RYM - Ryman Healthcare

[percy]

I was in Nelson a couple of weeks ago.Rym home there is huge.Was in Orewa this week and another RYM village.What a nice place to retire to.Both villages first rate as we would expect.
RYM just going from strenght to strenght.Would be a brave punter to sell down their holding.

[ENP]

With the RYM income statements, their re-valuation of land prices is what was driving the earnings/share. Now that the real estate market is slowing, should this be a concern? It made up a huge chunk of their revenue/income.

Thanks.

[percy]

ENP. from craigs investment partners.
Since listing in june 1999 RYM has delivered it's shareholders a total return,which includes shareprice appreciate and divdends of 1,043% or 24.3%pa.
Our population is ageing,proportion of over 65s is expected to double from 12% today to 26% by 2041.The number of over 85s is set to increase 4 fold from 1.4% to 4.8% by 2041.
The aged care operations generate care as management fees that represent 35% of RYM's total revenue.The sale of new units acconts for 27% of revenues,and the resale of units 38% of revenue.
RYM is exposed to change in value of its units when these are resold,which happens on average of every 7 years.However,the company earns management fees which equates to 20% of the
0riginal price {over a five year period},providing the company with a buffer against any fall in value.
The market perceives RYM fortunes to be closely linked to the housing market.RYM proved the market wrong.Not only did it maintain profitability over 2008 and 2009,but it was one of the very few companies that delivered earnings growth.EPS have grown by 18% pa since 2001 and dividends by 22%pa.An investor who purchased shares in the IPO has seen their dividend yield rise from 4.4% in 1999 to 19.6% today.

[COLIN]

RYM is one of my core holdings. They have an excellent business model - not so good, though, for the families of those who purchase units in the retirement villages, who not only forego any capital gain but actually receive less than Mum/Dad paid for their unit. Sure, it works the other way in a downtrending market, but when did we last see residential properties actually decline in value over a 7-year period? During the Great Depression, perhaps.

[percy]

RYM is one of my core holdings. They have an excellent business model - not so good, though, for the families of those who purchase units in the retirement villages, who not only forego any capital gain but actually receive less than Mum/Dad paid for their unit. Sure, it works the other way in a downtrending market, but when did we last see residential properties actually decline in value over a 7-year period? During the Great Depression, perhaps.

Peace of mind comes at a price.A few years ago my brother who is a valuer in Hobart,and I put our mother into a retirement home at Buderim on the sunshine coast.We k new the cost but she would not come and live in either Christchurch or Hobart.As you say capital loss and expensive costs.

[macduffy]

A nice profit increase from RYM in what has been a difficult year for most property sector companies.

I hold.

[percy]

Well I thought the result was a cracker.Growth out of cash flow.wonderfull.

[ENP]

It had the most volatility (7 cents) in one day since I've been watching it.
Kind of weird that it opened and now closed at the same $2.14 despite the good news.

[percy]

It had the most volatility (7 cents) in one day since I've been watching it.
Kind of weird that it opened and now closed at the same $2.14 despite the good news.

Yes weird,sometimes the market expects a good result ,and when the result does not excede it the market will mark the shares down.I think the market will see the result for what it was ,and I would expect the SP will move up in a couple of weeks time.Cash flowup,profit up,divie up will result in SP up.They intend to open TWO yes TWO new villages a year.This company goes from strength to strength,and is easy to see why it is the best company on NZX.This company is so focused on what it is doing.The company is in the right sector at the right time.It is the leading company in this growing sector.

[Zito]

I think the result - great as it undoubtedly is - was entirely expected. So we were not going to see a huge jump in the share price today. The fact is that at $2.14, the PE is over 13 - and with the current global uncertainty and overall sentiment now bearish, it is difficult to see how a higher PE is justified.

[percy]

I think the result - great as it undoubtedly is - was entirely expected. So we were not going to see a huge jump in the share price today. The fact is that at $2.14, the PE is over 13 - and with the current global uncertainty and overall sentiment now bearish, it is difficult to see how a higher PE is justified.

There is no slow down in EPS growth.Past year up 19% to 15.8cents.Should growth continue at 19% EPS would go to 18.8cents.I am sure the market would rerate to a PE of 15 which would mean a SP of $2.82.A lot of people say if PE is lower than growth % you are safe.PE higher than growth problems.So PE of 19 would be stretching the valuation.That would be a SP of $3.57.If you took today's EPS of 15.8cents and multiplied that by the 19% earnings growth the SP would be $3.00.If you said that earnings may increase as the RYM brand is getting stronger and the business model is improving,and can further improve with the large land bank they have ,then today's SP is modest.As I have posted previously when Nana has to go into a retirement home she has to go.RYM seems a bit immune to market uncertainty,so market should pay or accept a higher PE because of this.

[macduffy]

,so market should pay or accept a higher PE because of this.

There's really no "should" about the market.

When sentiment improves, maybe. Meanwhile, I'm happy to hold RYM for its future growth prospects.

[percy]

There's really no "should" about the market.

When sentiment improves, maybe. Meanwhile, I'm happy to hold RYM for its future growth prospects.

macduffy
you are right.I have replaced should with may. .

[peat]

A lot of people say if PE is lower than growth % you are safe.PE higher than growth problems.

my book describes this as :


The PEG ratio: Price/Earnings to Growth, is a valuation metric for determining the relative
trade‐off between the price of a stock, the earnings generated per share (EPS), and the
company's expected future growth. PEG = PE / % future growth rate. A lower ratio is
"better" (the stock is cheaper) and a higher ratio is "worse" (expensive). It is generally
accepted that a PEG ratio of 1‐2 represents a reasonable trade‐off between cost (as
expressed by the P/E ratio) and growth: the stock is reasonably valued given the expected
growth. If a company is growing at 30% a year, for example, then the stock's P/E could be as
high as 60. It is generally only applicable to so‐called growth companies (those growing
earnings significantly faster than the market). For companies with zero expected growth,
the ratio is undefined (division by zero).
When the PEG is measured it is considered preferable to use the expected future growth
rate.
Widely used

[percy]

my book describes this as :


The PEG ratio: Price/Earnings to Growth, is a valuation metric for determining the relative
trade‐off between the price of a stock, the earnings generated per share (EPS), and the
company's expected future growth. PEG = PE / % future growth rate. A lower ratio is
"better" (the stock is cheaper) and a higher ratio is "worse" (expensive). It is generally
accepted that a PEG ratio of 1‐2 represents a reasonable trade‐off between cost (as
expressed by the P/E ratio) and growth: the stock is reasonably valued given the expected
growth. If a company is growing at 30% a year, for example, then the stock's P/E could be as
high as 60. It is generally only applicable to so‐called growth companies (those growing
earnings significantly faster than the market). For companies with zero expected growth,
the ratio is undefined (division by zero).
When the PEG is measured it is considered preferable to use the expected future growth
rate.
Widely used


Peat,
thank you.Exactly.EPS 15.8 SP $2.14 PE 13.53 divided by growth rate 19% =PEG of .71 which is very low.Not many companies with PEG under 1 so .7 is excellent.

[minimoke]

A bit of activity today - $64m in trades and down a couple of %

[COLIN]

A bit of activity today - $64m in trades and down a couple of %

I would have expected an SSH statement before close.

[minimoke]

I would have expected an SSH statement before close.
Ordinarily I would have thought so to - but this is in the NZX after-all.

[Lizard]

I would have expected an SSH statement before close.

I think they generally have 3 days to file an SSH.

Also, I think I've also seen some trades where the date of assuming control has been recorded on settlement date (i.e. 2-3 days later).

[Anna Naum]

I think they generally have 3 days to file an SSH.

Also, I think I've also seen some trades where the date of assuming control has been recorded on settlement date (i.e. 2-3 days later).

Paper suggesting that the seller was Canadian holder of 6.5% and the buyers were various locals

[Lizard]

The Emerald Capital/Gardiner stake was the only one large enough to provide $64m shares. It was sold in July last year to the trustees, Garlow Management, who were responsible for dealing with Gardiner's estate. Most of it then seemed to have been distributed to beneficiaries in March. Perhaps the beneficiaries have entered in to some kind of joint sale. Guess we'll find out.

[Silverlight]

Thre were two large trades yesterday, one for 24m shares the other 8m shares, I think only 24m shares changed hands, and speculation it was Alberta Inc who sold their stake of 24.95m shares, 4.99% of the company.

As it was below SSH size there would be no req. to provide an SSH notice.

[minimoke]

Thre were two large trades yesterday, one for 24m shares the other 8m shares, I think only 24m shares changed hands, and speculation it was Alberta Inc who sold their stake of 24.95m shares, 4.99% of the company.

As it was below SSH size there would be no req. to provide an SSH notice.
Unless there was one buyer of 32m shares?

[Snow Leopard]

Seems to be losing ground of late. Mind you it is still no bargain. :mellow:

regards
Paper Tiger

[Lizard]

Seems to be losing ground of late.

No worries. Will just be Phaedrus selling down after spotting one of those big OBV step thingies... ;)

[Snow Leopard]

No worries. Will just be Phaedrus selling down after spotting one of those big OBV step thingies... ;)
Fooled by randomness, eh?

[Lizard]

More seriously though, although I admire the performance of Ryman (exceeded my expectation), I still think their model weakens considerable in an environment of lower capital gains on residential property (which I think most would predict is likely for a few years yet). It is still the cash flowing from the boom in capital gains on resale that is funding their expansion and growth. With an average stay of 7 years, will the model peak about 3.5 years after the rate of capital gains peaked?

[Lego_Man]

Unless there was one buyer of 32m shares?

I think Milford Asset Management took the chunk.

[Phaedrus]

[Seems to be losing ground of late?] No worries. Will just be Phaedrus selling down after spotting one of those big OBV step thingies. Not me Liz - any semi-competent TA would have been out of RYM well before the OBV "step".


Fooled by randomness, eh?You think a major shareholder bailing out is a random event, PT? I don't!

http://i602.photobucket.com/albums/tt102/PhaedrusPB/RYM78.gif

[yabster]

Can't see whats changed though- 16% increase on profit to a record $61m and an increased divvie. Ryman also has demographics on its side.

Still holding at this stage.

[percy]

Can't see whats changed though- 16% increase on profit to a record $61m and an increased divvie. Ryman also has demographics on its side.

Still holding at this stage.

You are not alone yabster.The 10 year record is second to none,and I believe the next 10 years we see even better results as the strenght of the brand is getting stronger.They only have to announce that they are going to build a home someplace and they get enquires.the ageing population means they in the right business at the right time.Sell my brother?Yes! Sell my RYM? No!

[Sauce]

More seriously though, although I admire the performance of Ryman (exceeded my expectation), I still think their model weakens considerable in an environment of lower capital gains on residential property (which I think most would predict is likely for a few years yet). It is still the cash flowing from the boom in capital gains on resale that is funding their expansion and growth. With an average stay of 7 years, will the model peak about 3.5 years after the rate of capital gains peaked?

Lizard,

I have helped half a dozen people out of their homes and into RYMAN villages, and I have also recently been involved in helping a family member out of several residential properties (including the family home) and into a non-RYM retirement village.

The decision making process is so different from buying a home - it is literally out of necessity not desire. And there is almost nowhere to go - the waiting list at some of these places is up to a year long. Retirement is basically a property sector of its own - with the ONLY link to residential being the time it takes to sell the occupants home when its necessary for the funds - however that hardly slowed them down during the GFC when days to sell was at its lows and things are considerably better now.

I have also seen that the families concerned are more interested in getting their loved one into good care than concerned with money. Sometimes even stumping up some cash until the parents house sells. The families, rightly so, are more interested in the wellbeing of their family member than if there is slightly more or slightly less cash left over at the end (generally). And, being brutally honest, ageing family members can be a real problem, having them cared for, somewhere accessible and easy to visit is what these family's want.

And for the elderly, they care about the money even less. Priorities at that stage of life are very different and money has much less importance - but quality of life was what its all about - and quality of life is the value RYM and others offer.

Something else that interested me during my various times dealing with these families and people entering retirement villages was the esteem they had for RYM villages. It seemed apparent they had by far the best reputation, locations and facilities. The only reason I saw people even consider other villages was due to the waiting lists at the RYM ones. simply quite amazing.

THe growing supply and demand imbalance will ensure that RYM will be kept in good fortunes for the foreseeable future, and if anything, the current state of the development land market (the WORST hit, with no financing and no developers left) will most likely provide once in a lifetime opportunities for RYM to expand its land bank at rock bottom prices.

Regardless with current land bank they can expand significantly. I doubt rate of growth can match the last ten years but their 15%pa target seems very realistic based on land bank rate of new units being built.

Whatever the returns end up being it seems pretty obvious to me that there is not much downside risk for RYM. Market dominance and ridiculously favorable economics will prevail.

Cheers

Sauce

[Lizard]

Thanks Sauce. I have no problem with the services that RYM provide, their pricing, nor the fact that demand is likely to increase. I also think it is quite likely they can maintain 15% earnings growth, purely on the basis that they use an approximate discount rate of 15% on future cashflows when working out the fair value of investment properties. So there is a "built in" value increase to be reported.

My concern is mostly with the cashflow statement. When units re-sell (after an average of seven years), they get the cash in at the current LTO (licence to occupy) price and pay out based on (a large portion of) the original purchase price. At the moment, they are a cash machine due to the increases in the prices of LTO's over a period greater than seven years. When the differential in LTO price over the 7 yr ave falls, then this reduces cashflow. (Though offset by increase in number of units). Since most of the cashflow is still ploughed back into development, the rate of development becomes more difficult to fund as cashflow falls. (I realise cash is generated from other avenues, but in my analysis, the majority of the other sources of cash are required to maintain services).

