SUM - Summerset Group

[Beagle]

Yes good debate. What I see with RYM is that if they grow earnings by 15% to 31 March 2016, (and affirm guidance for ongoing 15% earnings growth) they will be on a historical underlying PE of 26.6 to March 2016 and on a forward PE of 23.1 for FY17. That would make it the lowest forward PE they've been on for several years and is within the 23.5 PE target I have for well managed companies in this sector so I am inclined to buy into RYM as well sometime this year but I would prefer to see them break their long established trading range first. I guess the other relevant factor here is that money on call waiting to buy is only earning 2% before tax so the opportunity cost of holding is very low and not materially dissimilar to this sector's dividend yield.

[Beagle]

Hi Roger, have you adjusted your PE of 23.5 strategy since rates have been falling? I'm not quite sure right now where they were 2 years ago but equity values have increased in this environment which should push up the values of growth companies. The market should be willing to pay for growth in this environment because there is not a lot of it so maybe we are prepared to pay higher rates now than we were back then. I'm not trying to answer the question for you, just putting some of my thoughts down to. I don't have a number in mind of what I'm prepared to pay for a growth company, it depends on many things but in this case, I believe SUM is valued appropriately right now with further upside over the next year.

Thank you, good post and fair comment. Ben Graham's formula was based on a long term risk free rate of 4% and presently the long term N.Z. Govt stock is trading at 2.5% so that does change the implied formula to EPS x (10 + 2g) and for this sector that implies for good companies which one is confident of ongoing long term growth of 15% per annum a PE of 25 is good value. In theory then we should see at some stage over the next year RYM's SP start tracking up in line with their long term earnings growth of 15% per annum but technical's and range trading are a funny thing and sorry to have a bob each way so too speak but as long as you have another profitable home for your money at present I don't think waiting until there's a clear break-out above $9 is a silly idea either...however long that might take ?

On the other hand we have SUM which grew EPS last year 55% and a build rate increase this year of 33% trading on Dec 2015 historical underlying earnings PE of 24.7 at $4.25. If their underlying profit expansion this year is commensurate with their build rate guidance they are currently trading on a forward PE of 4.25 / .2289 = 18.6 !

[Jinx]

Someone is willing to put their money where there mouth is with a 100,000 parcel of shares coming though off-market

[Beagle]

Ryman also allow pets by arrangement, oh and I almost forgot to mention those fixed service fees for life. PS-Great debate people but must get some work done. PPS- I did put my money where my mouth is by buying 20k Ryman shares at $8.30 yesterday.

So let me ask you a theoretical question mate. We have 3 Terrier sized dogs and they do get a bit yappy when there's something to get excited over and they're coming up 10 years old, please don't ask me about the vet bills as that's a sore point right now.. Now suppose I was 75 and my wife and I wanted to shift into a Ryman unit. Would we be allowed ? What about if my personal favourite Basil who's having an operation next week died, would I be allowed to replace him ?

What about later when they all died, think average life expectancy is about 15. I know three dogs is a pretty unusual situation and I know the village manager has to juggle other people's right to peace and quiet with residents own rights to enjoy life. Do you think at either SUM or RYM we'd have a any hope of buying an occupation licence with 3 dogs ? Dogs are in many ways better than kids, opps did I really say that out loud I guess the real short version of this question is are SUM or RYM more pet friendly ?

[couta1]

Short answer Mate is no to the 3 dogs and no to replacing your allowed dog by arrangement once it dies. PS- Have you thought about taking an interest in fish or turtles? PPS- I love dogs too, never cried so much than when my long term running companion died last year.

[stoploss]

So let me ask you a theoretical question mate. We have 3 Terrier sized dogs and they do get a bit yappy when there's something to get excited over and they're coming up 10 years old, please don't ask me about the vet bills as that's a sore point right now.. Now suppose I was 75 and my wife and I wanted to shift into a Ryman unit. Would we be allowed ? What about if my personal favourite Basil who's having an operation next week died, would I be allowed to replace him ?

What about later when they all died, think average life expectancy is about 15. I know three dogs is a pretty unusual situation and I know the village manager has to juggle other people's right to peace and quiet with residents own rights to enjoy life. Do you think at either SUM or RYM we'd have a any hope of buying an occupation licence with 3 dogs ? Dogs are in many ways better than kids, opps did I really say that out loud I guess the real short version of this question is are SUM or RYM more pet friendly ?

