forecast
implies a 4.8% dividend yield.
100% dividend payout ratio is
supported by accommodation
bond funding
Good return on tangible equity (ROTE) – nominal FY14 return on equity
appears low, at ~4%. However, nominal ROE is depressed due to high
acquisition goodwill ($384.5m on $800m total assets in FY14) resulting from
Japara’s acquisitions over eight years. Removing acquisition goodwill results in
FY14 ROTE of ~17%.
Nominal ROE is depressed by
acquisition goodwill. FY14 ROTE
is ~17%

08 October 2014
High growth, fragmented sector
Japara is a value-adding consolidator in a high growth, fragmented sector.
AGED CARE IS GROWING QUICKLY
The residential aged care sector comprises ~186,000 beds/places, more than
double the size of the hospital sector’s (public and private combined) 87,000 places.
The government expects the number of beds to increase to ~265,000 by 2022, at a
compound annual growth rate (CAGR) of 4.2% per annum (source: The Future of
Aged Care Nursing in Australia, October 2013).
The Productivity Commission expects that:
the number of Australians aged over 85 years will double within 20 years; and
by 2050 more than 3.5m Australians will use aged care services each year.
Total sector revenue CAGR from 2009-14 is about 9%.
The number of aged care beds is
expected to increase by ~45% to
265,000 by 2022
CHART 1: TOTAL SECTOR REVENUE GROWTH 2009-14
Source: Report on Government Services 2013 – Steering Committee Report, 2012-13 Report on the
Operation of the Aged Care Act 1997
Total sector revenue CAGR is
~9% from 2009-14
HIGH OCCUPANCY RATES REFLECT SUPPLY-DEMAND IMBALANCE
High demand outlook:
- Demand is underpinned by an ageing population.
- The government forecasts demand growth of 4.2% per annum through to
2022.
Supply side constraints exist:
- Aged care places increased by ~1.9% per annum from 2006-13. It is
uncertain how many places will be confirmed going forwards. We expect
continuing supply-side constraints given: the government funds ~70%
operating revenues; continuing cost inflation to the government on a per bed
basis; federal government budget constraints; and barriers to entry,
including government limits on new bed numbers and continuing regulatory
compliance.
High occupancy rates reflect the supply-demand imbalance:
- Occupancy rates have averaged 92.3% over the past five years.
Demand is underpinned by an
ageing population
We expect continuing supply side
constraints
6.5
7.1
8
8.7
9.2
0
1
2
3
4
5
6
7
8
9
10
FY09 FY10 FY11 FY12 FY13
GovernmentFunding($bn)

08 October 2014
CHART 2: AGED CARE OCCUPANCY RATES
Source: Australian Institute of Health and Welfare, “Australia’s Health”, 2012
High occupancy rates reflect the
supply-demand imbalance
FRAGMENTED SECTOR
The aged care sector is highly fragmented.
Japara’s 3,408 beds comprise ~2% market share, making it the fifth-largest player
(after Bupa, Opal, Regis and Estia).
The key sector statistics (as at 30 June 2013) are:
 2,716 homes;
 around 186,000 beds;
 65% are single-facility operators;
 38% are private for-profit operators; the majority are not-for-profit;
 more than 90% operators have less than 10 facilities (source: Inaugural Report,
ACFA 2013).
CHART 3: BEDS PER OPERATOR
Source: WHTM Research, company accounts
JHC’s 3,408 beds is ~2% market
share
JHC is the sector’s 5th-largest
operator by number of beds
92.9%
92.4%
93.1%
92.8%
92.7%
92.0%
92.2%
92.4%
92.6%
92.8%
93.0%
93.2%
FY09 FY10 FY11 FY12 FY13
OccupancyRate
-
1,000
2,000
3,000
4,000
5,000
6,000
Bupa Opal
Aged
Care
Regis Estia Japara Allity Aegis Arcare Tricare Hall &
Prior
Blue
Cross
Beds