I still think they might have difficulty raising the cost of a licence to occupy at much beyond the rate of increase in residential housing. Might be wrong. I'm finding it difficult to find data on their average selling prices, though looks like 2010 was around $307k each?

There is no way I am implying that RYM is not a good company - it is a good model and they implement it very well. My main point as a share investor is that things have been exceptionally good for RYM due to the increase in value of LTO's. Can they remain as good in a flat property market? I don't know.

[percy]

Thanks Sauce. I have no problem with the services that RYM provide, their pricing, nor the fact that demand is likely to increase. I also think it is quite likely they can maintain 15% earnings growth, purely on the basis that they use an approximate discount rate of 15% on future cashflows when working out the fair value of investment properties. So there is a "built in" value increase to be reported.

My concern is mostly with the cashflow statement. When units re-sell (after an average of seven years), they get the cash in at the current LTO (licence to occupy) price and pay out based on (a large portion of) the original purchase price. At the moment, they are a cash machine due to the increases in the prices of LTO's over a period greater than seven years. When the differential in LTO price over the 7 yr ave falls, then this reduces cashflow. (Though offset by increase in number of units). Since most of the cashflow is still ploughed back into development, the rate of development becomes more difficult to fund as cashflow falls. (I realise cash is generated from other avenues, but in my analysis, the majority of the other sources of cash are required to maintain services).

I still think they might have difficulty raising the cost of a licence to occupy at much beyond the rate of increase in residential housing. Might be wrong. I'm finding it difficult to find data on their average selling prices, though looks like 2010 was around $307k each?

There is no way I am implying that RYM is not a good company - it is a good model and they implement it very well. My main point as a share investor is that things have been exceptionally good for RYM due to the increase in value of LTO's. Can they remain as good in a flat property market? I don't know.

In annual report"We are not reliant on prices lifting above current levels to achieve our target growth in earnings over the next few years,as we have healthy embedded gains still to realise accross our villages.We estimate that we would realise an additional $140million if all our units were reset to our current prices.In turn,our management fees also grow as pricing is reset to new levels."

[Sauce]

Hi Lizard

Thanks for your reply. I got your point but wasn't totally clear on mine I think: From what I have seen (and I have been working with residential property intimately for the last ten years) I believe they will be able to keep raising prices over the long term. Due to the necessity of the demand, the psychology, and the supply imbalance. As long as they do it conservatively.

Ive walked through a RYM village and several of its units and I can tell you that your $307,000 buys you a lot more than just the unit. For old people (and their families), its a lifestyle, community, facilities, and simply being taken care of. And the buyers arent saying "well I can buy a unit down the road in an apartment complex the same size for $250,000 so why would I pay $307,000 for this?" it simply doesn't work like that. The $250,000 apartment is not comparable or even remotely an option for these people.

The "stepped" care is also a huge and growing part of it. Being able to go from relative independence, to hospital care or dementia care without ever being shifted again. That is a huge piece of mind for everyone, and worth extra $$ for certain. Selling piece of mind about someone as dear to you as your closest relatives, the psychology doesn't get much more compelling than that.

Unfortunately for some families it gets to the point where they are desperate because of the waiting lists. And it certainly has made me realise what a disaster we have on our hands trying to find something to do with the aging population going forward, because RYM and Metlife alone will not be enough. And some already cannot afford it and I think that will get worse.

I guess we will find out in good time ! :)

Percy: great post and point. Imagine how many units they have sold throughout earlier years that have yet to roll over (bad pun?). $140,000,000 worth of locked in gains will keep them going for awhile.

[Sauce]

P.s. Regarding stagnating house prices and general affordability (rather than unit price comparisons) - Things would have to stagnate in the housing market for a long time before this was an issue, and as long as price rises are conservatively managed I believe the demand will soak it up, the families of occupants would foot more of the bill, and those that can't afford it will simply miss out.

[POSSUM THE CAT]

Sauce how come a lot of elderly people wish to hell they had never heard of them because they cannot afford to get out of them

[Sauce]

Sauce how come a lot of elderly people wish to hell they had never heard of them because they cannot afford to get out of them

Please enlighten us ?

Old people do seem to have a propensity to complain about life perhaps that is what your experiencing.

Anyway, where exactly are they going to go Possum? The kids basement? ;)

[Sauce]

Anyway Possum, its obvious that your general statement cannot be true across the board, or RYM would not be so dominant. I know for a fact that the elderly communities are the biggest gossips in town, and bad service or experiences would quickly lead to a bad reputation, which RYM simply do not have.

[macduffy]

Sauce how come a lot of elderly people wish to hell they had never heard of them because they cannot afford to get out of them

I find that a surprising statement.

I know of at least four friends of the family who are living very happily in the Kilbirnie and Burma Road "villages" in Wellington. My own interest is a very modest investment in the shares!

[CJ]

Sauce how come a lot of elderly people wish to hell they had never heard of them because they cannot afford to get out of them

Can you explain.

With the DMF capped at 20% they knew exactly what they were getting into and can get out at any time. The longer they stay the better value the DMF is and the weekly fee is effectivley capped on entry as well (CPI adjustment which they dont normally do.

[POSSUM THE CAT]

A lot of them have gone into the village life & do not like it (the cat annoys a neigbour they cannot alter the garden or do anything) This is just some of the complaints have a look through Fair Go and they cannot afford to get out. It is not all A bed or Roses. Being in that age group I would not invest in them. I can see to many problems.

[percy]

A lot of them have gone into the village life & do not like it (the cat annoys a neigbour they cannot alter the garden or do anything) This is just some of the complaints have a look through Fair Go and they cannot afford to get out. It is not all A bed or Roses. Being in that age group I would not invest in them. I can see to many problems.

A friend of mine"s mate managed a retirement village in Brisbane.Terrible job,all the mad old buggars with too much time on their hands made his life hell!! Australia is not alone having mad old buggars.I think RYM's good handling of them is what attracts the good old buggars to RYM.
With so few developers in the market I would expect RYM are making good profits on new villages.

[POSSUM THE CAT]

Good Advertisement for RYMAN HEALTH CARE on TV one breakfast this morning. Will the Share Price go up or down Charging $1000.00 per week for IMO poor care
would not like to go into care at one of their villages Prison would provide better aged care.

[percy]

Good Advertisement for RYMAN HEALTH CARE on TV one breakfast this morning. Will the Share Price go up or down Charging $1000.00 per week for IMO poor care
would not like to go into care at one of their villages Prison would provide better aged care.

My mother-in-law is 87,allways having falls.That's what old people do.RYM system and Doctor let him down.Will happen again.RYM still provide the best aged care.
Prison most probably wellcome you.I look forward to RYM care myself.

[POSSUM THE CAT]

Percy I would certainly not want to be Paying $1000.00 per week for that sort of care. I think a manslaughter charge by neglect of duty should be considered.

[Serpie]

We do work for many resthome organisations, and if I was to choose one, it would be Ryman. Some of the others are pretty flash too, but Ryman's one's are the nicest.

Disc - have never held Ryman, but I'm a fan of the company and the sector.

[percy]

I cann't help feeling a part of the problem was he was too nice an old chap.said he was OK when clearly he was not.Everyone very upset,Ryman will be doing their utmost to make sure it is not repeated.As per my previous post,it will happen again,but hopefully systems will be put in place to ensure the wellfare of the oldies.Thank you serpie for your informative post.

[Snow Leopard]

So invasion planning is underway (http://stocknessmonster.com/news-item?S=RYM&E=NZSE&N=197768).
Let us hope that it goes well

regards
Paper Tiger

[macduffy]

Yes, let's hope it's not a "bridge too far"!

I have high regard for Ryman's mangement and I'm sure they've done their research well on the Australian market and regulatory framework. In fact, now might be a good time to secure a suitable site for their first village, at a reasonable price. A few Aussie operators are probably sitting on undeveloped land that they wouldn't mind passing on.

I hold.

[percy]

I hold AVE Aevum in aussie.I asked Simon Challies his view of them a couple of years ago.He said he felt they were more of a "life style' operator, where RYM were "total care"
I must admit I would sooner hold RYM than AVE so am very pleased they are going to Aussie.
I think their timing is good.

[macduffy]

Stockland's bid for AVE highlights the attractiveness of the retirement village business in Australia. RYM's decision to move into Aussie looking better every day!

[Pete]

Up 6c today afetr being flat for a while, any news?

[scamper]

the shareprice has been creeping upwards for the last three months after it had the big 30 million crossing in late june.
its divi is still only 2.8%. the half-year result will be about three weeks.
maybe good news about the australian venture?
the chart is looking good.
the 6-month downtrend has been broken, the 30-day MA crossed up about a month ago, bollies converging.
if today's sp holds, tomorrow the chart will look full of potential.
BUT, the volume today is quite low. Paws crossed.
I can't find any news that would cause the current 2.9% jump.

[Sauce]

I can't find any news that would cause the current 2.9% jump.

Hi Guys

It jumped on the MET half year result. Which was good. Including record closed sales.

RYM announce their half year late next month. I expect the half year to be tracking slightly ahead of their 15% target growth rate.

I have a valuation for RYM at the half year of $2.67, rising to $2.85 at full year, if they sustain 15% growth throughout the year which looks very likely at this point.

The share price has been tracking sideways all year while the business has been growing, providing a very good value opportunity over the last couple of months.

Regards,

Sauce

[Sauce]

maybe good news about the australian venture?


Hi Scamper

This is literally years away, I wouldn't even factor this into your thoughts on RYM yet. Talking to the CFO about it he is very clear that they are going to move very slowly, setting up and testing a single village to get the model perfect. He emphasized strongly that it will take years to get the initial village established.

Importantly, they expect to meet target growth rates for foreseeable future without factoring in any success in Australia.

Cheers

Sauce

[percy]

Thanks for your informative post sauce.Like others I was a bit taken by surprise with SP jump.Very pleased as I added to my holding with the money I got from selling AVE.I look forward to RYM reaching your targets.!!!!!!

[percy]

Hi Scamper

This is literally years away, I wouldn't even factor this into your thoughts on RYM yet. Talking to the CFO about it he is very clear that they are going to move very slowly, setting up and testing a single village to get the model perfect. He emphasized strongly that it will take years to get the initial village established.

Importantly, they expect to meet target growth rates for foreseeable future without factoring in any success in Australia.

Cheers

Sauce

Well sauce,as you predicted RYM half is a cracker.

[Lizard]

I think the cashflow statement needs to be considered alongside that - nothing wrong, but doesn't quite paint the same picture and is really more to the point as I see it (given the number of valuation assumptions that affect the P&L).

[Sauce]

I think the cashflow statement needs to be considered alongside that - nothing wrong, but doesn't quite paint the same picture and is really more to the point as I see it (given the number of valuation assumptions that affect the P&L).

Hi Lizard,

I don't believe its necessary to dissect the cashflow statement to determine if this is a good or bad result. The 36m in the announcement is their true cash profits and does not include any valuation assumptions at all - in fact the very first line in their announcement separates the realized profit from the valuation gains. This is a great result. Ahead of their 15% target (running about 17%).

The cashflow statement for RYM will show the enormous amount of positive cashflow they are generating from occupancy advances, which as usual will be far in excess of both reported and realised profits.

For instance if you take a look at last years cashflow statement they were able to re-invest 120m in new development from total net operating cashflow of 140m, plus pay out 30m in dividends. Yet their realised profit was only 61.4m. And none of those figures include any "re-valuations".

The cashflow statement is important to understand how they are able to recycle their capital and make such high returns on shareholders funds but it doesn't show you what cash an owner could take out of the business because a large part their cashflows are basically an interest free loan from the residents.

The best way to judge RYM is from their realised profits, as per the half year announcement. I hope this makes sense. I would love to hear what you think Lizard.

With regards,

Sauce

[Sauce]

Well sauce,as you predicted RYM half is a cracker.

Hi percy

Yes I think it was excellent! Amazing that people could still think this company will suffer due to the poor property market. Percy, as you know I think RYM is very good buying right now.

Cheers

Sauce

[h2so4]

Hi Sauce

How are owner earnings looking?

[Sauce]

Hi Sauce

How are owner earnings looking?

Hi h2s04

My opinion is that the realised profit for the 36m is the owner earnings of RYM. So very good.

If you annualise that RYM are giving about a 7% after tax "owner earnings" yeild with half of that being retained and reinvested at a rate of return of 30%.

Of course the returns are boosted by their ability to also invest capital from occupancy advances and a small amount of debt. But the leverage effect of that means they generate a 30% return on the earnings they retain which in turn means their dividend compounds of 15%pa.

I hope this helps.

Cheers

Sauce

[h2so4]

Am I right in thinking that the profit of $36M does not include the occupancy sales or advances?

[Lizard]

I hope this makes sense. I would love to hear what you think Lizard.

Hi Sauce,

Probably I should clarify my position a little:

I think Ryman are a good, well-run company.
I think they can produce above average long term returns (provided the model avoids regulation).
I just haven't considered the last two years to be the best time to invest in RYM (apart from during the few short months in 08/09 when nearly everything was cheap!)
If I had RYM in my portfolio, I would likely continue to hold it unless I found something better to buy.


I would prefer not to enter into a long debate regarding the accounts - I'm sure your understanding of the detail is better than mine. I would not have expected the property slowdown to have a huge impact yet. As we know, the model contains a huge buffer that makes it very slow to react to property price trends.