Sounds like you need some EBOS Roger to hedge up the pet costs . I did find my mothers independent unit at Rita Angus had pretty good sound protection .. also the neighbour was pretty hard of hearing not an uncommon thing at that age ... so you might just be able to slip a couple of dogs in come the time .....

[Beagle]

Short answer Mate is no to the 3 dogs and no to replacing your allowed dog by arrangement once it dies. PS- Have you thought about taking an interest in fish or turtles? PPS- I love dogs too, never cried so much than when my long term running companion died last year.

The little buggers do have a way of "worming" hopefully not literally their way into your heart don't they !! So the strategy on moving into a SUM or RYM facility is to have one extremely cute young puppy that will hopefully live a long life and his / her sibling on standby with the breeder in case something goes wrong...they'd never know if you did a sly switch if you had too would they

LOL Stoploss, Keep it between us but I have dreams of EBOS floating their pet division off as a separate entity

[stoploss]

The little buggers do have a way of "worming" hopefully not literally their way into your heart don't they !! So the strategy on moving into a SUM or RYM facility is to have one extremely cute young puppy that will hopefully live a long life and his / her sibling on standby with the breeder in case something goes wrong...they'd never know if you did a sly switch if you had too would they

LOL Stoploss, Keep it between us but I have dreams of EBOS floating their pet division off as a separate entity

Roger it is healthy to have some interests outside of the markets , so in terms of dreams my differ a little, apologies for hijacking SUM thread, this is my last word for the day

https://www.facebook.com/Officialemi...type=3&theater

[Grunter]

First time poster here, have been following this thread for a while since I became interested in Summerset.

Just want to say I believe a lot of you worry about a lot of things that don't matter in the long run to the performance of this company.

The guy with the best ideas on this company is Roger - he's hit the nail on the head on how to value retirement villages - it's all to do with underlying earnings. The drivers for underlying earnings growth are:

1) house price growth
2) the number of units that can be built, sold and resold

Everything else to do with this company is just noise.

Looking at Summerset, I see it as grossly undervalued - Summerset should be a similar performer to Ryman in terms of earnings growth in the long term, and I believe their P/E should converge to a similar level. For a growth company, a P/E of 11 is low, therefore RYM's 15 is more sensible in this climate of inflated P/E ratios. Given this, the value of SUM should be $5.85 at their current earning level.

I'm working on building a DCF model for SUM, but a year ago, their DCF valuation was $4.30. Since then they have had significant increases in underlying earnings as well as increased build rates, so this points to even better than predicted underlying earnings growth than originally modelled.

[Beagle]

Welcome to the forum Grunter and thank you for your vote of confidence.

Agree with what you've said as basically these centres from an operational perspective make very little money.

There remains a lot of confusion regarding reported earnings so i'll very briefly recap those seeing as its getting late, (feels even later with daylight savings having finished).

The International Financial Reporting Standards (IFRS) require property companies including companies to include in their annual earnings the full change in the value of all properties, as though they could all be sold at current market value at balance date. A lot of people use this figure as let's be honest, the vast majority of the time property goes up mostly because good land is scarce and the cost of construction generally goes up at the very least in line with inflation.

The PE for SUM of 11 is the IFRS earnings.

Underlying earnings are lower and are those actually earned by the company in the year, (cash earnings), actual profit on new builds plus profit on resale's and some minor noise from other operations.
Underlying earnings for SUM were 17.2 cps for 2015 so the historic PE based on underlying earnings as at today's closing price is 24.65.

The company has clearly grown underlying earnings on average at more than 15% per annum since listing but if we are to use RYM's long term average at around 15% then using Ben Graham's valuation formula modified for the lowest interest rates in 60 years and headed lower where V = historic EPS x (10 + 2g) where G = 15% long term growth we get 17.2 x 40 = $6.88.

Given the company is growing its development book by 33% this year and if we assume that earnings grow in line with this and then tail off to the agreed 15% per annum, this time next year using the famous Ben Graham valuation model would give us fair value of $6.88 x 1.33 = $9.15 !

Its harder for bigger companies to grow so fast as younger smaller ones and this probably counts against RYM to some extent.

Quite aside from the valuation, and something I don't talk about often on here is that Retirement companies have an extremely favourable tax situation In N.Z. They have a binding ruling from the IRd that they don't pay tax on the profits of occupation licence resale...don't ask me how they got that ruling but it exists and explains why none of them pay much tax.

Provided Julian Cook can keep the wheels on straight as the company grows I think we are in for a very good ride in the years ahead. I also think RYM will do exceptionally well in the long run...probably a little bit more of a hiatus before their SP resumes tracking up in line with EPS growth again.