08 October 2014
Revenue model
Aged care operators source their revenue from two sources:
federal government revenue, called “ACFI” (~70% Japara’s revenue); and
resident payments (~30% revenue).
AGED CARE FUNDING INSTRUMENT (ACFI) REVENUES
There are four types of payments made by the federal government to aged care
operators:
Basic residential care subsidy (“ACFI”) – ACFI revenues are driven by a
resident’s dependency (ie level of care needs) and income. Payments are
provided in accordance with the payment schedules of the Aged Care Funding
Instrument (ACFI). The process of claiming revenue from the government is
rather technical and often requires dedicated ACFI teams to maximise revenue.
Japara achieved average ACFI funding of $146 per day per place, which is 17%
above the industry average of $125 per day in FY14.
Primary supplements – primary supplements are payable to operators that
can demonstrate they supply specific higher-care services to eligible residents,
as approved by a Government Aged Care Assessment Team (ACAT). The
types of services include:
- enteral feeding; and
- administration of oxygen to an eligible resident.
Other supplements – Other supplements are provided to operators that supply
more than 40% of their residential services to supported, concessional or
assisted residents, as defined in the Residential Care Subsidy Principles 1997.
Conditional adjustment payments (CAPs) – CAPs are available to operators
that satisfy improved management practice criteria. The subsidy is designed to
improve the overall performance and accessibility of the sector.
JHC’s operating revenue
comprises ~70% government and
~30% resident payments
There are 4 types of payments
made by the government to aged
care operators
JHC received average ACFI
funding of $146 per place per day
RESIDENT CONTRIBUTIONS
Residents contribute around 30% of operating funding through two categories,
regulated by the government:
Basic daily care fee – this contributes to living expenses (eg meals, laundry,
heating/cooling, nursing and personal care). The maximum basic daily fee is
currently 85% of the annual single basic age pension for all permanent
residents, which is currently ~$17k per annum.
Income-tested fee – if a resident’s income is above a specified limit, the
additional fee paid by the resident replaces the government’s proportion of
funding (ie there is no impact to the aged care operator).
The maximum basic daily fee is
85% of the annual single basic age
pension, currently ~$17k pa

08 October 2014
NEW REVENUE LINES
Other revenue lines include:
Daily accommodation payments (DAP) – from 1 July 2014, new rules apply
which give residents the option of paying a DAP instead of an accommodation
bond (known as a “refundable accommodation deposit” or RAD). If a resident
chooses to pay a DAP (instead of a RAD), then the DAP is received as revenue
by the aged care operator.
Japara forecasts that the DAP/RAD mix for new residents will be 37.9% and
62.2%, the average DAP for FY15 is $51 per resident per day, and the average
RAD per resident in FY15 is $283,000.
Extra services fees – it is too early to estimate how much upside Japara can
capture in increased extra services revenue.
Extra services fees are for upgraded standards of accommodation, food and
other services (eg entertainment). From 1 July 2014, aged care operators can
offer Extra Services to all beds (previously it was limited to a maximum of 15%
of beds).
Japara is rolling out its My Choices extra services offering from October 2014,
charging $45 per day for extra services. The full level of customer take-up will
be known in about 2.4 years (ie the average length of stay for a resident).
It is too early to estimate how
much upside JHC can capture in
increased Extra Services revenue
JHC is rolling out its My Choices
extra services offering from
October 2014

08 October 2014
Value-adding, top quartile operator
Japara has a track record of applying its established systems and processes to add
value to acquisitions. Value-adding methods include:
 improving occupancy;
 improved ACFI billing – ACFI calculations are quite complex and given
residents’ care needs change over time, and Japara has a full-time ACFI-billing
team focused on revenue maximisation;
 reducing catering, cleaning and laundry costs through in-house service
provision;
 reduced temporary labour hire – efficient rostering reduces the need to hire
expensive agency staff;
 procurement savings through scale; and
 focus on best-practice technologies and methods – Japara seeks continuous
operational improvement through the use of new technologies and systems.
Japara’s $21,540 EBITDA per resident is in the sector’s top quartile (Chart 4). This
is driven by its systems and processes as well as operating scale.
JHC has a track record of adding
value to acquisitions through its
established systems & processes
and operating scale
CHART 4: EBITDA PER RESIDENT PER ANNUM 2011-12
Source: “Inaugural Report on the funding and financing of the Aged Care Sector”, Aged Care Financing
Authority, 2013
JHC is a top quartile
operator
($15,000)
($10,000)
($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Not-for profit For-profit Government Total
1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