However, my view remains that RYM has been well-placed to capitalise on a long period of capital gain in the property market that has resulted in increases in LTO prices. Over a gradual period, this price increase has turned on a tap of cash to enable growth by reinvestment in new units. Should this now be offset by prolonged sideways move in LTO prices, then the tap will gradually turn off again as the spread between last paid price and new sale narrows. As a result, cash for new units may not be as readily available.

RYM will still be a good investment over the long term, as the model should produce better returns than other property investments. But I would rather be investing when the market is entering a period where LTO prices on existing units can be increased.

It remains a good company, but (by my measures) I don't think an investment now would be priced or timed to give the "exceptional" returns we all are looking for in a sharemarket investment.

Hope that explains my thoughts my clearly.

[Sauce]

Am I right in thinking that the profit of $36M does not include the occupancy sales or advances?

Hi h2

Sorry for late reply

It only includes the portion of sales that represent profit, i.e. the margin they make over new development cost, the margin on re-sale gains, and the profit on care and management fees. It's the money left over for owners after all obligations, expenses and tax are accounted for.

And contrary to something I posted on the Owner Earnings thread, It also has about 3-5m of non-cash charges deducted which for RYM is a close enough approximation of maintenance capex.

RYMs realized profits are literally the true cash that can be taken out of the company, i.e. buffets 'owner earnings'.

Which is ironic considering how many people think RYMs reporting is somehow dodgy.

The IFRS accounting changes which distort actual reported earnings are actually damn confusing, but that's not RYMs fault, and that's why they report the two figures.

Cheers

Sauce

[Sauce]

Hi Sauce,

It remains a good company, but (by my measures) I don't think an investment now would be priced or timed to give the "exceptional" returns we all are looking for in a sharemarket investment.

Hope that explains my thoughts my clearly.

Hi Lizard,

Thanks for your great reply. Wasn't looking for fight, but I do love debating the alternate view as it helps me really try and look at other perspectives and helps balance my view. So I really do appreciate you taking the time to post your view.

You are not alone in your views on RYM. Which is to some degree why I believe it's cheap right now. My research and my discussions with the CFO and even sales staff have confirmed to me several things:

1. They have 4-5 years of built in growth from previous LTO increases
2. They still have pricing power at current price point and current level of demand can sustain continued price increases
3. It is almost a certainty that demand for their products will increase for the foreseeable future
4. While they halted price increases during the GFC as a precautionary measure they are going to start increasing them again

It's important how well they have managed their pricing to date, edging up slower than they could have, always beating the rest of the market on price and quality, and leaving some pricing power on the table.

With vacancy at 0.006% at march 2010 after two years of the biggest global property crash in history, it's pretty obvious the demand is strong enough to continue to raise prices in coming years, and undoubtedly that process will be as well managed as it has been in the past.

However - While exceptional returns are somewhat subjective, I think you will find that RYM will deliver exceptional returns even accounting for a slow down in resale gains 4-5 years out. Management and care fees and new development sales will continue to underpin growth.

For instance: Assume a 15% growth rate for the next 5 years and then the growth rate slowing every year in a straight line to 3% terminal growth rate by year 10.

Present value of the dividends and terminal value is $2.70 per share at a discount rate of 10%, and that's using last years realised profits.

Personally I think those are very conservative inputs. The odds of RYM not beating that scenario (albeit with less linear figures) are very slim in my opinion.

Personally I think we will see exceptional returns from RYM. The current market view that RYM is a property company with its fortunes tied to the recent property boom is presenting an opportunity.

RYM is unloved and high quality which is a good combination. I hope I am right because I have now hold a hell of a lot of these :)

Always love to hears your thoughts lizard.

Regards,

Sauce

[Sauce]

In my opinion, the best way to think of RYM is this:

It is a Healthcare need that drives the demand. It's the development activity that generates its profit making ability.

And demand is ultimately what dictates the price consumers will pay.

RYM is a Healthcare company that just happens to make its money by building hospitals for the old people to occupy. just because they come in the form of townhouses and apartments, doesn't make them comparable to everyday townhouses and apartments. And neither is the demand or pricing.

Would you compare the cost of a one week stay at Wakefield hospital to a one week stay in a hotel and think that was a worthwhile comparison?

With regards,

Sauce

[h2so4]

Hi Lizard,


The cashflow statement for RYM will show the enormous amount of positive cashflow they are generating from occupancy advances, which as usual will be far in excess of both reported and realised profits.

,

Sauce

Could you not add these occupancy advances into owner earnings to get a better idea of what growth is being achieved by RYM.

In other words start at the cashflow statement make a few non cash adjustments and then deduct cap ex to give you owner earnings?

[_Michael]

hey sauce and lizard,

good posts and agree with the four years remaining value as the average hold is around seven years and property market has been in doldrums for only three years now so makes sense based on the seven year tail lizard alludes to

not sure i agree it is unloved though as this is a long time darling of the market, compare its valuation with counterparts in australia and you will find it is actually a well loved stock

it does deserve premium however as it is run as good as any listed company and has always stuck to doing the basics exceptionally well

ryman have generally priced competitively as they are the lowest cost operator due to scale and out of the box repetitive design features etc however the real tail wind now is that developer finance has dried up meaning half of their competitors disappeared during the financial melt down

i hold a couple from the depths of the 08/09 crash but would sell and lock in gains if something better comes along good but not cheap imo

cheers

michael

[JayPe]

it does deserve premium however as it is run as good as any listed company and has always stuck to doing the basics exceptionally well

ryman have generally priced competitively as they are the lowest cost operator due to scale and out of the box repetitive design features etc however the real tail wind now is that developer finance has dried up meaning half of their competitors disappeared during the financial melt down

The latter is a really important point. The best time to grow is when prices are down (news to anyone?) - Ryman has been quite conservatively run, with money to spare for development that can now be put to really good use in a market where land is relatively cheap and competition is relatively scarce.

Ryman's management have always refused to borrow heavily to fuel unrealistic growth, and the current climate is their reward for good management. As a shareholder its my reward too.

[Sauce]

Could you not add these occupancy advances into owner earnings to get a better idea of what growth is being achieved by RYM.

In other words start at the cashflow statement make a few non cash adjustments and then deduct cap ex to give you owner earnings?

Hi h2

You can't include all their cash from occupancy advances in your assessment of the cash that is theoretically distributable (i.e. owner earnings) because it ultimately has to be paid back. You can only use the profit component which is their margin.

RYMs seperated out 'realised profits' is literally as close to buffetts definition of 'owner earnings' as anyone could rationally calculate.

Cheers

Sauce

[Sauce]

hey sauce and lizard,

good posts and agree with the four years remaining value as the average hold is around seven years and property market has been in doldrums for only three years now so makes sense based on the seven year tail lizard alludes to

not sure i agree it is unloved though as this is a long time darling of the market, compare its valuation with counterparts in australia and you will find it is actually a well loved stock

it does deserve premium however as it is run as good as any listed company and has always stuck to doing the basics exceptionally well

ryman have generally priced competitively as they are the lowest cost operator due to scale and out of the box repetitive design features etc however the real tail wind now is that developer finance has dried up meaning half of their competitors disappeared during the financial melt down

i hold a couple from the depths of the 08/09 crash but would sell and lock in gains if something better comes along good but not cheap imo

cheers

michael

Hi Michael,

Thanks very much for your thoughts and post. Australian village operators do not display the same the growth profile and return on capital that RYM does. And they are actually very different businesses. They tend to be lifestyle villages (basically mctownhouses) and do not provide the same continuum of care, hospital, dementia etc. I'm not sure comparison is to useful particularly using PE ratios.

My comment about it being unloved was probably a bit out of context with what I meant. I am not suggesting its a punished beaten down stock by any stretch of the imagination. BUT every which way I look at it (and I have looked at it many ways), I think the market in general is (slightly) undervaluing RYMs growth prospects due to the general opinion that their fortunes are more closely tied with residential property market than is actually the case.

But I don't want to overstate this - It's simply a modest discount, with reasonable yet basically guarenteed growth on top.

Regarding value assessment:

I see RYM as value right now based upon it's return on capital and growth. Which I personally believe is a more rational approach than the PE ratio.

In the last 10 years RYM grew at somewhere around 24% compounding year on year for a decade and threw off 160m in dividends at the same time. Way way ahead of their stated target. You simply do not need that kind of stupendous growth to make a LOT of money.

Consider this, if they ONLY compound realised profits at 15%pa for the next 4 years, and growth slows to say 8 - 9% for a few years as lag of not increasing prices has an impact, then so what, they will still be growing at a very very acceptable level providing great compounding returns for shareholders. Thats doubling your money every 5 - 7 years and if you can buy at modest discount you should do even better than that, and then you get dividends as well. Thats an exceptional opportunity in my book.

The thing is that reasonable growth is almost guarenteed and safety of principle is as good as it gets. I also suspect that RYM will suprise lot of people with how they continue to compound profits.

Of course it won't be the next ten bagger in just a few years, but chasing those kind of returns is unneccasary when you can safely compound away at even 10% - 15% compounding after tax (and better!).

There is of course some connection with residential property (i.e. old people do make assessment of apartment/townhouse "purchase" vs their property value) but it is no where near the important driver of pricing people think it is. The strong demand driven by need, not want, is a far more important aspect.

Ironically the earnings TAIL effect of RYMs development program is means that more and more growth will also come from care and management fees as well - rather than any tail effect of no price increases for last two years being a worry.

Totally agree with your assessment of RYMs scale and low cost advantages and lack of competition/finance. Those are very powerful competitive advantages.

Thanks again for your post and love to hear your thoughts.

Cheers

Sauce

[Sauce]

The latter is a really important point. The best time to grow is when prices are down (news to anyone?) - Ryman has been quite conservatively run, with money to spare for development that can now be put to really good use in a market where land is relatively cheap and competition is relatively scarce.

Ryman's management have always refused to borrow heavily to fuel unrealistic growth, and the current climate is their reward for good management. As a shareholder its my reward too.


Hi JayPe

I agree completely. This is a great environment for RYM. They have a product/service which demand has not been effected by the downturn at all, yet they can now pick up land for new development at rock bottom prices.

Thats a good position to be in.

Cheers

Sauce

[CJ]

You can't include all their cash from occupancy advances in your assessment of the cash that is theoretically distributable (i.e. owner earnings) because it ultimately has to be paid back. You can only use the profit component which is their margin.I would think you can. They only have to pay it back IF (and that is a big IF) they resell the unit. Therefore it will essentially never be repaid.

[Sauce]

I would think you can. They only have to pay it back IF (and that is a big IF) they resell the unit. Therefore it will essentially never be repaid.


Hi CJ

You mean if they cant sell the unit? They have a 6 month guarantee and if the occupancy is not re-sold within 6 months the will pay a family out. This will never occur of course due to the waiting lists for units.

So you are right that they basically never have to repay the advances, because the next incoming resident pays a new occupancy right, and the family of the last resident gets paid out only when a new resident is found. So technically the new resident pays the old resident out.

This allows them to re-invest their original capital over and over again. It is certainly this cheap and efficient use of capital that allows them to make such high returns for shareholders.

However I don't believe it is money that can be considered shareholders profit as they still have a liability to the occupants. It would start to feel something like a very dodgy ponzi scheme if they started distributing all the occupancy right cash to shareholders!!

Cheers

Sauce

[h2so4]

Hi CJ

You mean if they cant sell the unit? They have a 6 month guarantee and if the occupancy is not re-sold within 6 months the will pay a family out. This will never occur of course due to the waiting lists for units.

So you are right that they basically never have to repay the advances, because the next incoming resident pays a new occupancy right, and the family of the last resident gets paid out only when a new resident is found. So technically the new resident pays the old resident out.

This allows them to re-invest their original capital over and over again. It is certainly this cheap and efficient use of capital that allows them to make such high returns for shareholders.

However I don't believe it is money that can be considered shareholders profit as they still have a liability to the occupants. It would start to feel something like a very dodgy ponzi scheme if they started distributing all the occupancy right cash to shareholders!!

Cheers

Sauce

Well what happens to the cash from the occupancy advances? Doesn't it go into the investment fund?

[Sauce]

Well what happens to the cash from the occupancy advances? Doesn't it go into the investment fund?

Hi h2

Yes, you are right. It's reinvested in building new villages and hospitals. But thats very different than paying it out as a dividend! More villages and hospitals can be converted into cash.

If you distribute the cash to shareholders its gone.

Sauce

[percy]

sauce,
Do you have any idea as to when RYM will pay imputed divies.?
I note in an article a few weeks ago on RYM,in The Press ,the general comment from residents was that they wished they moved into village years earlier.RYM are encouraging people to become members of the RYM community before they actually move in.
Keep up your great research.

[CJ]

Do you have any idea as to when RYM will pay imputed divies.?Never is a very long time but I think that it is the most likely estimate.

[Lizard]

I think that due to recent changes in tax (depreciation), the broker forecasts I have seen estimate they will begin paying tax in 2013. So I guess after that there is the possibility of partial imputation?

[mamos]

Sauce and others, thanks for great thread. Few questions I have


1. Unrealised re-sale bank currently $160m. If the average churn of RV units is 7 years can we expect approximately (1/7th) of this amount to be released each year as re-sale gains? The re-sale bank will be replenished with any FV gains and building of new units.

2. Do the aged care beds only contribute to aged care fees and do not include DMF’s or re-sale gains?

3. The total stock of 2,733 units, how is this split between RV units and aged care beds and how do the average margins on each compare?

4. While dividends are unimputed, wouldnt it make sense to retain all earnings in the business, rather than distribute them to shareholders who have to pay tax on them in the current income year?

5. Will dividends only be partially imputed once tax losses are fully utilised?

[CJ]

4. While dividends are unimputed, wouldnt it make sense to retain all earnings in the business, rather than distribute them to shareholders who have to pay tax on them in the current income year?

