Rest homes

[bunter]

Looking at this sector...



GY%
SharePrice
FairVal
SP/FV



arv
5.9%
0.980
1.020
0.93



met
0.80%
4.820
0.680
6.71



rym
1.50%
8.10
2.280
3.62



sum
1.60%
3.140
0.730
3.90





'Fair value' is based on long term forecast dividends, and annual average long term dividend growth of 11% pa for all four.
You could argue some deserve a higher growth factor than others, for diverse reasons.

Like ARV, for example. The board looks OK - http://www.arvida.co.nz/our-people
The chairman chairs Westpac NZ. Board members are shareholders.
The rest home owners who sold into this offer are also shareholders.

At just over $200m mcap, with no substantial shareholders (ie 100% free float), a 30% rise would see ARV on the NZ50.
How likely is that?

This sector seems way overvalued, at 4-7 times fair value, per my model anyway.
Except ARV, which is just under fair value.

If ARV does a good job of integrating its businesses, and acquires more rest homes (as it said it would), it could be in line for a big rerating - 4-7 times my 'fair value' of $1.09 would be $5.

Put another way - if ARV does well over the next year, and grows as it said it would, a value of $5 wouldn't look out of place compared to other RH operators.

My guess is something in-between - SUM, RYM and MET share prices to remain the same or fall – and ARV’s to increase.
Provided again it is managed well.

Technically, there's very little data but it's over the 200 and 50 day SMAs, and the 50day EMA is slightly above the 200.

I bought some and plan to buy more if the price goes up.
6713

[percy]

I would be very wary of comparing ARV to the likes of RYM and SUM,which have very clever "models" they rolling out.
ARV is made up of a hotch potch collection of retirement villages, the owners of which are using ARV an exit vehicle from the industry. It will become a serial under performer.

[bunter]

I would be very wary of comparing ARV to the likes of RYM and SUM,which have very clever "models" they rolling out.
ARV is made up of a hotch potch collection of retirement villages, the owners of which are using ARV an exit vehicle from the industry. It will become a serial under performer.

Could be.

Could be the promoters are harnessing the abilities of the entrepreneurs who started these businesses and taking the best of the systems, experience and talent available to forge a dynamic rapidly growing entity which will come to dominate the rest home sector in NZ.

All just words, aren't they? Like 'best of breed', 'hotch potch' and 'clever models'.

I'd like someone with a deep understanding of the sector to explain, using numbers, and without emotion, the market (or their own) valuations of MET, SUM and RYM. I don't get it.

They're obviously not explained by dividend flows. What then? Assets?

And secondly, why ARV is worth what the market says it is worth, given the same methods and assumptions used to value the other three.

[percy]

The only person who has successfully understood valuing retirement villages is a former poster Sauce.Made brokers' valuations look foolish.
To gain some of his thoughts you should search for a thread called "owners earnings verses retained earnings".
He also posted early on ,on MET,RYM and SUM threads..

[bunter]

The only person who has successfully understood valuing retirement villages is a former poster Sauce.Made brokers' valuations look foolish.
To gain some of his thoughts you should search for a thread called "owners earnings verses retained earnings".
He also posted early on ,on MET,RYM and SUM threads..

Thanks Percy. I think Sauce's valuation would be closer to mine than to market.

Sauce's latest valuation on RYM (http://www.sharetrader.co.nz/showthread.php?626-Ryman-Too-boring-to-talk-about&p=381386&viewfull=1#post381386) I could find was $3.80 on 15/9/12, when the stock was trading at $4.

Coincidentally, I sold in November 2012 at $4.04, believing it was overpriced (having bought in at $2.9).

I wonder what he would think of today's valuation.

[troyvdh]

Dear bunter ...great post and much appreciated...debate is vital.
However...and I do acknowledge that you hold shares in ARV ....have you experienced the ups and downs of the market...perhaps you could tell us your exposure...some folk on this forum treat same as an intellectual exercise
Me ...in this sector...4000 RYM 3000 MET 7000 SUM ...all purchased years ago cheers troy

[percy]

I often wonder what his valuations would be.
I brought in about $2.11 and remember he valued them at $2.70 which was a country mile ahead of brokers.He really understood Ryman better than anyone else.
Always helpful too.!