08 October 2014
CHART 5: EBITDA PER RESIDENT PER ANNUM 2006-12
“Report on the residential aged care sector”, KPMG, 2013

08 October 2014
Accommodation payments
OVERVIEW
Accommodation bonds (also known as refundable accommodation deposits or
“RADs”) are a unique feature of the aged care sector.
RADs are interest-free funding which aged care operators can use for working
capital and development, but not for capital management. The key impact is that
RADs can fund both brownfield expansion and acquisitions, as well as a 100%
dividend payout ratio. Table 1 describes the key features of RADs. We analyse the
valuation implications of RADs in the “Valuation” section below.
Accommodation bonds are also
known as refundable
accommodation deposits (“RADs”).
RADs are effectively interest-free
finance which can be used to
finance working capital and
development
TABLE 1: OVERVIEW OF RADS
Source: WHTM Research
Living Longer, Living Better – the new legislative framework
From 1 July 2014, the Living Longer, Living Better aged care reforms apply. Table 2
summarises the key changes, which include:
 100% of beds are now “bondable”. Previously, bonds were not permitted on
high care beds, so ~45% of Japara’s beds were potentially “bondable”. The final
level of Japara’s RAD base will be known in ~2.4 years, as it accepts new
residents over that time. As at 30 June 2014, Japara has $220.9m of RADs,
which we estimate will increase by $142m through to FY17.
 100% of beds can now choose to purchase extra services (previously capped at
15%).
100% of JHC’s beds are now
“bondable”. Previously, high care
beds (~54% JHC’s total) could not
be “bonded” beds. Extra services
can now be offered to 100% of
beds
Feature Description
Paid by: Aged care residents upon admission to an aged care facility.
Amount Set by the operator.
Averaged ~$274k across the sector in 2013.
Ministerial Approval is required if >$550k.
Duration: Held for the duration of residents’ stay.
Repayment date:
Refunded immediately if the resident moves to another facility or w ithin 14 days of the
grant of probate.
Repayment amount: Face value (ie. zero price inflation or deflation; zero interest paid).
Applicable to:
From 1 July 2014, operators are able to charge bonds to all classifications of residents.
Previously, less than half of JHC’s beds w ere “bondable”.
Use of funds:
Can be used by the operator to fund developments, acquisitions or repay debt but not to
pay dividends.
Capital gains: Bond capital gains accrue to the operator.
Bonds are generally correlated w ith residential property prices.
Bond capital gains have been ~9.9% CAGR over the last 7 years, broadly in line w ith
residential property market grow th.
Guarantee: Bond repayments are guaranteed by the Government.

08 October 2014
TABLE 2: OVERVIEW OF LEGISLATIVE CHANGES
Source: WHTM Research
ACCOUNTING
Refundable accommodation deposits (RADs) have both a balance sheet and cash
flow impact:
On the balance sheet, RADs are current “other financial liabilities”. Even though
100% of RADs are classified as current, typically only around 40% of RADs are
repayable each year as residents depart the aged care facilities.
On the cash flow statement, RADs are financing cash flows. In FY14, Japara
reported a $25.6m cash inflow in “proceeds from accommodation bonds” and
an $11.2m cash outflow in “repayment of accommodation bonds”.
It is important to note that RADs are not considered as debt for the purposes of
bank credit analysis because typically RADs are repaid to a departing aged care
resident from the RAD deposit of an incoming resident.
Daily accommodation payments (DAPs) are recognised as revenue in the profit and
loss statements and as operating cash flow.
RADs are classified as current
“other financial liabilities” and are
reported in cash flow from
financing activities
Feature Pre 30 June 2014 Post 1 July 2014
Accommodation bonds Bonds on high care
beds not permitted.
Operators can charge ABs to all classifications of residents
AB prices set at
operator discretion.
The distinction betw een Low Care, High Care and Extra Services
residents w ill be removed
Maximum set at $550k (w ith any excess requiring ministerial
approval).
Payment options Only ABs w ere paid. Residents can choose betw een payment of a lump sum (RAD) or
regular cashflow (DAP), or a cominbation of both.
Resident fees (DAP) $33 fixed fee. Average DAPw ill likely increase from $33 fixed to ~$51 per day,
w hich is 6.59% of the bond w hich the residents w ould otherw ise
be paying.
Extra services Only 15% of beds could
purchase extra
services.
100% of beds can choose to purchase extra services for higher
end lifestyle services (e.g. food, entertainment) and superior
accommodation (e.g. Hotel services).
Means testing Changed.
Significant
refurbishment
Did not apply. Operators w ho have completed a new construction or a significant
refurbishment receive an additional $20 a day accommodation
supplement.

08 October 2014
Valuation
BLENDED VALUATION
Our blended valuation is $2.77 per share, summarised in Table 3. Note that:
Upside risk exists from increased RAD-funded acquisitions. We forecast
an additional ~$142m in increased RAD balance over the next three years.
Based on Japara’s expected returns from its August 2014 Whelan acquisition,
an additional $142m in acquisitions can generate from 30-60% EPS upside (not
in our base case valuation).
It is too early to estimate extra services penetration, given Japara’s My
Choices extra services offering is being rolled out from October 2014.
Risks to our base case valuation
include: acquisitions and extra
services
TABLE 3: BLENDED VALUATION
Source: WHTM estimates
EV/EBITDA VALUATION
Our EV/EBITDA multiple of 12x is a discount to Japara’s recent 13.9x acquisition of
Whelan.
TABLE 4: WHELAN ACQUISITION METRICS
Source: JHC. Upside case reflects further growth in EBITDA anticipated in line with JHC portfolio
average over time and as the Trevu facility is completed and operational
Methodology Key Inputs Weighting Value ($ps)
Discounted Cash Flow 11.0% WACC 50% $2.94
EV/EBITDA multiple 14x FY15E EV/EBITDA 25% $2.71
PE multiple 22x FYF PE 25% $2.51
Weighted average $2.77
Methodology Base Upside
Net purchase price 39.5 39.5
EBITDA 2.85 4
EV/EBITDA (x) 13.9x 9.9x
Source: JHC. Upside case reflects further growth in EBITDA anticipated in line
with JHC portfolio average over time and as Trevu facility is completed and
operational.