5. Will dividends only be partially imputed once tax losses are fully utilised?
4. only if they have a better use for the money. I dont think money is constraining their growth at the moment but if it was, then I would agree.
5. correct.

[JayPe]

I dont think money is constraining their growth at the moment

That's correct. I must confess that I once had a chat to the CFO about whether they would set up a DRP, which I was quite keen on. And in a nutshell his response was that they don't have any plans too, because they don't need it.

[Sauce]

Hi mamos

Nice to have some discussion going on RYM, gives me a chance to enjoy some more digging around. :p

People have basically answered your questions already but my thoughts for what its worth:



1. Unrealised re-sale bank currently $160m. If the average churn of RV units is 7 years can we expect approximately (1/7th) of this amount to be released each year as re-sale gains? The re-sale bank will be replenished with any FV gains and building of new units.


At the half year 2011 turnover was about 13% which was way down on the long term average which I believe is about 20%. So somewhere between 5 - 7 years seems right.

Yes, the re-sale bank does get slightly replenished by new builds due to the discount they are initially offered to the first occupant - but I am not sure how significantly. The theory goes that if RYM cannot increase the market value of their occupancy rights for a long period of time, then their re-sale margin will decrease, and their rate of growth will slow down somewhat. But care/management and new build growth would continue regardless.

However, It's worth noting that the company increased their estimated future re-sale gains by 15% (140m to 160m) in just the last 6 months. I expect this is already evidence that RYM will surprise many with the pricing power they can still tap into in future years when the residential property market is flat. Although some of this 20m increase will reflect the fact they discount their new sales to get new villages off the ground smoothly, leaving some margin for re-sale gain at the expense of new-sale margin.

The company has stated they do not need to increase prices to achieve growth targets for the next 4-5 years, and that was when they had 140m of embedded gains not 160m.


2. Do the aged care beds only contribute to aged care fees and do not include DMF’s or re-sale gains?


I understand that when people are transferred to a care bed, their unit goes on the market, and the purchase of the care bed is deducted from what is repaid to them after the management fee comes off. And often their ongoing care fees are then paid from these proceeds also until they pass.

I think all the care bed revenue is recorded under care fees but I will check.


3. The total stock of 2,733 units, how is this split between RV units and aged care beds and how do the average margins on each compare?


Total number at 1h11 is actually 4,217 units split 2,543 independent and 1,674 care beds. The margins depend on if you mean resales or new units. Margins at half year:

Care fees 14.4%
New sales 20.2%
Re sales 19.8%


4. While dividends are unimputed, wouldnt it make sense to retain all earnings in the business, rather than distribute them to shareholders who have to pay tax on them in the current income year?

RYM have so much cash they can re-invest from the interest free occupancy advances by residents, they can easily meet their target returns while paying out shareholders half of all the profit component. And wisely, they do not wish or need to risk getting speed wobbles.

If you add up the initial share capital raised by RYM at its IPO, and then add the 50% of profits that are retained by the company for each year since the IPO, you are left with a figure that is a true shareholders equity figure. I.e. it does not include all the asset revaluations required by accounting rules.

By dividing the realised cash profits into this estimate of shareholders capital you will see that RYMs underlying economic return has averaged 31.34% pa on all funds invested on behalf of shareholders since listing.

Shareholders Equity (ex revaluations) End 2010 = $243m
(Forecast) realised profit for 2011 = 71m
(Forecast) Return on Invested Capital FY12 = 29.2%

What this doesn't account for is their use of occupancy advance cashflow to re-invest in new development.

So basically RYM are able to throw off a whole bunch of cash to shareholders and still grow at a phenomenal rate, because they have access to all this interest free cash they can use to fund growth with instead.

The company would say they are simply comfortable compounding at the rate they are and generating a huge amount of wealth at a very do-able pace.


I hope this is interesting and helpful to you or anyone else with interest in RYM mamos. I would love to hear your thoughts and any analysis you come up with. Do you hold RYM mamos?

With regards,

Sauce

[Sauce]

Mamos

One other quick comment:

RYM have never needed additional equity from the markets to fund growth, not once since listing, which is also attributable to their ability to recycle their capital. Compare this to hundreds of companies in Australia which actually RAISE capital to fund growth in the same year as paying out profit as dividends that shareholders then pay tax on, while reinvesting tax-paid cash back into the companies capital raising!!!

Hows that for ludicrous behavior !

Regards,

Sauce

[scamper]

Good work Sauce! You sound very positive -- do you hold?
Cheers.

[Sauce]

Good work Sauce! You sound very positive -- do you hold?
Cheers.

Hi Scamper

I certainly do hold. And yes I am convinced that RYM will be a very good investment for the foreseeable future. The days of 28% compounding capital growth are over, but either side of 15% pa, PLUS dividends, will do me fine.

And most importantly basically ZERO chance of losing your capital.

What about yourself Scamper?

With regards,

Sauce

[Sauce]

"basically ZERO chance" is perhaps a bit exuberant. Swap for "very little chance"

;-)

[scamper]

yep, Scamper holds, but the timing was lousy.
Bought almost at the end of last year's upswing, so am only in single digit profit.
I reckon the 3% divi is pretty miserable, and after a year of sideways trading, am losing confidence...
consequently, was most impressed with your research, and its positivity. Cheers.

[Bobcat.]

TA indicates that it is time to sell this climber, regardless of what you bought it for.

[Sauce]

yep, Scamper holds, but the timing was lousy.
Bought almost at the end of last year's upswing, so am only in single digit profit.
I reckon the 3% divi is pretty miserable, and after a year of sideways trading, am losing confidence...
consequently, was most impressed with your research, and its positivity. Cheers.

Thanks for your reply Scamper.

Based upon my estimates of value, RYM was trading around its intrinsic value at its highest point 2009 - so I don't think you necassarily paid over the odds. However it looks like there is more value now as the intrinsic value has risen over the last 12 months yet the share price has basically gone sideways. Combined with the opportunity to pick up shares around the $2 mark over the last few months, it has been good buying in my opinion. Not the right time to sell RYM anyway.

CFO told me most analysts put the value in the mid 2's and my own DCF and straight line valuation is $2.70 and 2.67 respectively. But to temper my enthusiasm - I know others who also hold and are very keen on RYM who have the value around $2.40 more in line with analysts conclusions.

Personally I like the 3% dividend, as I don't believe RYM need the cash for growth, and I know that in 10 years time it will be a significant source of cashflow. Don't forget that 3% dividend will compound at the same rate as their realised profit growth.

For example if they manage to compound cashflows at their target growth rate of 15% for 5 years: You will enjoy cash each year initially 3% of initial capital but will become 6% of initial capital in year 5, plus your initial capital will have doubled in value.

And if I am right and there is a small discount inherent in the shares now, you could do even better than that depending on the markets perception of RYM's at the time.

Time is the friend of a wonderful business and the enemy of a terrible one.

Cheers

Sauce

[Sauce]

TA indicates that it is time to sell this climber, regardless of what you bought it for.

Hi Bobcat

Glad to have someone throw around a different point of view!
I would enjoy it if you could post some charts to show us your thoughts and reasoning from a TA perspective.

I don't know anything about TA really but always keen to try and see things from other peoples angle.

Cheers

Sauce

[percy]

TA indicates that it is time to sell this climber, regardless of what you bought it for.

RYM is in a strong up trend.It is above 5 day,10 day,30 day,60 day,90 day,120 day and 180 day moving averages, which confirms the trend.

[Bobcat.]

I could be wrong (have been b4) but RYM is meeting resistance at 2:20 and the MACD and Scholastic indicate a falling away. Could punch through but IMHO it's more likely to fall away for a few weeks.

BC

[percy]

I could be wrong (have been b4) but RYM is meeting resistance at 2:20 and the MACD and Scholastic indicate a falling away. Could punch through but IMHO it's more likely to fall away for a few weeks.

BC

BC.
I hope you are wrong as I have just brought more recently.But really what upsets me is RYM is my 1st choice of 5 shares for next year's competition.I have had no joy in this years.Now you has cast doudt on my 1st choice.!!!!
Hate to think what you will say about the other 4.???!!!!!Have not put my entry in yet but looking at ABA,EBO,CCC,RYM,and ZIN or XRO

[darksentinel]

looking at ABA,EBO,CCC,RYM,and ZIN or XRO

Good luck with that (DISC: hold 3 of them ^^).

Bobcat seems correct in positing $2.20 as a resistance point, I don't really use MACD or Stochastic (which I assume "scholastic" should be :) ), but recent data does suggest that the local high has been reached for now, although I can't see anything indicating an overall trend-reversal.

[percy]

Good luck with that (DISC: hold 3 of them ^^).

Bobcat seems correct in positing $2.20 as a resistance point, I don't really use MACD or Stochastic (which I assume "scholastic" should be :)), but recent data does suggest that the local high has been reached for now, although I can't see anything indicating an overall trend-reversal.

Yes I had not really thought about the $2.20 resistance until he posted.I was just happy RYM was in an uptrend. I did look at charts ,and saw that $2.17 had been the top price reached twice this year.So is $2.17 or $2.20 the resistance point?I was hoping it would be closer to $2.75.!!!!!!!

[scamper]

Bobcat, my TA work suggests that it's still good, and would have to close below 213 to break the uptrend.

The bollies have converged and diverged at least four times in the last 6 months, and are currently still diverging -- just.
It is well above the 30- and 60- moving averages.
The MACD has been slithering round, closely twined for the last 4 months, during which there's been a 10% rise.

The 'resistance point' was 217, which was tested in January and May, not 220.
The last two weeks have seen tentative breaks above 217, which could be seen as a positive move beyond the year's trading range.

I can't actually find any TA sell indicators -- not to say that next week may have them sprouting everywhere...
Does anyone have access to OBV? Cheers.

[Phaedrus]

http://i602.photobucket.com/albums/tt102/PhaedrusPB/RYM127L.jpg

The Big Picture. RYM is in a "longterm" (21 month) uptrend. Because this uptrend is decelerating many indicators such as trendlines trigger multiple "Sell" signals as the uptrend progresses. Most of the "Sell" signals numbered here come from trendline breaks, but (3) and (10) are Bearish divergences while (7) and (8) are OBV derived. Note that all these signals presented singly and none were confirmed by any other signals at the time they were triggered. (You can see why is it unwise to act on the basis of any single unsupported signal). So, in spite of this string of "Sell" signals, many would still be holding RYM.

http://i602.photobucket.com/albums/tt102/PhaedrusPB/RYM127S.jpg

The Current Situation. RYM is in a nice clear, clean, tidy 5 month uptrend. It has recently broken above the old $2.17 Resistance level and continues to make higher highs and higher lows (that's an uptrend). It has recently formed a Bearish divergence, but again there were no supporting signals to warrant acting on this. (Note what happened last time this situation presented itself - at point (3) ) The OBV has shown 2 "steps" where big holders got out. This is considered to be Bearish, but again - no supporting signals from other indicators. The OBV is now rising again. The Slow Stochastic oscillator that has stayed positive throughout this uptrend remains positive. I am loathe to comment on the MACD because I consider this indicator to be totally ineffective. It has, for example, triggered 5 "Buy" and 5 "Sell" signals over the short period covered by the uptrend shown on this chart! (not to mention 16 trades over the period of the first chart - worse than useless.) In short, if you have (not unreasonably) chosen not to act on any of those 10 "sell" signals, there is certainly no reason to sell now.

So, how best to monitor the current uptrend? Significant weakness would be indicated by :-
(1) A break below the current price trendline.
(2) A downtrend.
(3) A break of the OBV trendline.
(4) A Stochastic oscillator Sell signal.
(5) A failure to stay above $2.17 (this now "ought" to be support).

[percy]

phaedrus.
Thank you for your great chart,and your informed comments.

[thishastowork]

yes agreed, thankyou very much

[Sauce]

Hi Phaedrus

Thanks very much for the time and effort you put into that post, I thoroughly enjoyed it as usual.

I have always admired the knowledge you have of your discipline and I wish I knew more about TA.

I have to admit to a fair amount of skepticism when it comes to TA for the average punter, however I have no doubt that given the right temperament and enough time, people like yourself can make above average returns. Of course by definition the same thing can be said for FA and Value investing as well so its a moot point anyway.

I am very interested in your thoughts on your last RYM post from 7/10 in bold below.

I hope this post doesn't sound disrespectful, I am not looking for a fight, I am genuinely intrigued by TA and literally have no understanding of it. As an observer of TA posts on this site I have seen so much posting that is historical pointing out how obvious buy and sell points are, yet comparatively few forward looking posts outlining that now is a good time to buy and sell.

Although your post below is still not quite this, but comes close, and now a few months later with hindsight, your view has changed "Any semi-competent TA would have been out of RYM" to "So, in spite of this string of "Sell" signals, many would still be holding RYM".

I would love to hear your thoughts and opinions on this. The main reason being that I have always considered trying to trade trends of high quality companies not worth the risk that one would end up left behind because of a stop loss, or a bad sell signal. But then I am ignorant of the techniques...

Thanks in advance,

Sauce






Not me Liz - any semi-competent TA would have been out of RYM well before the OBV "step".

You think a major shareholder bailing out is a random event, PT? I don't!

http://i602.photobucket.com/albums/tt102/PhaedrusPB/RYM78.gif

[Snow Leopard]

Hi Phaedrus...
....Thanks in advance,

Sauce

Oh dear! :D

regards
Paper Tiger

'Tis the season to be jolly. Fala la la laa la la la laaa

[Phaedrus]

As an observer of TA posts on this site I have seen so much posting that is historical pointing out how obvious buy and sell points are, yet comparatively few forward looking posts outlining that now is a good time to buy or sell. There had been some discussion on selling RYM and the whole point of yesterdays post was to illustrate the fact that technically, now is NOT a good time to do so. It proceded to give examples of what would need to happen for RYM to become a Sell in the future. I classify that as forward looking!