[Beagle]

My 2 cents on RYM. They have highly predictable earnings growth, arguably the best on the entire NZX and have a stated intention of trying to maintain an average EPS growth of 15% per annum and have achieved that for well over a decade. Understanding that and their business model is the key to understanding there isn't really any impediment to that growth continuing so its reasonably safe to use an assumption of 15% EPS growth for the foreseeable future.
Using Benjamin Graham's valuation formula on V = EPS x (8.5 + 2g) we get last year underlying EPs of 0.23 x 38.5 = $8.85.

Using my tight arsed accountant's buy price valuation technique where I use forward guidance EPS x (8.5 + 1g) where forward guidance is for EPS growth of 15% this year I get .2645 x 23.5 = $6.21. I only buy growth on the cheap :)

[bunter]

Dear bunter ...great post and much appreciated...debate is vital.
However...and I do acknowledge that you hold shares in ARV ....have you experienced the ups and downs of the market...perhaps you could tell us your exposure...some folk on this forum treat same as an intellectual exercise
Me ...in this sector...4000 RYM 3000 MET 7000 SUM ...all purchased years ago cheers troy

Up and downs - I've had a few.

Happy to give out percentages - ARV is my smallest holding, at approx 0.6% of portfolio (see sig).

If the price goes up I usually buy more - so the smallest holding can become one of the larger ones - as with NZR.
And if it falls I usually get out.

So the portfolio should in theory comprise small holdings in poorly performed stocks and large holdings in winners.

Feelings get in the way sometimes - e.g. CNU ('I'm losing money and don't want to think about it', 'the market's wrong') and AIR ('It's wrong to invest in airlines' and 'the price has gone up too much already').

Sorry, drifted off topic a bit.

[couta1]

With all due respect bunter crunching numbers is only half of the story when determining which company/companies have the brightest future in this industry you need to understand how the continuum of care model/Govt funding model/Ageing demographics apply to each company. ARV has an inferior model to the big three listed companies as it is not primarily a development company like the big three, what drives them, quite simply proven track records coupled with growth potential from a huge baby boomer tailwind. You need all those Apartments/Cottages to feed the care centers especially in the low occupancy periods as there is increasing pressure to keep people in their own homes as long as possible(These are the people that would move directly into the care centers) so you can see the big advantage there is in having a self feeding setup

[troyvdh]

bunter cheers

[bunter]

With all due respect bunter crunching numbers is only half of the story when determining which company/companies have the brightest future in this industry you need to understand how the continuum of care model/Govt funding model/Ageing demographics apply to each company. ARV has an inferior model to the big three listed companies as it is not primarily a development company like the big three, what drives them, quite simply proven track records coupled with growth potential from a huge baby boomer tailwind. You need all those Apartments/Cottages to feed the care centers especially in the low occupancy periods as there is increasing pressure to keep people in their own homes as long as possible(These are the people that would move directly into the care centers) so you can see the big advantage there is in having a self feeding setup

Crunching numbers is what we're light on, plenty of asseveration, not much analysis.

[couta1]

Crunching numbers is what we're light on, plenty of asseveration, not much analysis.
Anyways I think my post gave you a bit more insight into why ARV won't touch the big three with their current model until/if they become a successful development company. PS- Apart from this sector I find your valuations positively uplifting:cool:

[Beagle]

'Fair value' is based on long term forecast dividends, and annual average long term dividend growth of 11% pa for all four.

There's a major flaw in your model right there.
What makes you think they're all growing at the same rate ? Quite obviously RYM's growth rate in EPS has averaged over 15% in recent years.
Your new entrant, anyone's guess seeing as they're paying such a high percentage of profits out as dividends, maybe you'd better re-run your valuation model on them using 3-5% growth ? and MET have been growing EPS quicker than 11% recently. A model is only as good as the sum total of the assumptions behind it.
Me... I'll stick with my version of Benjamin Graham's valuation formula posted above which tells me the only one of any interest at a reasonable valuation in N.Z. is MET.

[Vaygor1]

Fascinating discussion.