08 October 2014
COMPARABLE COMPANIES VALUATION
The only directly comparable listed stock is Regis Healthcare Ltd (REG), which
listed on the ASX on 7 October (issue price $3.65 per share, closed at $4.02 on first
day of trading). Ryman (RYM) and Summerset (SNZ) are dual NZ-ASX listed
integrated health care-retirement village operators.
The key conclusions are:
Japara’s FY15F PE of 22.4x is broadly in line with sector average of 22.7x.
Japara’s FY15F EV/EBITDA of 12.4x is at a discount to Regis’ 13.4x.
Both Japara and REG trade at a discount to New Zealand’s integrated aged
care-retirement village business models (RYM and SNZ). We believe that the
higher valuation rating reflects the diversified earnings base and longer-stay
residents (a “one-stop shop” providing independent retirement living to
supported aged care services). The higher valuation of integrated retirement
village-aged care operators represents a potential upside for Japara and REG if
their business models evolve over time.
The listed retirement villages sector (including INA, LIC and AVO) trades at a
27% FY15F PE discount and 16% EV/EBITDA discount to the aged care
sector. We believe this is due to the increased capital intensity and relative lack
of annuity revenues compared with the aged care sector.
JHC’s FY15F PE of ~22x is in line
with the sector average
JHC and REG could re-rate if their
business models evolve into
integrated retirement village-aged
care models
The retirement village sector
trades at a discount to aged care
due to higher capital intensity and
lack of annuity revenues

08 October 2014
TABLE 5: COMPARABLE COMPANIES VALUATION
Source: Wilson HTM Research
RAD VALUATION IMPACT
RADs effectively provide an interest-free source of funding for brownfields and
acquisitions.
In our discounted cash flow (DCF) valuation, we include the capital appreciation of
RADs as free cash flow to equity. Our rationale is that:
departing residents only receive the face value of the RAD upon departure, and
any capital uplift (or decline) is received (or incurred) by the aged care operator;
and
historically, the value of RADs has increased ~9% per annum, broadly in line
with residential property market growth.
RADs provide free optionality on acquisition value-add. Aged care operators with a
track record of value-adding acquisitions are well placed to benefit from the Living
Longer, Living Better reforms, which increase the number of potentially bondable
beds.
We do not consider RADs to form a part of debt for the purposes of enterprise value
calculation, consistent with the treatment of commercial banks (which do not include
RADs in bank debt covenants). Our rationale is that in a going concern aged care
operator in a stable sector, RADs will not have any claim over the assets of the
aged care operator and will instead be repaid by incoming residents.
In our DCF valuation, the capital
appreciation of RADs over time
are included as in free cash flow to
equity
RADs provide a free call option on
acquisition value-add
We do not consider RADs to be
debt, consistent with the treatment
of commercial banks
Comparable companies
Ticker
Mkt cap
(A$M) PE PE PE PE EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA
2014 2015 2016 2017 2014 2015 2016 2017
Comparable Companies
Aged care
Japara Healthcare Ltd JHC 623.4 27.6x 22.4x 21.5x 17.8x 14.8x 12.4x 12.0x 10.4x
Regis Healthcare Ltd REG 1,207.2 25.2x 13.9x 13.4x - -
Ryman Healthcare Ltd RYM 3,815.0 32.3x 25.5x 22.5x 19.2x 23.3x 22.5x 19.6x 16.2x
Summerset Group Holdings Ltd SNZ 554.8 22.0x 18.0x 14.0x 13.2x 20.6x 17.4x 14.2x 13.5x
Average - aged care 27.3x 22.7x 19.4x 16.7x 18.2x 16.4x 15.3x 13.4x
Private hospitals
Ramsay Health Care Ltd RHC 10,001.0 30.3x 25.5x 22.3x 19.8x 15.9x 13.1x 10.9x 9.8x
Healthscope Ltd HSO 4,295.6 21.2x 25.6x 23.8x 20.7x 19.7x 13.6x 12.6x 11.2x
Average - private hospitals 25.8x 25.5x 23.1x 20.2x 17.8x 13.4x 11.8x 10.5x
Health services
Sonic Healthcare Ltd SHL 6,976.4 17.8x 16.7x 15.3x 14.0x 11.9x 11.0x 10.1x 9.2x
Primary Health Care Ltd PRY 2,138.9 14.1x 12.0x 11.1x 10.3x 8.0x 7.6x 7.2x 6.7x
Invocare Ltd IVC 1,202.6 25.6x 23.2x 20.9x 19.6x 14.2x 13.1x 12.1x 11.4x
Virtus Health Ltd VRT 623.6 19.3x 17.1x 14.8x 13.4x 12.0x 10.5x 9.3x 8.3x
Average - health services 22.4x 20.1x 17.8x 16.5x 13.1x 11.8x 10.7x 9.9x
Retirement villages
Ingenia Communities Group INA 313.2 25.6x 15.9x 11.0x 8.2x 30.4x 15.5x 11.8x 10.7x
Lifestyle Communities Ltd LIC 178.9 16.6x 13.8x 12.6x 11.2x 9.6x 8.1x 7.4x 6.5x
Aveo Group AVO 1,025.2 21.4x 19.9x 14.1x 12.6x 22.0x 17.8x 13.1x 12.3x
Average - retirement villages 21.2x 16.5x 12.6x 10.7x 20.7x 13.8x 10.8x 9.8x
Average - total 23.7x 20.8x 17.7x 15.6x 16.8x 13.6x 11.8x 10.6x