Now a few months later with hindsight, your view has changed from "Any semi-competent TA would have been out of RYM" to "So, in spite of this string of "Sell" signals, many would still be holding RYM". Sauce, you seem to think there is some sort of conflict between those 2 comments. There isn't. Both are simple statements of fact. Situations change over time. RYM was a sell, now it isn't. Many people do not use TA and wouldn't have sold on the basis of those earlier technical signals. Others will have bought in since then. Yesterdays post was created for those that are currently holding RYM and wondering whether to sell or not.

Even with the benefit of hindsight, my view has not changed one iota. The earlier post illustrated a good time to sell RYM. This latest post shows that now is not a good time to sell RYM.

[Sauce]

Hi Phaedrus,

Thanks for your reply. As I mentioned in my interest was this:


The main reason being that I have always considered trying to trade trends of high quality companies not worth the risk that one would end up left behind because of a stop loss, or a bad sell signal. But then I am ignorant of the techniques...

If RYM was a Sell, and now it isnt, that sort of highlights what I was getting at. In my mind I can't reconcile those statements with TA having been useful to outperform buying and holding RYM over the last 6 months. But like I say, I simply don't understand enough about it.

I don't want to open a can of worms, perhaps I should stick to my knitting or learn more about TA before getting into a discussion on it with someone as knowledgeable as yourself!

But If I haven't totally pissed you off I would love to see what you think of ANG on the ASX (there is a thread on it) - it appears to have been in a very steep uptrend since the lows of the GFC yet several times it has been heavily sold down on the way up, and during those sell downs I kept wondering how a TA practitioner would have dealt with those drops (that seemed to break all the long term moving averages, and yet the share would continue to appreciate strongly from then onwards).

Cheers and thanks again for all your posts, I genuinely appreciate the immense contribution you have made to sharetrader, and I certainly didn't intend to offend!

Regards,

Sauce

[Phaedrus]

If RYM was a Sell, and now it isnt, that sort of highlights what I was getting at. In my mind I can't reconcile those statements with TA having been useful to outperform buying and holding RYM over the last 6 months.But Sauce, I did not claim that TA had outperformed buying and holding over the last 6 months! In any case, when an uptrend is fairly steady, nothing will outperform simply "buying and holding". I was using TA to make the single point that, right now, RYM is NOT a sell.


I would love to see what you think of ANG:AX it appears to have been in a very steep uptrend since the lows of the GFC yet several times it has been heavily sold down on the way up, and during those sell downs I kept wondering how a TA practitioner would have dealt with those drops (that seemed to break all the long term moving averages, and yet the share would continue to appreciate strongly from then onwards).Occasionally, with some stocks, nothing beats simply "buying and holding". ANG is not one of those stocks - at one point it dropped from $4 to 80 cents in a year. Buying and holding is a recipe for disaster when a stock is in an ongoing downtrend and even the most crude, simple TA will outperform it under such circumstances.

I'll post an ANG chart for you, addressing these points.

[Sauce]

Phaedrus;329301]But Sauce, I did not claim that TA had outperformed buying and holding over the last 6 months! In any case, when an uptrend is fairly steady, nothing will outperform simply "buying and holding". I was using TA to make the single point that, right now, RYM is NOT a sell. Thanks Phaedrus. I wasn't meaning to imply you said that either! My point simply around my uninformed thoughts that TA could lead to selling out and leaving money on the table. Your original comment and then recent comment seemed to confirm this possibility. If any decent techical analyst would have sold at 07/10 then is it not likely that they would have left some money on the table in this instance?

No methodology, system or person is perfect, and I am also not suggesting that it needs to be to make money over the long term!

My question then extends to ANG over the last couple of years also. I accept that TA might have got you out of ANG (and all stocks perhaps) as the market tanked. But I am interested in how TA would have dealt with the volatile swings on the way back up. My instinct is that mediocre traders would at some point have exited ANG and missed a lot of the rise. But my lack of knowledge means my instinct is quite likely wrong.

It's not an attack on TA. Just me trying to understand the risks and rewards of it in relation to these scenarios, but as I say, perhaps I just need to learn more about it.

I look forward to the your thoughts on ANGs chart!

Thanks again

Cheers

Sauce






Occasionally, with some stocks, nothing beats simply "buying and holding". ANG is not one of those stocks - at one point it dropped from $4 to 80 cents in a year. Buying and holding is a recipe for disaster when a stock is in an ongoing downtrend and even the most crude, simple TA will outperform it under such circumstances.

I'll post an ANG chart for you, addressing these points.
My reference was after the GFC on the way back up - I appreciate good TA might have got you out before the full effects of the downturn were felt which would have provided a huge advantage over others expecially if you could use TA to time re-entry near the bottom.

I look forward to it, thanks!

[scamper]

Well, on 7 Dec (above) Bobcat thought TA showed a sell at 117.
Several people disagreed, including scamper who hedged the opinion with 'next week might be different'.
Phaedrus replied and pointed out with one of his marvellous charts and explanations that 7 Dec was NOT a good time to sell.
And now, a whole week later, the sp is 125.
The resistance at 117 is well broken and the upward trend has danced a little acceleration (how's that for technical?)
And there are no sell indicators in sight.
Scamper holds.

[Snow Leopard]

Well, on 7 Dec (above) Bobcat thought TA showed a sell at 117.
Several people disagreed, including scamper who hedged the opinion with 'next week might be different'.
Phaedrus replied and pointed out with one of his marvellous charts and explanations that 7 Dec was NOT a good time to sell.
And now, a whole week later, the sp is 125.
The resistance at 117 is well broken and the upward trend has danced a little acceleration (how's that for technical?)
And there are no sell indicators in sight.
Scamper holds.

A number of readers may, like myself, be a little mystified at first glance by the stock prices in the quoted post. However one can reconcile reality and scamper-world by adding 100 (that is NZ$1) to the above prices and you are as they say "In the money".

Additionally for "above" if you read "previously" (chronologically speaking) then you convert the physical layout to the temporal domain and all confusion is removed.

best wishes
Paper Tiger

Disc: The Tiger holds RYM.

[scamper]

strange, thought the 3 minutes between posting and editing would have cleared me!
but i must have pushed a wrong button for the edit...
agree about the 'above', henceforth 'previously' (giving the date was a clue for paper tigers).
christmas wishes to you too. scamper

[Beagle]

Really enjoyed reading all these posts on RYM, especially your's Sauce.

Lots of Technical Analysis but I like to take a more fundamental approach and this is how I see Ryman.

1. Their facilities are first class, I've seen a number of them myself and if anyone's in any doubt have a tour through the Evelyn Page facility in Remuera Auckland.
2. They're good value for the high calibre of what's on offer, suggesting considerable further pricing power.
3. Excellent management, you don't win Retirement Village of the Year operator six times by accident.
4. Its a needs based business, it does well in both good times and bad and has demonstrated an excellent ability to grow even during the GFC, how many others compaies have done that ?
5. Earnings per share have grown around 26% compared to the previous corresponding perod last year and extrapolating that out it looks like they're hitting the ball well and truly out of the park compared to their stated goal of 15%, despite the almost total paucity of growth anywhere else in N.Z., anyone noticed the latest GDP figures out today ?
6. Despite this growth they would appear to be on a very modest P.E. of just a little over 11 which all things considered the way this company has grown in truly appalling times seems extremly cheap to me, is this N.Z's cheapest true growth stock, surely it is !! How well will they do when the economy eventually turns around ?
7. The Price Earmings ratio to current growth, (P.E.G ratio) as its known is less than 0.5, anything under 1.0 is good value and the last time I bought a true growth stock trading at these sort of extremly cheap PE and PEG multiples I made a lot of money and there's no reason to think a patient investor won't do so again.
8. The company enjoys a dominant position in the market, extremly favourable demographics with future growth underpinned by huge increases in retiree's, will enjoy increasing efficiencies due to its growth in size and quite frankly I can't find anything not to like apart from the low dividend, which who cares if the dividend grows by 15% or even more per year.

I'm in. This is one growth stock I am very happy to put in the bottom draw so to speak and sleep well at night with.

[percy]

Roger,
If you think sauce's posts on RYM thread are good,go to owner earnings vs free cash flow.[sharetrader nz page 5].Snoopy and sauce discussing RYM.Totally brilliant.sauce knows this company inside out.An exceptional anylsis of RYM.

[Sauce]

Hi Roger,

Thanks for your post I really enjoyed reading it!

Agree with all your thoughts on RYM. Two things to consider Roger; the true PE is actually about 16 - I work off the realised "cash" profits rather than the reported profit that includes non-realised valuation gains. In my opinion the only thing that matters is the excess cashflow the company generates that is attributable to shareholders. This is the "realised' profits which they include alongside reported profits (its an accounting requirement for them to re-value their villages each year and include paper-gains in their reported profits).

Secondly, the second half of this year is unlikely to be as huge for RYM as the first half, due to the timing of settlements and new village openings. My figures show about 16 or 17pc full year profit growth.. (about 71 - 72m cash profits) BUT watch the management and care fees in the second half, they will grow strongly due to previously completed village cash flows maturing.

I totally agree with you on this one roger. It's pretty hard to go past RYM for safety of principle and above average returns.

Regards,

Sauce

[Sauce]

Roger,
If you think sauce's posts on RYM thread are good,go to owner earnings vs free cash flow.[sharetrader nz page 5].Snoopy and sauce discussing RYM.Totally brilliant.sauce knows this company inside out.An exceptional anylsis of RYM.

Aww shucks thanks Percy,

Thanks to Snoopy I learned a lot from that thread and thoroughly enjoyed the banter, and was able to make a sizable investment in RYM from the research that Snoopy lead me to do, so from my perspective I should be buying Snoopy several Lagers to say thanks !

Regards,

Sauce

[Beagle]

Thanks for bringing me down to earth a bit Sauce, yeah point taken regarding unrealised gains, still PE ratio compares very favourably with other good growth stocks like Mainfreight on about 21 times earnings last time I looked.

Looking forward to reading your cash flow analysis that Percy is referring too as soon as I get some spare time.

I like the fact that its a feel good investment too, of course there will always be the odd exception or concern but taken as a whole they seem to be doing a very good job of looking after our Elderly people and the ones I have met in Ryman's facilities seem very happy. I also like the fact that everything is done in house and its a business model of providing much needed comprehensive retirement facilities that can be rolled out throughout Australasia in time. The demographics as previously mentioned are brilliant, the execution almost flawless PE and PEG ratio's are good, and so on. I'm very happy to be in for the long haul.
Feels like a rock solid socially responsible and ethical investment to me and naturally I'm looking forward to the growth over the years too !!

Talk more soon.

[Sauce]

Further thoughts for anyone who is interested;

Snoopy pointed out (on the Owner Earnings thread) that the unrealised gains probably do represent further value to shareholders, if you look at RYM as a property owning company. I disagreed with him at the time, but after some discussions with the company and further thought I think he does have a point.

The portfolio value of RYMs villages less its debt is basically its liquidation value. RYM ensure the valuers are ultra-conservative using discount rates of 15% and long term growth of 3%. So in reality the villages are likely to be worth a lot more (if for instance they were to sell an entire village to another operator, such as MET just did recently).. but lets ignore that, as it simply adds more safety to assumptions.

What this really comes down to for me is safety of your principle. The more the value of the village portfolio grows the more security is behind your shares. So contrary to my original thinking the increases in valuation are actually very relevant to shareholders/investors.

HOWEVER with regards to actually evaluating its current and future performance to determine value, the free cash the business generates for shareholders is still the most important factor, as that is what will drive dividends and share price appreciation, like any other non-speculative asset. At least as long as the RYM plans to own its villages forever.


Feels like a rock solid socially responsible and ethical investment to me and naturally I'm looking forward to the growth over the years too !!I agree, I have a lot to do with older people's transition into some of RYMs villages in my job, and I have seen first hand what a win win situation it is (for shareholders and the elderly who go into the villages). And yes it is as ethically run as you could hope for.

With regards,

Sauce

[Beagle]

Hey Sauce,

Amoung the many things that impressed me when I was looking at Ryman as a place for my parents to be cared for was the "no increase in weekly fees ever". This sounded especially good for occupants relying on National Super which as we know is indexed to the inflation rate each year so in effect my parents net disposable income would increase in real terms.

But looking at it now from a shareholders perspective do you know how Ryman is coping with managing this in the light on the recent GST increase ? Do they attain such great stability in weekly occupancy costs by capitalising on their ever growing economies of scale ? Look forward to hearing your thoughts.

Long term holder now and if I hold for long enough it might grow to the point where I get a free unit when I retire in 16 years time !!

[CJ]

Roger - I think they have the ability to increase the weekly fees - there advertising material just says that they have never used that option in the past

[Beagle]

Roger - I think they have the ability to increase the weekly fees - there advertising material just says that they have never used that option in the past

Thanks CJ. It was a while back so what you've suggestred sounds more likely, I probably got it wrong.

[voltage]

This stock is a stand out for dividend growth long term, around 20% historically per annum. It is a business and property play. My number one in a portfolio.

[Snow Leopard]

This stock is a stand out for dividend growth long term, around 20% historically per annum. It is a business and property play. My number one in a portfolio.

Nearly as good as Mainfreight, heh ?

best wishes
Paper Tiger

NZX Disc: mostly MFT & RYM, add some IFT and a dash of PPL.

