Investment Matters

Attractive sector dynamics: an ageing population

We often discuss one of our key investment philosophies at First Samuel of seeking a meaningful upside, without significant downside risk - it is why low P/E (i.e. inexpensive) companies are often attractive to us.

But this is not, by any means, our single investment factor.  Readers will also know about the importance of (a) a sustainable dividend and (b) long-term profit growth.  In this week's Investment Matters, we discuss a sector that we expect to provide long-term profit growth - Australia's ageing population.

Looking for long-term growth

When looking for sound long-term investments, we seek companies that operate in sectors that are expected to experience systemic growth over time - at least in line with economic growth, or preferably more.

That way, the companies have a tail wind behind their revenue and thus their earnings, and they should be able to achieve strong growth over time.

To clarify

Your investment team won't pick just any company that sits in a sector with the favourable dynamics.  There are plenty of overvalued or high risk companies in any sector.  Each company needs to be assessed on its own individual merits. 

However, having a strong sector dynamic adds weight to the investment decision, where other characteristics of the company are also favourable.

Investment dynamics

An example of an investment dynamic that First Samuel is attracted to is infrastructure demand.  Both Australia and the US have under-invested in infrastructure on a widespread basis, and for a number of years - and there is growing need for this to be corrected.  Cardno provides First Samuel clients an exposure to this dynamic.  Another key dynamic in the equity portfolio is Australia's ageing population.

This graph, based on ABS data, shows the expected percentage of the Australian population aged 65 or more.  The growth in one particular year won't make a noticeable difference to earnings of a company in this sector, but the cumulative change will have a meaningful impact on the total demand for services for this cohort.  And this will translate into meaningful earnings growth over time - assuming the company has positioned itself to be able to capture the increase in demand.

Population

Equity portfolio's exposure

First Samuel's clients' equity portfolios have direct and indirect exposure to the ageing population dynamic.  The most obvious is Aveo.  Aveo provides retirement accommodation and related services to retired people.  It is actively developing both brownfield units, and new villages, to cater for the growing demand.  It currently owns 89 villages, with 4 new villages to be completed by FY-18 and a development schedule extending to FY-19 and beyond.

The other exposure to the aging population dynamic is Primary Health Care.  As people get older, and live longer, they require more doctor visits.  Additionally, to minimise expensive (for the government) hospital visits, the use of primary care (GPs) needs to be optimised (maximised) - and we see a need for additional focus on this in coming years.  The use of ancillary services including pathology and imaging (which Primary also provides) is also projected to increase as people get older.

To capture increasing demand Primary is growing its medical centre and imaging footprints (number of sites), and diversifying and expanding patient service offerings (e.g. chronic care, dental).

Conclusion

Investing in a company with exposure to a strong investment dynamic provides underlying support for the company to, over time, grow its revenue - and thus its profit.  An obvious investment dynamic that First Samuel has actively sought exposure to, is Australia's ageing population - which Aveo and Primary Health Care both provide.