08 October 2014
Earnings outlook
GUIDANCE
Japara has confirmed its FY15F prospectus EBITDA forecast of A$48.9m and
A$27.7m NPAT. Adjusting for August 2014’s Whelan acquisition (settling December
2015) implies FY15F EBITDA guidance of $50.3m and NPAT of $30.0m.
Chart 6 illustrates Japara’s EBITDA bridge from FY14 to FY15F. Below, we discuss
the key earnings drivers:
organic revenue growth (ie ACFI revenue);
occupancy rates;
brownfields expansion;
acquisitions;
regulatory change; and
margins.
CHART 6: EBITDA BRIDGE TO FY15F
Source: JHC FY14 results presentation

08 October 2014
ACFI REVENUE
Our forecast organic revenue growth of 6-8% cross-cycle comprises:
ACFI organic growth of 4-5% per annum; and
Acuity creep of 2-3% per annum.
However, organic revenue growth is variable from year to year. Relevant historical
data points include the following:
The CAGR in government fees paid per resident from FY09 to FY13 was ~7.1%
per annum:
- Total government spending per resident has increased in line with the
increasing care needs of residents (called “acuity creep”). Acuity creep adds
~2-3% per annum.
- The government tends to increase the ACFI fee schedule by ~1.6-2% per
resident per annum as part of its Commonwealth Own Purpose Expense
(COPE) schedule, but will reduce this to 0% after a period of above-average
revenue growth. In FY13, the government set the COPE at 0%.
- COPE grew by an average 8.7% between 2009 and 2012.
The government believes the overall cost per patient will settle at 2-3% above
inflation.
We forecast organic revenue
growth of 6-8% p.a.
Acuity creep adds 2-3% revenue
p.a.
COPE adds up to 2% p.a.
OCCUPANCY
Occupancy is an important revenue driver. Occupancy rates tend to be seasonal,
with lower occupancy during weather extremes. Chart 7 illustrates Japara’s
occupancy rates:
occupancy increased to 95.2% during the FY14 reporting period (from 22 April
to 30 June 2014); and
Japara’s average 95% occupancy level is above the sector average of 92.7%
(Chart 8).
CHART 7: JHC OCCUPANCY RATES
Source: JHC FY14 investor presentation

08 October 2014
CHART 8: INDUSTRY OCCUPANCY RATES
Source: JHC prospectus
BROWNFIELDS
We estimate Japara will increase its bed portfolio by 405 beds from FY15-17F
through brownfields developments. We view brownfields favourably because:
they do not involve new land acquisition or town planning risk;
the expansions are typically covered by existing allocations for new beds from
the government;
they are self-funding from RAD inflows. Current brownfield development
estimates are $222k per place, compared to average new bond values of
~$274k in 2013.
We estimate JHC will add
405 beds through brownfield
developments from FY15-17F
ACQUISITIONS
Acquisitions are a core component of Japara’s strategy to grow to 5,000 beds in the
medium term. The growth profile from Japara’s current 3,408 portfolio is:
405 brownfield beds; and
1,187 bed acquisitions.
We will only factor acquisitions into our base case valuation once they have been
announced.
JHC needs to acquire 1,204 beds
to achieve its medium term goal of
5,000 beds
REGULATORY CHANGE
Regulatory change remains a key risk for aged care operators, given around 70%
revenues are from the government and continuing compliance requirements.
However, we believe that even though there may be short-term changes to revenue
composition, the government has accepted a certain level of cost inflation in the
aged care sector is necessary to service the ageing population (refer “ACFI
revenue” above).
During FY14, regulatory changes with a downside revenue impact were:
removal of the payroll tax supplement for for-profit aged care operators, costing
Japara a ~$4.0m annual EBITDA benefit in FY15F; and
removal of the dementia supplement, costing Japara about $3.0m.
Japara has advised that it is quite unusual for the sector to have experienced two
rounds of regulatory change in FY14.
In the short term, we believe that regulatory risk is cyclical, peaking with the federal
election cycle. Hence, we believe the prospect of further material regulatory change
in the next two years is limited.
In the long term, we believe that while there may be changes to the composition of
ACFI revenues over time the government recognises the need for a well-funded and
profitable aged care sector and hence is unlikely to dramatically alter the industry’s
economics.
FY14 was unusual in that there
were two changes to the ACFI
revenue model in a short period
In the short term, regulatory risk is
cyclical, in line with the political
cycle
In the long term, we believe the
government is unlikely to
dramatically alter the industry’s
economics