[voltage]

Paper tiger, kingfish top 2 holdings are mainfreight and RYM

[Sauce]

Hey Sauce,

Amoung the many things that impressed me when I was looking at Ryman as a place for my parents to be cared for was the "no increase in weekly fees ever". This sounded especially good for occupants relying on National Super which as we know is indexed to the inflation rate each year so in effect my parents net disposable income would increase in real terms.

But looking at it now from a shareholders perspective do you know how Ryman is coping with managing this in the light on the recent GST increase ? Do they attain such great stability in weekly occupancy costs by capitalising on their ever growing economies of scale ? Look forward to hearing your thoughts.

Long term holder now and if I hold for long enough it might grow to the point where I get a free unit when I retire in 16 years time !!

Hi Roger!

Sorry I have just got back from holiday

This is the first of their peace of mind guarentees that provide residents:

1. Weekly fee guarentee
We know how important it is to you to have certainty regarding your living costs.
“We guarantee that, in the event that we do increase our weekly fees, that the increase will be limited to the increase in the Consumer Price Index” This gives you assurance that if any increase occurs that it will only be made in line with inflation.
Did you know that in over twenty years a Ryman townhouse or apartment resident has never experienced an increase in their base weekly fee?

However there really is no need to increase existing fees when the average stay is only 5 years, as it doesnt take long for a fee increase to filter down through all the units as they turn over. Plus the weekly fee is seperate from and very small in comparison to the care fees which can get up to $800 or $900 a week, variable depending on how much care someone needs I believe, and which can increase at any time.

Regarding GST: This is a tax collected on behalf of the government. So I would have thought an increase in GST is not an increase in the weekly fee.

Regarding economies of scale: Gordon said their economies of scale were now a big part of their ability to make their units affordable and therefore was an important competitive advantage. The deals they get from suppliers are on very good terms and prices.

I hope this helps.

Cheers

[Sauce]

Also, considering the weekly fee is only like 120 bucks a week or something, the benefit of being able to give residents the peace of mind guarantee that the prices will never rise on them, FAR outways any small financial benefit they would get from increasing the fees on existing units with say only 2-3 years to go.

This is from a sales perspective.

[buns]

Anyone have any idea on the damage to Ryman's 6 blocks in Chch?

Figured there must be some pretty hefty damage, and the SP could have retreated a tad.. Seems not.

[Sauce]

Anyone have any idea on the damage to Ryman's 6 blocks in Chch?

Figured there must be some pretty hefty damage, and the SP could have retreated a tad.. Seems not.

Hi Buns

RYM announced all was OK (as per announcement copied below). In the short term the situation is probably not going to be good for turnover in the CHCH villages though. RYM have 20% of their villages in CHCH. And it would be safe to say potential occupants will struggle to get out of their existing homes at realistic prices due to earthquake carnage.

Of course most importantly it was great that no one was killed or injured.

With regards,

Sauce


GENERAL: RYM: Christchurch Earthquake Update
RYM
25/02/2011 11:14
GENERAL

REL: 1114 HRS Ryman Healthcare Limited

GENERAL: RYM: Christchurch Earthquake Update

Media Release - 25 March 2011

Christchurch Earthquake Update

The Ryman team wish to extend their sympathies to all the people who have
lost family, friends and colleagues in the earthquake.

We are very grateful and relieved that our staff and residents in
Christchurch are all safe and well.

"We have received an amazing response from our staff, suppliers and
contractors, both in Christchurch and from further afield," said Chairman Dr
David Kerr. "This has allowed us to continue to care for our residents in
Christchurch."
"Our villages are all sound, and did not sustain any structural damage."

Ryman head office has been relocated from the Christchurch CBD to back up
premises in Sockburn and is operational.

Ends
Media Advisory: For further information or comments please contact Chairman
Dr David Kerr on 021 362 403
End CA:00206105 For:RYM Type:GENERAL Time:2011-02-25 11:14:12

[percy]

Sauce,
off the top of my head.There must be a lot of elderly having to move out of damaged homes,who will not want to go back to their old homes,and whose families will be keen for them to move into the safety of a RYM village.?

[arcticblue]

I was out at their Aidanfield place in the weekend and there didn't appear to be any damage. I also heard through a friend that they already had a backup office sorted out prior to the earthquake, that seems like a pretty thorough backup plan!

[Sauce]

Sauce,
off the top of my head.There must be a lot of elderly having to move out of damaged homes,who will not want to go back to their old homes,and whose families will be keen for them to move into the safety of a RYM village.?

Hi Percy,

Sounds reasonable. But don't forget entry into the villages has to be paid up front. Most families can't stump the 300 - 400k required without realising the equity from the existing home of the resident-to-be.

I don't believe the earthquake will have a material effect on RYMs prospects as a whole. But I would be suprised if there wasn't some short term negative effects for the CHCH villages.

And as you say; demand could even increase in CHCH once the dust settles so to speak (is it ok to say that?!).

Regards,

Sauce

[percy]

Hi Percy,

demand could even increase in CHCH once the dust settles so to speak (is it ok to say that?!).

Regards,

Sauce

Ofcourse it's OK to say that.!!!! Thanks for your reply.Trust you are safe and well.

[thishastowork]

end of uptrend?

[JayRiggs]

end of uptrend?

LOL, I hope not, I bought some at $2.34.
Anyone know when the next profit result is coming out?

[percy]

LOL, I hope not, I bought some at $2.34.
Anyone know when the next profit result is coming out?
Last year the full year result was announced on 19th May.

[JayRiggs]

Nice announcement today. A new village to be built!


New Ryman Village for Waikanae
Christchurch based aged care and retirement village operator Ryman Healthcare today announced that Waikanae will be home to its 25th retirement village.

“We have secured a superb site,” said Ryman managing director Simon Challies, “and we look forward to offering the people of Waikanae, and the wider Kapiti Coast, a first class choice in their retirement.”

The 6.9 hectare site on level ground at the north end of Parata St, enjoys good aspect and is located close to the Waikanae town centre.

Ryman plans to develop a retirement village offering the full continuum of care - independent townhouses, serviced apartments, village centre, and a resthome which also offers hospital and dementia care services.

On completion the village will be home to over 400 residents.

“We are very pleased to be making a $100m investment in the local economy,” said Mr Challies, “and to be able to assist both the Government and the District Health Board to cater for the growing need for aged care services in the region.”

Ryman currently owns 22 villages nationwide, which each offer a combination of retirement living and resthome care. The villages are all designed, built and operated by Ryman.

The company is opening a new village in Dunedin this month, and has recently fast-tracked its plans to build a new village in North East Christchurch to address the immediate need arising out of the earthquake.

It has a landbank of over 2,000 units and beds in New Zealand and is actively seeking a site for its first village in Australia.

The company is a six times winner of Best Retirement Village in New Zealand, serves over 5,000 elderly New Zealanders and employs over 2,500 staff.

[Sauce]

From percy:



Sauce,
off the top of my head.There must be a lot of elderly having to move out of damaged homes,who will not want to go back to their old homes,and whose families will be keen for them to move into the safety of a RYM village.?

From Ryman:


The company is opening a new village in Dunedin this month, and has recently fast-tracked its plans to build a new village in North East Christchurch to address the immediate need arising out of the earthquake.

Looks like your thoughts might have been right on the button Percy.

Regards,

Sauce

[mamos]

Deutsche Bank initiated coverage today with a buy. Target price 2.71

[percy]

Some retirement homes in ChCh [Kate sheppard,not a RYM home] have been destroyed and will not be rebuilt.Owners and occupiers are in limbo as they do not know how much or when they will be paid out.The amounts occupiers will get will not be enough for them to buy a unit in another home.Retirement homes can not let these people occupy a unit until such time they can pay for it.Catch 22.
Result.Homeless oldies. Others will have to live with family,or friends?

[Pumice]

Some retirement homes in ChCh [Kate sheppard,not a RYM home] have been destroyed and will not be rebuilt.Owners and occupiers are in limbo as they do not know how much or when they will be paid out.The amounts occupiers will get will not be enough for them to buy a unit in another home.Retirement homes can not let these people occupy a unit until such time they can pay for it.Catch 22.
Result.Homeless oldies. Others will have to live with family,or friends?

Could be a great PR opportunity for Ryman.

[percy]

Could be a great PR opportunity for Ryman.

Yes,RYM have the reputation for being very fair.It is a dreadful problem for a retiree to find themselves in.Thought they have brought a roof over their heads until they die,only to find themselves in this situation.I cannot see how anyone could have foreseen the problem occurring.Just another urgent problem that will take a long time to sort out, I would think.

[mamos]

Article in today's AFR about retirement industry over there.

Says that industry is in for a shake up due to problems with some rogue operators who still charge weekly fees while trying to sell the units.

Also says age that people are moving in to retirement villages is increasing. Recent development average age was 81 years. Therefore trend is for deferred management fee over a shorter period.

Says in US they operate a rental system however pension in Australia is not high enough to support this.

People aged over 85 expected to increase from 400k now to 1.8m by 2050.

[percy]

RYM's strength is their reputation.The best operator in the right industry at the right time.

[shasta]

RYM's strength is their reputation.The best operator in the right industry at the right time.

Probably the best stock on the NZX if you had to hold one stock for the next 10 years

[Sauce]

RYM's strength is their reputation.The best operator in the right industry at the right time.

Hi Percy,

RYMans true competitive advantage is their low cost model. Through vertical integration and now important scale advantages (I understand they get cost + 5pc from many external suppliers) they are able to offer their units/beds at affordable levels while still maintaining large profit margins. They trounce the competition in this regard.

I think your right about their reputation. It still astounds me how many people know about RYM and speak so highly of them. 30 years of experience and product development provides them with operating advantages like the best village layouts, experienced management and staff, and of course the big one is the full stepped care offering right through to dementia and hospital beds. Even for an entrant with unlimited funds, it would be very difficult to truly replicate RYMs in all aspects, and it would take a very long time.

RYM is currently building 50% of all new retirement units under construction in NZ and the total industry build rate looks very unlikely to be able to satiate the growing demand.

Shasta: I think you are right. Having a healthy portion of RYMAN Healthcare in your portfolio provides a level of certainty that is virtually impossible to find elsewhere in New Zealand with its tiny markets.

I think its great to see more people seem to have an understanding of the strength of RYMs model. And very good to see that the brokers are finally waking up that RYMs fortunes are not reliant on a booming housing market (as per all the recent broker reports now state).

Many regards,

Sauce

[Sauce]

This is a very material announcement. This will mitigate any difficulty RYM might have had maintaining its target growth rate as the portfolio grows, and shows their commitment to maintaining their growth rate over the medium term. Still the best compounding machine on the NZX in my (uneducated and possibly quite wrong) opinion.



"Commencing work in Tauranga marks a lift in our build rate from 450 to at
least 550 units or beds per annum," said Mr Challies, "to meet the strong
demand we are experiencing for our services across the country."Cheers

Sauce

[mamos]

Agree so long as the 550 represents the long-term build-rate and not just temporary.

[Sauce]

Agree so long as the 550 represents the long-term build-rate and not just temporary.


Hi Mamos

My guess is that it does.

At the risk of attempting to over-interpret the announcement, the words "marks a lift in our build rate" seem purposefully chosen.

It also proves they have the resources to accomodate the higher build rate, which means as long as they have sufficient land (inc sites with appropriate scale) available there is no reason the build rate could not be maintained.

I will see I can find out from the company

Cheers

Sauce

[percy]

[QUOTE=Sauce;341879]Hi Percy,

. Even for an entrant with unlimited funds, it would be very difficult to truly replicate RYMs in all aspects, and it would take a very long time.

Sauce,
Sorry to edit your spledid post but I think the above is THE MOAT Buffett refers to.

[percy]

Probably the best stock on the NZX if you had to hold one stock for the next 10 years

Well that sums it up in very few words. YES.

[percy]

This is a very material announcement. This will mitigate any difficulty RYM might have had maintaining its target growth rate as the portfolio grows, and shows their commitment to maintaining their growth rate over the medium term. Still the best compounding machine on the NZX

Sauce

Yes a very significant material annoncement. Bit like buying a new car and finding it has a 6th gear.!!!!
I look forward to your new projections,with interest.!!!!!

[Sauce]

[QUOTE=Sauce;341879]Hi Percy,

Sauce,
Sorry to edit your spledid post but I think the above is THE MOAT Buffett refers to.

Not a doubt in my mind Percy

Cheers

Sauce

[mamos]

Stephen R at Macquarie upgraded target price yesterday.

He has an even higher build rate forecast out into the future to meet demand.

[scamper]

Lots of local excitement and ODT newspaper stuff about the opening of the Yvette Williams Village in Dunedin.
There are apparently just two serviced apartments left, and although officially opened with some residents already there, the place still looks like a building site. From the street, it looks as if the opening should be weeks away, but I guess the inside is all up and running.

[percy]

Lots of local excitement and ODT newspaper stuff about the opening of the Yvette Williams Village in Dunedin.
There are apparently just two serviced apartments left, and although officially opened with some residents already there, the place still looks like a building site. From the street, it looks as if the opening should be weeks away, but I guess the inside is all up and running.

scamper,
I have noticed this "building site" at other Ryman villages.No one seems to complain ,just happy to be there.I suppose RYM make sure residents know how long the builders will be there.

[Sauce]

scamper,
I have noticed this "building site" at other Ryman villages.No one seems to complain ,just happy to be there.I suppose RYM make sure residents know how long the builders will be there.