Just taking one of those companies (in this case RYM), there is a history of great conjecture as to what these shares are really worth at any given instant in time.
Roger points this out very well in this thread and many people have widely debated this issue over the years in the RYM thread too.

The same level of debate also applies to MET and SUM… a bit too early just yet for ARV.

I am a fairly serious shareholder (I think) in RYM with a 6 figure holding for many years now. My enthusiasm for their share-price and worth has been curbed somewhat in the last year or so… mostly by Roger and Winner, and for that I thank them both. To begin with I didn't like what they were telling me but these days I embrace it. Their views (and yours Bunter) are as real as as mine after all, and along with everyone else including the insto's (who also consist of individuals with a wide range of viewpoints), we collectively form what really is 'The Market'.

In RYM, there has been great debate over time using all sorts of methods and assumptions, with a variety of basis' including Underlying Profit, Earnings Per Share, Discounted Cash Flow, Net Tangible Assets etc etc … There has been Fundamental Analysis versus Technical Analysis discussions, and hybrids of the two… not to mention aches, strains, and period pains…. coughs, colds, and sore holes... and pimples on the dixy…. So in all this there is no absolute rights or wrongs.

Mathematical analysis aside, my views are:

RYM. Great company (naturally, I am biased). The ability to predict their future results is as good as one could ever hope for. Share price possibly a bit overvalued at the moment, but if you are happy with 15%+ capital gain plus a small dividend each year (over the long term) then just buy them.

SUM. I don't care for this company. I don't trust the board and I don't like their culture. The data they produce is unreliable and therefore meaningless to me. Others will disagree with this and I am fine with that. I would maybe consider buying them anyway if I was a speculative investor and/or a trader, but I'm not.

MET. I don't hold a view. But I intend to be looking into them this year to develop a feel.

ARV. I don't hold a view on them either. However, with no history yet, I see this as a purely speculative share for some time yet. I think Percy's post (the 2nd post in this thread) are wise words indeed and should be well heeded. I might take a look at ARV around 2020 assuming they still exist.

[Beagle]

Fascinating discussion.

Just taking one of those companies (in this case RYM), there is a history of great conjecture as to what these shares are really worth at any given instant in time.
Roger points this out very well in this thread and many people have widely debated this issue over the years in the RYM thread too.

The same level of debate also applies to MET and SUM… a bit too early just yet for ARV.

I am a fairly serious shareholder (I think) in RYM with a 6 figure holding for many years now. My enthusiasm for their share-price and worth has been curbed somewhat in the last year or so… mostly by Roger and Winner, and for that I thank them both. To begin with I didn't like what they were telling me but these days I embrace it. Their views (and yours Bunter) are as real as as mine after all, and along with everyone else including the insto's (who also consist of individuals with a wide range of viewpoints), we collectively form what really is 'The Market'.

In RYM, there has been great debate over time using all sorts of methods and assumptions, with a variety of basis' including Underlying Profit, Earnings Per Share, Discounted Cash Flow, Net Tangible Assets etc etc … There has been Fundamental Analysis versus Technical Analysis discussions, and hybrids of the two… not to mention aches, strains, and period pains…. coughs, colds, and sore holes... and pimples on the dixy…. So in all this there is no absolute rights or wrongs.

Mathematical analysis aside, my views are:

RYM. Great company (naturally, I am biased). The ability to predict their future results is as good as one could ever hope for. Share price possibly a bit overvalued at the moment, but if you are happy with 15%+ capital gain plus a small dividend each year (over the long term) then just buy them.
SUM.][B] I don't care for this company. I don't trust the board and I don't like their culture. The data they produce is unreliable and therefore meaningless to me. Others will disagree with this and I am fine with that. I would maybe consider buying them anyway if I was a speculative investor and/or a trader, but I'm not.
MET. I don't hold a view. But I intend to be looking into them this year to develop a feel.

ARV. I don't hold a view on them either. However, with no history yet, I see this as a purely speculative share for some time yet. I think Percy's post (the 2nd post in this thread) are wise words indeed and should be well heeded. I might take a look at ARV around 2020 assuming they still exist.