08 October 2014
MARGINS
Japara is forecasting EBITDA margins to improve back up to 18.5% in FY15 (16.3%
FY14).
Margins have been somewhat volatile, driven by:
the government’s downwards revision of its price growth per resident (called
“COPE”) from 2.0% to 0% in FY13; and
above-trend wage inflation with the Victorian enterprise bargaining agreement
increasing twice in the space of six months; 3.0% in October 2012 and a further
2.0% in April 2013. Labour costs were around 80% of total costs in FY13.
Margins have been somewhat
volatile

08 October 2014
Japara business overview
BUSINESS OVERVIEW
Japara has grown from inception nine years ago become the sector’s fifth-largest
aged care operator, with 3,408 beds (3,346 operational beds, after the closure of
45 beds at Launceston), comprising ~2% share of the 186,000 beds in Australia.
Japara’s portfolio is overweight Victoria. It has 39 aged care facilities (including
Whelan), of which 3 are leased and the remainder owned freehold. The geographic
spread is:
Victoria (31 facilities);
New South Wales (2 facilities);
Tasmania (1 facility); and
South Australia (5 facilities, including 4 from Whelan in Adelaide).
We expect that NSW will provide attractive acquisition opportunities for Japara as
NSW’s facility ownership transitions away from not-for-profit (NFP) operators. NSW
is unique in its high concentration of NFP operators, with 2 of the state’s top 10
operators being “for profit”. NFPs such as Baptist Care, Freemasons and Uniting
Church have large portfolios.
JHC has 3,408 beds across
39 facilities across Australia
NSW presents an attractive
expansion opportunity as facility
ownerships transitions away from
not-for-profit sector
Japara’s business model is to provide for “ageing in-place” by servicing Low Care,
High Care, Extra Services and dementia-specific residents. This allows residents to
stay in the one place, and Japara to capture revenue through the resident’s
personal aged care journey.
Japara has high leverage to new RAD inflow given ~54% of its portfolio comprises
high care beds, which were previously not “bondable” beds.
JHC’s business model is to provide
“ageing place”, which brings it one
step closer to RYM and SNZ’s
integrated retirement village/aged
care models.
CHART 9: CLASSIFICATION OF BEDS CHART 10: BEDS BY LOCATION
Source: WHTM estimates Source: Japara, WHTM
2,713
163
134 76
VIC
NSW
TAS
SA
Bed Type Number % total
Low Care 370 11%
High Care 1,917 57%
High Care Extra Services 942 28%
Independent Living Units 135 4%
Total 3,363 100%

08 October 2014
Board and management
Linda Nicholls AO, Non-Executive Chairman
Linda is a senior executive and company director with more than 30 years’
experience across Australia, New Zealand and the United States. Linda is the
chairman of Yarra Trams and a Director of Fairfax Media, Pacific Brands Group,
Sigma Pharmaceutical Group, Low Carbon Australia and the Walter and Eliza Hall
Institute of Medical Research. Previously, she was chairman of Healthscope and
Australia Post, and was a Director of St George Bank.
Linda holds a Masters of Business Administration from Harvard Business School
and a Bachelor of Arts in Economics from Cornell University.
Andrew Sudholz, CEO and Executive Director
Andrew is a founding shareholder and executive director of Japara.
He has more than 30 years’ experience in the real estate, healthcare and
professional services industries. Before establishing Japara, Andrew was a global
partner of the Arthur Andersen Group, a national partner of Ernst & Young’s Real
Estate Advisory Services Group and the state general manager of the Triden
Corporation. He is also a fellow of the Australian Property Institute, a former
president of the Victorian division and national board member of the Property
Council of Australia and is currently a member of the Australian Institute of
Company Directors.
Andrew holds an Associate Diploma of Valuations from the Royal Melbourne
Institution of Technology.
Richard England (Non-Executive Director)
Richard has more than 18 years’ experience as a non-executive director and
Chairman.
He is currently chairman of Chandler Macleod Group and of Ruralco Holdings and
is a non-executive director of Allianz Australia, Nanosonics and Macquarie Atlas
Roads. He was a Chartered Accountant in Public Practice and a partner at Ernst &
Young, where he was the national director of Corporate Recovery and Insolvency.
He is a councillor of the Royal Sydney Botanic Gardens Foundation and is deputy
chairman of Indigenous Art Code, the company administering the Indigenous
Australian Art Commercial Code of Conduct.
Richard is a fellow of the Institute of Chartered Accountants in Australia, is a
qualified Chartered Accountant and a member of the Australian Institute of
Company Directors.
Tim Poole, (Non-Executive Director)
Tim has more than 15 years’ experience as a director and chairman.
He is currently a Director of Newcrest Mining, chairman of Westbourne Credit
Management and a director of AustralianSuper, Continuity Capital and Lifestyle
Communities and is a member of the LEK Consulting Advisory Board. He has
formerly held the position of managing director of Hastings Funds Management and
was the former chairman of Asciano.
Tim holds a Bachelor of Commerce from the University of Melbourne and is a
Chartered Accountant.