Hi Scamper, Percy

People who buy off the plans or during construction are given a discount of approximately 10%. This allows RYM to sell down their project before completion, and also settle the development in "stages" so they can get revenue in before the entire development is finished.

So residents who move in before total completion are compensated in a way. This is how it is sold to residents.

Cheers

Sauce

[percy]

Hi Scamper, Percy

People who buy off the plans or during construction are given a discount of approximately 10%. This allows RYM to sell down their project before completion, and also settle the development in "stages" so they can get revenue in before the entire development is finished.

So residents who move in before total completion are compensated in a way. This is how it is sold to residents.

Cheers

Sauce

offcourse.thanks sauce.

[scamper]

What a great idea! hope they open another one in Dunedin in the next 20 years....
my parents are very happily ensconced in the Frances Hodgkins village here.
it's a banana-shaped high-rise tucked into the volcanic cliffs overlooking St Clair Beach, the Harbour, peninsula and city etc.
Large balconies and fabulous views...

[percy]

What a great idea! hope they open another one in Dunedin in the next 20 years....
my parents are very happily ensconced in the Frances Hodgkins village here.
it's a banana-shaped high-rise tucked into the volcanic cliffs overlooking St Clair Beach, the Harbour, peninsula and city etc.
Large balconies and fabulous views...

Have only seen it from a distance,but I would think it would be a lovely place to live in. Glad your parents are happy there.

[percy]

Some retirement homes in ChCh [Kate sheppard,not a RYM home] have been destroyed and will not be rebuilt.Owners and occupiers are in limbo as they do not know how much or when they will be paid out.The amounts occupiers will get will not be enough for them to buy a unit in another home.Retirement homes can not let these people occupy a unit until such time they can pay for it.Catch 22.
Result.Homeless oldies. Others will have to live with family,or friends?

This was featured on Campbel live to night.I did hear new earthquake proff foundations have recently been completed at Kate Sheppard.The latest liquidifacation have ruined them too ! !!!
On this issue RYM have come out on top by putting residents interest first.well done Simon Callis and team.
I would suspect the owner Lance Bunting would have all his capital in this village and would not have the resources to help out residents.He would most probably have it mortgaged,so he looks to be the biggest loser.The lawyers will do well.

[CJ]

The lawyers will do well.I am not so sure. The legel agreement will be pretty specific on what happens. The residents will be getting back their entry payment less the exit payment.

Residential and commerical tenants dont get insurance proceeds even though they pay the insurance premiums (implicity (through rent) or explicity respectively) so why should Village residents??? The issue is Residents pay a large upfront payment in return for a 'discounted' rental while they remain a resident.

Before I get called mean, I do see both sides. I haven't done the maths to see how it would work if the Resident did get the insurance but in theory it would leave the village operator with a big loss (a distroyed village with not enough money to demolish and rebuild).

[percy]

I am not so sure. The legel agreement will be pretty specific on what happens. The residents will be getting back their entry payment less the exit payment.

Residential and commerical tenants dont get insurance proceeds even though they pay the insurance premiums (implicity (through rent) or explicity respectively) so why should Village residents??? The issue is Residents pay a large upfront payment in return for a 'discounted' rental while they remain a resident.

Before I get called mean, I do see both sides. I haven't done the maths to see how it would work if the Resident did get the insurance but in theory it would leave the village operator with a big loss (a distroyed village with not enough money to demolish and rebuild).

I agree with your post,but for a lot of the residents affected by the quake,I think they will find it very hard to understand that they have lost their home,with little likely hood to regain their former position.The money they receive will not go far in getting them residency in another retirement village.As for the owner,I can not see the village being rebuild where it stands now.Should he receive full insurance pay out, I can not see him being able to replace what he has lost.At lot of issues that nobody[except RYM]could have foreseen.I would hate to be 82 years old facing these issues.

[POSSUM THE CAT]

Why should residents pay exit payment. They did not exit. They have been thrown out. Retirement Village Contracts Stink. I am in that age group and have yet to see a contract that someone in sane mind would sign. How good is their legal advice? In my opinion very similar to legal advice that got a lot of people into BlueChip

[CJ]

I agree with your post,but for a lot of the residents affected by the quake,I think they will find it very hard to understand that they have lost their home,with little likely hood to regain their former position.The money they receive will not go far in getting them residency in another retirement village.As for the owner,I can not see the village being rebuild where it stands now.Should he receive full insurance pay out, I can not see him being able to replace what he has lost.At lot of issues that nobody[except RYM]could have foreseen.I would hate to be 82 years old facing these issues.Completely agree.

I do wonder if Ryman did a few calcs after the quakes and thanked the lucky stars one of their villages didn't have to be closed down. Their change in policy last year (according to last nights news) could have cost them a lot.

[percy]

Completely agree.

I do wonder if Ryman did a few calcs after the quakes and thanked the lucky stars one of their villages didn't have to be closed down. Their change in policy last year (according to last nights news) could have cost them a lot.

RYM were very lucky there was no real damage.Yes would have cost them a lot.I must have miss heard,as I thought Simon Callis said they changed it 4 years ago.
What I do see is 1/ Ryman put residents first,and 2/they have the capital/resources to weather such a disaster.
Yes I bet the calculators were worked overtime.!!!!!!

[Billy Boy]

Correct me if I'm Wrong....
These agreements appear to be in essence the same as commercial lease.
Q. Who actually owns the building. Does the tenant only own "right to occupy",
thereby in fact being a "conditionial tennant" with special OPEX's in place ?
Part of the OPEX being a payment that goes toward insurance for the L/Lord.
???
BB

[percy]

Correct me if I'm Wrong....
These agreements appear to be in essence the same as commercial lease.
Q. Who actually owns the building. Does the tenant only own "right to occupy",
thereby in fact being a "conditionial tennant" with special OPEX's in place ?
Part of the OPEX being a payment that goes toward insurance for the L/Lord.
???
BB
As far as I know the Margaret Stoddard village is "in essence the same as commercial lease".Note again not a RYM village.
I do not know what/how the RYM insurance works.What I take from the TV program,and what Simon Challis [rym, ceo]said was that RYM foresaw the insurance risk/
problem would disadvantage residents so they have altered their's.
RYM owns their buildings.

[Billy Boy]

Tks percy
Seams some very bad advice has been comming from Lawers or maybe
old folks just dont understand, & thats perfectly understandable.
pissst... Dont tell the Gumment or we will another equiry. :rolleyes:
BB

[CJ]

BB - Most villages are set up as a license to occupy so similar to a commerical lease. The monthly outgoings are akin to OPEX payments. They do pay a entry fee but get that back at the end, less an exit fee. The exit fee is normally 20-30% (it goes up each year but is capped at that amount) and is in essense the 'rent' - payable on termination but secured against a deposit 3x - 4x the size of the rent.

Percy - It may have been 4 years ago that it changed. He said not only do they not get charged the exit payment but they get the full insurance premiums. That will leave them with a shortfall to rebuild which they aren't insured for (since they said they will pass that on). They are large enough and spread out enough though for them to be considered 'self insured for this kind of large scale event.

BB - This normally wouldn't be an issue. Say a unit burnt down. Exactly the same thing would happen - they would only get their entry fee less the exit fee repayed (ie. about 75% of the deposit). But I assume most villages would just move them into the next vacant unit and treat them as not having moved out. They can then use the insurance to rebuild the damaged unit and resell the license to occupy.

[percy]

BB - Most villages are set up as a license to occupy so similar to a commerical lease. The monthly outgoings are akin to OPEX payments. They do pay a entry fee but get that back at the end, less an exit fee. The exit fee is normally 20-30% (it goes up each year but is capped at that amount) and is in essense the 'rent' - payable on termination but secured against a deposit 3x - 4x the size of the rent.

Percy - It may have been 4 years ago that it changed. He said not only do they not get charged the exit payment but they get the full insurance premiums. That will leave them with a shortfall to rebuild which they aren't insured for (since they said they will pass that on). They are large enough and spread out enough though for them to be considered 'self insured for this kind of large scale event.

BB - This normally wouldn't be an issue. Say a unit burnt down. Exactly the same thing would happen - they would only get their entry fee less the exit fee repayed (ie. about 75% of the deposit). But I assume most villages would just move them into the next vacant unit and treat them as not having moved out. They can then use the insurance to rebuild the damaged unit and resell the license to occupy.

CJ,thank you.

[Billy Boy]

Tks CJ & Percy

[Sauce]

Isn't it funny how all the brokerages that were dissing RYM during the housing decline have changed their tune..

I have now seen DCF valuations and target prices for RYM from three brokerages ranging from $2.90 - $3.10, which ironically are now higher than my own current valuations. When as recently as 08/09 and even 2010, those same brokerages had doubts about the viability of RYMs business model in a declining housing market, and had valuations far below my estimates.

Now we have comments like this coming from recent broker reports on RYM:


Ryman well positioned to leverage its pricing

With a potential scarcity of high quality product and large
well capitalised operators, RYM with its 20+ year track
record remains well positioned to enjoy very strong demand
for its product and to leverage its pricing accordingly.And almost identical admissions from two other brokers that RYMs pricing is not entirely set by the residential housing market.

I find this incredibly ironic that they now profess RYM to have some pricing power even in a declining market... But now this is no insight right? its simply hindsight now that RYM have proven it. It seems the role of the broker is simply one of commentary rather than insightful thinking about the micro and macro economics when it was truly useful (i.e. when the stock was trading at a hefty discount !!)..

Of course there is some link between village pricing and the housing market (i.e. The old person buyers have to have enough equity in their homes to afford them to start with!) but the fact remains that RYM have considerable pricing power and will continue to do so for the foreseeable future, even if the residential market as a whole continues to decline.

I agree with the latest broker reports, but its the timing that makes me wary. It wasn't difficult to see this 1, 2 or even three years ago.

Don't trust broker reports and think independently is the lesson. That is a lesson that has been hammered home to me countless times now since 2007.

[percy]

well all of us RYM followers on sharetrader certainly have your independant research/advice to be thankful for.thank you.

[Beagle]

RYM still good buying at $2.59 ? Thoughts anyone. Hold 25,000 considering adding.

[percy]

RYM still good buying at $2.59 ? Thoughts anyone. Hold 25,000 considering adding.

I think RYM has speed up their game,building more, so growth be higher.The moat has got deeper,much harder to enter the game for a new player.So RYM prospects with an ageing population looks excellent.Now to answer your question.I do not think you should let RYM make up more than a third of your total share portfolio.

[CJ]

The moat has got deeper,much harder to enter the game for a new player.Why? Anyone with enough land and money can build one.

Rymans advantage is in its systems I would have thought. It can build and run more efficently meaning it gets super returns for the same income compared to other competitors.

This isn't a moat argument, more an economies of scale argument.

Interested in your thoughts.

[robo]

Why? Anyone with enough land and money can build one.

Rymans advantage is in its systems I would have thought. It can build and run more efficently meaning it gets super returns for the same income compared to other competitors.

This isn't a moat argument, more an economies of scale argument.

Interested in your thoughts.


Barriers to entry in this market is only access to capital, their dominant position and track record would take time to beat though

[percy]

CJ and Robo.You are correct.I do feel you would need a mountain of money to even start.To ever get the reputation RYM have achieved would take years.
Each year their reputation grows.People trust them.The moat grows deeper and wider each year.Their model is excellent.Operations excellent.Buildings excellent.
They only need to put up a notice they are going to build a village on a piece of land to get firm commitments.What sauce is bringing to our notice is that brokers who thought the property market would affect RYM are wrong.RYM is a retirement village,home,care model.You enter a village and they look after you until you die.
The stand alone private village will find increasing difficulties staying in business,while RYM will grow.We can see from latest announcements that RYM are speeding up their growth.
The moat. the strength of the moat I feel is the amount of money and time it would take to beat RYM.or to equal them.

[POSSUM THE CAT]

Percy I think you are blinded by your own thought. not realistic research Where are all these (brainless) rich retirees that can afford their fees coming from. I am in this age group & would not dream of signing one of there contracts. I am not that stupid There are at least Seven Retirement Villages being spruiked on TV in Auckland Area at the moment

[percy]

Percy I think you are blinded by your own thought. not realistic research Where are all these (brainless) rich retirees that can afford their fees coming from. I am in this age group & would not dream of signing one of there contracts. I am not that stupid There are at least Seven Retirement Villages being spruiked on TV in Auckland Area at the moment

Possum The Cat. No surprises from your post.!!! Retirement villages everywhere.Only one really successful listed one though, and that is RYM.The others will spend heaps advertising,while RYM just need to put up a notice they are building a village here to get sales.I go past 4 fish and chip shops to get the fish and chips I like,and if they were listed I would buy shares in them.!!! RYM have also proved people will drive past other villages to get a RYM unit. Reputation. I have been waiting for your old prison argument..!!! lol
What has blinded me is the share price performance of RYM.All done without calling on shareholders to fund growth.

[buns]

The stand alone private village will find increasing difficulties staying in business,while RYM will grow.

I don’t agree with this statement entirely.

I agree that RYM plays this game better than the others, but that doesn’t mean any new entrants won’t survive. Their margins/profits may not be the same as RYM’s, but they could still hang around earning lower margins/profits whilst taking customers from Ryman.

Ryman in no way have a monopolistic product, it just seems that way because they dominate the market.

Someone could still enter this market and do well if they are sensible about it, but won’t do as well as RYM who have the systems, process etc etc in place to achieve the economies of scale.

As CJ points out, that is RYM’s point of difference. Over all these years they have found what works, what doesn’t and been able to create the most efficient operating model possible.

Ryman in many ways will be the incumbent when it starts building in Melbourne, a lot of their advantages they have in NZ won’t help them over there. Will be interesting to see how that works.