That hits the nail directly on the head, I couldn't agree more. RYM head and shoulders above any other company here and have well and truly earned a very hefty PE premium to the others through their long and very distinguished growth record on the NZX. I see slightly better value in MET at the present point but for a set and forget investment for the next 20 years RYM is an absolute no brainer. I'm a bit of a miser so I'm waiting for them to get a bit cheaper, (or stay roughly the same for another 12 months and get cheaper on a fundamental basis through earnings growth) and then I'm in for life :)

[bunter]

My 2 cents on RYM. They have highly predictable earnings growth, arguably the best on the entire NZX and have a stated intention of trying to maintain an average EPS growth of 15% per annum and have achieved that for well over a decade. Understanding that and their business model is the key to understanding there isn't really any impediment to that growth continuing so its reasonably safe to use an assumption of 15% EPS growth for the foreseeable future.
Using Benjamin Graham's valuation formula on V = EPS x (8.5 + 2g) we get last year underlying EPs of 0.23 x 38.5 = $8.85.

Using my tight arsed accountant's buy price valuation technique where I use forward guidance EPS x (8.5 + 1g) where forward guidance is for EPS growth of 15% this year I get .2645 x 23.5 = $6.21. I only buy growth on the cheap :)

Thanks for taking up the invitation to 'use your numbers'.

My first thought was that that valuation system was seriously flawed because it didn't take into account long term interest rates - but on researching Graham's formula - I found that in 1974 he actually did modify the formula, to V = EPS x (8.5 + 2g) *i/4.4 - where i is current long term interest rates, and 4.4 was the long term interest rates that prevailed when Graham developed his model in 1962.

Graham was an American investor and my guess is his method will tend to give valuations that are too high for NZ - because our interest rates have been higher over many years.

His later (1974) method is similar to mine - its inputs are earnings, a growth factor (estimated for 7-10 years) and (as modified) current long term interest rates.

Mine are dividends, a GF estimated for 10 years, and current long term interest rates.
Both are 'anchored' to the long term interest rates that prevailed when the model was developed (5% in my case).

I chose dividends rather than earnings because I felt uneasy about investing in 2012 and wanted to be more sure of getting my money back. So the model is no good for growth stocks.
'
I looked at some NZ stocks and applied Graham's valuation, 'Roger' valuation and averaged them. Then worked out the RVG- 'Graham's relative valuation' = V/current price.


And applied it to the retirement sector stocks and some other favourites.
It seems to confirm that the retirement sector is overvalued - relatively speaking - but the market valuations are more-or-less in line with Graham values.

Infratil and HNZ are way undervalued, per Graham.
Spark is becoming fairly valued - I am guessing overseas money has piled into SPK just lately.

As above, I think the Graham valuations are too high for NZ.

The growth factors and eps+1 figures are my guesses, and the eps figures are subject to small adjustments - e.g deducting property revaluations for ARV.




G%
EPS
EPS+1
Val1
Val2

V1V2Avg
Price
RGV


Rym
15%
0.236
0.272
9.10
6.39

7.75
8.15
95%


Met
10%
0.217
0.239
6.19
4.42

5.30
4.84
110%


Sum
8%
0.096
0.104
2.35
1.71

2.03
3.16
64%


Arv
5%
0.059
0.062
1.09
0.84

0.96
0.97
99%














IFT
15%
0.185
0.213
7.13
5.00

6.06
3.09
196%


HNZ
15%
0.077
0.107
2.97
2.52

2.74
1.19
230%


AIR
10%
0.236
0.295
6.73
5.46

6.09
2.57
237%


SPK
5%
0.233
0.245
4.31
3.31

3.81
3.39
112%

[Beagle]

10 year Govt stock yield are under 4%. Just a heads up. One of the most respected brokers has just moved their risk free rate in their DCF model down to 4.4% (from 4.9%). Makes using the Ben Graham method easy doesn't it !!
I expect other brokers will do the same now its clear we have ultra low interest rates for the foreseeable future. I have some sympathy for your jaundiced view surrounding getting your money back.
HNZ appears dirt cheap because it is and so is AIR. These are extremely cheap PE stocks that have excellent growth prospects (my two biggest positions).
I agree that the retirement sector as a whole is fully priced. RYM would be my pick based on its superb no B.S. track record of delivering strong growth. MET could outperform in the short run.