08 October 2014
David Blight, Non-Executive Director
David has more than 30 years’ experience in the real estate sector and has held
several senior positions with well-known Australian companies.
Previously, he was managing director and chief executive officer of APN Property
Group. He has held various positions concurrently with ING, including vice chairman
of ING Real Estate, chairman and chief executive officer of ING Real Estate
Investment Management and was on the management, diversity and leadership
councils of the ING Group. David also has experience as a property valuer and
general manager in Australia and New Zealand having previously worked for many
property valuation companies including Mirvac Funds and Armstrong Jones.
David holds a Bachelor of Applied Science in Property Resource Management
(Valuation) from the University of South Australia.
John McKenna, Chief Financial Officer and Company Secretary
John McKenna is the Chief Financial Officer, with more than 30 years’ experience in
financial services and related sectors.
Prior to joining Japara, John was an executive director and chief operating officer of
Burdett Buckeridge Young, a stockbroking and corporate advisory company, where
he headed their finance and compliance divisions. He formerly held senior finance
roles with the National Australia Bank Group including head of finance and financial
controller of the UK branch.
John has a Bachelor of Commerce degree from the University of Melbourne, is a
qualified Chartered Accountant and has a Post Graduate Diploma in Applied
Finance with the Securities Institute of Australia.
Jerome Jordan, Executive Director of Operations
Jerome is the Executive Director of Operations and has more than 20 years’
experience in the aged care sector.
Prior to Japara, Jerome was the executive director at Glenvoir Holdings, where he
managed the aged care and nursing facilities.
Jerome has a Master in Business Management and a Post Graduate Diploma in
Business Management from Monash University, a Post Graduate Diploma in
Gerontology and a Bachelor of Health Science (Nursing) from Victoria University
and multiple Certificates in Aged Care, Occupation Health and Safety and Front
Line Management.
Julie Reed, Executive Director of Aged Care Services
Julie is the Executive Director of Aged Care Services. She has more than 30 years’
industry experience in the sector.
Prior to Japara, she held positions as a registered nurse at Sandringham Hospital
Acute Care, a RCS coordinator at Australian Residential Care and the director of
nursing at the Rosehill Aged Care Facility, Coogee Private Nursing Home and
Pembridge Private Nursing Home.
Julie was a founding member of NURSAC Victoria and has held multiple positions
including chairman and treasurer, and was the Victorian representative for both
NURSAC and the Royal College of Nursing – Aged Care Liaison Committee for
many years. Julie has worked as a sessional teacher for private registered training
organisations and higher education facilities, teaching about the aged care sector.
Julie is a graduate from the Alfred Hospital, School of Nursing.

08 October 2014
Risks
DOWNSIDE RISKS
Liquidity risk – the DAP/RAD mix and accommodation bond values
There is a risk that there will be a liquidity event driven by RAD redemptions not
being offset by incoming RADs. From 1 July 2014, residents can choose whether to
make a lump sum (RAD) or a periodic payment (DAP) to aged care operators. This
may reduce overall RAD inflows.
In our view, a liquidity event driven by the DAP/RAD mix is unlikely given:
Japara’s prospectus forecasts;
current experience (July to Oct 2014); and
upside of Japara being able to receive RADs on high care beds (~54% Japara
portfolio) for the first time from 1 July 2014.
We also believe that a liquidity event driven by accommodation bond (AB) value
decline is unlikely given:
ABs would have to decline by ~18% before operators’ cash balances would be
adversely impacted, given ~18% growth in AB values over the past three years
(the average resident stay is ~2.5 years) (source: “Inaugural report on the
funding and financing of the aged care sector”, 30 June 2013).
AB values are less than 50% of median property prices, indicating a large
property market downturn is required before residential home vendors will be
unable to fund ABs.
Japara’s RAD LVR ratios sit below industry averages. Operators with high-
priced bonds would be affected first.
An acquisition-driven liquidity event is more likely, in our view.
Regulatory risk
Regulatory change remains a key risk for aged care operators, given approximately
70% revenues are from the government and continuing compliance requirements.
In the short term, we believe that regulatory risk is cyclical, peaking with the federal
election cycle. Hence, we believe the prospect of further material regulatory change
in the next two years is limited.
In the long term, we believe that while there may be changes to the composition of
ACFI revenues over time, the government recognises the need for a well-funded
and profitable aged care sector and hence is unlikely to dramatically alter the
industry’s economics.
Acquisition risk
Japara needs to acquire 1,204 beds in the medium term to achieve its stated goal of
a 5,000 bed portfolio. However, acquisitions are subject to pricing, availability,
funding and execution risk. These risks are mitigated by Japara’s strong acquisition
track record and ~54% high care beds in its portfolio (which increase the prospect
of high RAD inflows).
The outlook and impact of rising sector valuation multiples is unclear. On the one
hand, Japara may be unable to identify value-adding acquisitions. On the other
hand. Japara’s valuation may increase in line with the sector, or in an extreme
scenario it may even consider a trade sale to a larger operator (Regis, BUPA, Opal
or a superannuation fund).

08 October 2014
UPSIDE RISKS
RAD inflows
We assume that RAD inflows will be 62.2% of all incoming residents, in line with
Japara’s forecasts. Given Japara prices it bonds below industry levels and rising
sector competition, there is a possibility that Japara may receive higher RAD
inflows. RAD inflows can add shareholder value if deployed into value-adding
acquisitions.
Extra services revenue
The extent of upside in extra services revenue will not be known for up to
12 months.
Japara can now offer extra services to all beds.
Previously, extra services could only be offered to a maximum of 15% of beds.
Japara is rolling out its “My Choices” extra services offering from October 2014
to all beds. The penetration of My Choices will be mature across the bed
portfolio in 2.4 years as new residents fully replace the existing residents.

08 October 2014
RETURN RE-INVESTMENT MATRIX RISK MEASURES
Return
High
Cash
Generator
Champion
Low
Challenged Potential
Low High
Re-investment
Japara has a 100% dividend
payout ratio, with
accommodation bonds
funding growth and working
capital.
Low Med High Spec
Share
Price
Risk
Business
Risk
Key risks are acquisition and
liquidity risk.
BUSINESS DESCRIPTION
Japara Healthcare Limited (JHC) is an operator of residential aged care facilities in Australia. Japara has grown from inception 9 years ago to 3,408
beds, comprising ~2% market share. Its portfolio is overweight Victoria (81% total beds), with a presence in SA (10% total) and NSW (5%) and
Tasmania (4%). Japara has high leverage to new RAD inflow given ~54% of its portfolio comprises (what were previously classified as) high care
beds.
INVESTMENT THESIS
We estimate Japara can generate up to ~50% EPS upside as it deploys up to $142m in increased refundable accommodation deposits (RADs) in
value-adding acquisitions.
REVENUE DRIVERS BALANCE SHEET
 Occupancy rates
 Brownfields expansion
 Acquisitions
 Nil debt on the balance sheet
 RADs are a form of interest-free funding available to aged care
operators
MARGIN DRIVERS BOARD
 Organic revenue growth (ie. ACFI revenue)
 Regulatory change
 Linda Nicholls, Chairman
 Richard England, NED
 Tim Poole, NED
 David Blight, NED
KEY ISSUES/CATALYSTS MANAGEMENT
 The key catalysts required to re-rate Japara are: 1) continuing
RAD inflows in line with prospectus expectations;
2) continuing value-adding acquisitions; and 3) realisation of
brownfield development opportunities
 Andrew Sudholz, CEO
 John McKenna, CFO
 Jerome Jordan, Executive Director Operations
 Julie Reed, Executive Director, Aged Care Services
RISK TO VIEW CONTACT DETAILS
 Liquidity risk
 Acquisition risk
 Accommodation bond risk
Address: Q1 Building, L4, 1 Southbank Boulevard, Southbank, VIC 3006
Phone: 03 9649 2100
Website: www.japarahealthcare.com.au

08 October 2014
Head of Research Head of Institutional Sales
Shane Storey (07) 3212 1351 Richard Moulder (02) 8247 6603
Industrials Sydney
James Ferrier (03) 9640 3827 Jonathan Scales (02) 8247 6613
Stewart Oldfield (03) 9640 3818 Duncan Gamble (02) 8247 6629
George Gabriel (03) 9640 3864 Michael Pegum (02) 8247 6602
Andrew Dalziel (07) 3212 1946 Anthony Wilson (02) 8247 3113
Healthcare and Biotechnology Peter Tebbutt (02) 8247 6682
Shane Storey (07) 3212 1351 Melbourne
Joseph Michael (02) 8247 3101 David Permezel (03) 9640 3885
Resources Adam Dellaway (03) 9640 3824
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