[COLIN]

Isn't it funny how all the brokerages that were dissing RYM during the housing decline have changed their tune..

I have now seen DCF valuations and target prices for RYM from three brokerages ranging from $2.90 - $3.10, which ironically are now higher than my own current valuations. When as recently as 08/09 and even 2010, those same brokerages had doubts about the viability of RYMs business model in a declining housing market, and had valuations far below my estimates.

Now we have comments like this coming from recent broker reports on RYM:
And almost identical admissions from two other brokers that RYMs pricing is not entirely set by the residential housing market.

I find this incredibly ironic that they now profess RYM to have some pricing power even in a declining market... But now this is no insight right? its simply hindsight now that RYM have proven it. It seems the role of the broker is simply one of commentary rather than insightful thinking about the micro and macro economics when it was truly useful (i.e. when the stock was trading at a hefty discount !!)..

Of course there is some link between village pricing and the housing market (i.e. The old person buyers have to have enough equity in their homes to afford them to start with!) but the fact remains that RYM have considerable pricing power and will continue to do so for the foreseeable future, even if the residential market as a whole continues to decline.

I agree with the latest broker reports, but its the timing that makes me wary. It wasn't difficult to see this 1, 2 or even three years ago.

Don't trust broker reports and think independently is the lesson. That is a lesson that has been hammered home to me countless times now since 2007.

I agree with the points you make, Sauce.

Have held RYM for some time, and recently added to my holding. They don't give the spectacular thrills that some of my Aussie mining specs have given, but nor do they give the spills! They constitute part of my longer-term core holdings in "solid" NZ stocks.

Undoubtedly RYM will have gained considerable enhancement to their reputation following the debacle with the Kate Sheppard Homes earthquake horror story in Ch-ch. I know a couple of the KS residents who were affected and, believe me, their predicament is not nice, to put it mildly. According to reports, there are only about 10% of Retirement Village operators who - like Ryman - provide full payout (the greater of cost or insurance payout) in the event of a disaster.

[Beagle]

Thanks guys. I think RYM are in a commanding position, their reputation speaks for itself and oldies don't care if they lose some of their original investment when they die, most kids take inheritance for granted anyway so what does it matter if some goes in exit fees on death. The bottom line for people in this age group is they know Ryman will look after them and with the aging population I see great growth over the next couple of decades and beyond. Maybe my increased shareholding today will get me a free unit in 15 years time LOL.

"Commencing work in Tauranga marks a lift in our build rate from 450 to at
least 550 units or beds per annum," said Mr Challies, "to meet the strong
demand we are experiencing for our services across the country[." Emphasis added from recent stock exchange release.

[percy]

I don’t agree with this statement entirely.

I agree that RYM plays this game better than the others, but that doesn’t mean any new entrants won’t survive. Their margins/profits may not be the same as RYM’s, but they could still hang around earning lower margins/profits whilst taking customers from Ryman.

Ryman in no way have a monopolistic product, it just seems that way because they dominate the market.

Someone could still enter this market and do well if they are sensible about it, but won’t do as well as RYM who have the systems, process etc etc in place to achieve the economies of scale.

As CJ points out, that is RYM’s point of difference. Over all these years they have found what works, what doesn’t and been able to create the most efficient operating model possible.

Ryman in many ways will be the incumbent when it starts building in Melbourne, a lot of their advantages they have in NZ won’t help them over there. Will be interesting to see how that works.

buns.compliance costs,etc will make it hard for small operators.I think you and me buying a truck each and having a go at Mainfreight would have as much chance as a single operator would against RYM. Percybuns Freight.!!! [going nowhere quickly.] lol

[CJ]

Percy - I still dont think it is a moat but agree they do appear to have an advantage. I consider Microsoft to have a moat as if you want a word processor you need to be using word (small players like open office cant get market share giving it away for free)

RYM isn't a moat as there are already other big players - Metlife, somerset etc and other players can enter the market - admitably needing deep pockets but Neil Group is currently finishing off their first village.

What it does have is economies of scale and a proven system. Much like McDonalds vs the corner burger joint.

[percy]

I think the McDonalds vs corner joint sums up how I feel about it.The moat.I was thinking Buffett brought Mrs B's furniture store twice.!! The moat he said was her reputation.I never believed a furniture store could have a moat.!!!! lol

[POSSUM THE CAT]

Percy you still think it is an endless market at some point it must meet a saturation point when all those that want & can afford Retirement village fees, have the retirement units they want. It is not a perpetual for ever expanding market. Have A look at Govt figures on the assets and income Of upcoming retirees. Most will be trying to live on the pension with very little savings . How are these people going to afford Rymans Fees

[Sauce]

Hi Guys

I am enjoying all the lively debate about RYM!

If I may get involved...

It might pay to take a step back and consider what the terms 'Barrier to Entry" and "Competitive advantages' actually means. The definition of a company benefiting from 'competitive advantages' is a company that produces a 'Return on Capital' that is higher than it's 'Cost of Capital'. In theory, in a truly open market (one with no 'barriers to entry') any high returns will simply be competed away by new entrants until everyone is making returns equal to their Cost of Capital. However, if you have a business that has sustainable competitive advantages the excess returns above the cost of capital will not be competed away and the owners of the business will make outsized returns for long periods of time.

Generally speaking, operational efficiency is not a sustainable competitive advantage. Nor is access to capital. It might help for awhile, but if very high returns are visable, that is precisely what will bring a lot of money (capital) and smart operators (operational efficiency) to the table.

What Barriers to Entry doesn't mean - contrary to some comments here - is that no one can start a competing business. I can start selling bottled cola tomorrow if I want. And as CJ points out, McDonalds sells burgers, but so does the local burger joint as well. The difference is that I am very unlikely to make excessive economic returns if I try and compete with coke or with McDonalds. I.e. Coke has made long term returns as high as 50-60% on invested capital - I can tell you right now that no local burger joint will ever make those sorts of economic returns, and neither would I if started selling Cola.

So the term MOAT, and Barriers to Entry, really is simply defining the 'protection' of high returns on the capital that is invested and reinvested in the business. That protection predominently comes in two forms: Economies of Scale (so you can be the lowest cost provider and not allow others to make high returns like you) and Capitive Customers (so others cannot steal your customers - making you the dominant player and the one with the high returns). McDonalds has both of these through size and branding. The local burger store does not. The returns of each are therefore disproportionate and McDonalds has a huge economic MOAT around its higher returns that is virtually unassailable.

The way to test for a competitive advantage (quantitatively) is to check the Return on Invested Capital of a company. If it is higher than the cost of capital (the opportunity cost, or required return a investor in that business would generally expect.. say 8 - 12%pa for a typical business ) then the company, by definition, has competitive advantages. I.e. the sustainable ROC is 40% and the COC is 10% - this would be a great business to own.

The way to test for 'barriers to entry' or a MOAT (qualitatively), is really to understand how and why those high returns are sustainable and will not be competed away. Obviously if a company has made a Return on Invested Capital (or even ROE) of 40-50% for a decade or more, it very likely has large economic MOAT that stops competitors chipping away at those high returns.

So 'Barriers to Entry' in the case of RYM does not mean someone CANNOT open a retirement village. It simply means that someone cannot get the scale and pricing that RYM has to be able to compete away their high returns. We know that RYM makes a ROIC (return on invested capital) of 30% per annum, and has done for the last decade.

By definition they have competitive advantages. And quite clearly they are reasonable sustainable as nothing has derailed those high returns. So does it have barriers to entry? Yes. For many of the reasons that have already been covered - their systems, processes, village designs, experience of management,. Is their MOAT widening as Percy says? Yes, as they have achieved huge scale, they can offer the best service for the lowest price ( i.e. the lowest cost provider) and their brand and reputation provides captive customers. New entrants simply cannot match the quality of the offering for the same price and still make money, so RYMAN high returns are protected. That doesn't mean new entrants can't offer an inferior product for a higher price and still make money, it simply means they might survive on lower returns and not put any dent in RYMs higher returns.

In summary, even companies with huge economic MOATs can and do have competitors, often many, who all struggle with each other for more mediocre returns. But when you have a very fragmented market with ONE or TWO dominent players making outsized returns, this is usually a sign that their are significant economic barriers to entry for those firms. Indeed the existence of a 'winner' and many mediocre businesses below it on the return scale, is really one of the easiest ways to spot a MOAT.

I suggest anyone who wants to learn about competitive advantages reads "Competition De-mystified" by Bruce Greenwald (the value investing guru from columbia university).

Many regards,

Sauce

[Sauce]

A more succinct version of my above post would have been the following:

'BARRIERS TO ENTRY' does not necessarily mean MONOPOLY

& MOAT refers to the protection of excessive profits

[robo]

A more succinct version of my above post would have been the following:

'BARRIERS TO ENTRY' does not necessarily mean MONOPOLY

& MOAT refers to the protection of excessive profits

Barriers to entry are not always absolutes are they? just hurdles to overcome:confused:

[percy]

well I certainly learnt more about Moat,competive advantage,and barriers to entry.thanks.

[Sauce]

I think the McDonalds vs corner joint sums up how I feel about it.The moat.I was thinking Buffett brought Mrs B's furniture store twice.!! The moat he said was her reputation.I never believed a furniture store could have a moat.!!!! lol

It was her reputation for the lowest prices. She was a fanatic who was absolutely obsessed with selling people bargains and was able to do it profitably. She grew the store to such a scale that she could be the lowest cost provider and everyone in Omaha new they would get the best price from Mrs B so they didn't go anywhere else. She got economies of scale in her local market, was the lowest cost provider, and had captive customers from that reputation, and trying to compete with Mrs B would have been madness.

However if Mrs B had tried to open a store in New York, she would have got killed.

And that's why you can have 'barriers to entry' in local markets, but not necessarily on others.

Regards,

Sauce

[percy]

Possum.Fair point.A couple of years ago I was told the average income per person for Ashburton,and Richmond {Nelson}.Was about $18,000 or under.
There is a growing ageing population working for the retirement industry.There also appears to be a huge number of people who can, and will be able to pay.
I note also a great deal of people working past age 65.

[Sauce]

Barriers to entry are not always absolutes are they? just hurdles to overcome:confused:

No, but the larger the moat, the bigger the hurdle, which is what you want. As buffet always says, give him 100billion to profitably take market share from Coke, and he couldn't do it.

If a business is so entrenched and has very large economies of scale and customer captivity, it becomes almost impossible to take their market share from them and make good returns. You burn through so much cash trying that eventually you run out.

RYM is not quite Coke of course. But it would be VERY difficult for anyone to take $1billion and recreate RYM, while making economic returns. It would take a very long time and the risk would probably not make it worthwhile.

Regards,

Sauce

[Sauce]

An example of a business with a huge MOAT that IS virtually a Monopoly, is Trademe. They benefit from what is known as the 'Network Effect' where once they have all the customers, no one goes anywhere else, because they have all the customers! Which is such a powerful self perpetuating thing, especially for a business with such high operational leverage (i.e. Initial fixed costs are high, low ongoing variable costs - so at a certain inflection point in customer levels, each new sale goes straight to the bottom line and returns start to skyrocket).

Trademe is also a great example of how Barriers to Entry are usually local. I.e. if they try to go into Australia they will get killed by the incumbent (Ebay) and is also why Ebay won't bother coming here.

But, you still have Zillions and others trying. And perhaps they make enough to survive, perhaps they don't, but the returns will never be what Trademe has achieved.

[Sauce]

It also highlights why its not a good idea to get too excited about RYMs Australian expansion. Until they refine the model over there, it will be a long time before the risk of entering a new market subsides - their local advantages don't necessarily exist in Australia, and therefore they will have to try execute as effectively as possible until they do, or they could get killed. The company has done a lot of research and believes their model doesn't really exist over there yet, so they will have a first mover advantage to create the RYM model on the ground running, which will help - along with their experience of course - but its a different ballgame.

[CJ]

OK - so my definition of Moat is different (does that make me wrong ;) ). Economies of scale is/can be a subset of moat.

I always thought moat referred to a monopoly or duopoly situation where new players could never get traction (the trademe example above).

Thanks for the debate. In the end though we always agreed RYM is a good company.

[Sauce]

OK - so my definition of Moat is different (does that make me wrong ;) ). Economies of scale is/can be a subset of moat.

I always thought moat referred to a monopoly or duopoly situation where new players could never get traction (the trademe example above).

Thanks for the debate. In the end though we always agreed RYM is a good company.

Hi CJ,

I agree we both like RYM and its fun to bash around a few different points of view ! These kind of discussions really help me learn more about how it all works... So thanks for stoking the fire a bit more ;)

I think we are basically talking about the same thing. You are talking about the ultimate in wide Moats, and in theory the end result if the economics are good enough and the moat wide enough! What does "new players never get traction" mean? It means they flounder around with the other weak players fighting for lower returns, often failing altogether, maybe they hang on and scrape out a living.

Buffet talks about the economic Moat enjoyed by Sees candy. How many candy makers are their in the US? There are Lots. But don't all operate in the same product space and they don't all make returns as high as Sees candy.

What about Walmart ? that is one of the best examples you can have of the power of an economic Moat. They dominated all their local markets and spread out like a virus accross america. Then they tried to enter Germany and got killed. But there are still fragmented local competitors around in the discount warehousing space around America and a few big successful ones like K-mart etc.

Cheers

Sauce

[Sauce]

Another thought...

If you were searching for stocks with a Moat defined as businesses with a Monopoly or Duopoly, then you would simply be finding them once most of the growth had already occurred !!

It makes more sense to determine the businesses that enjoy an economic Moat (defined as barriers that stop competition driving down their returns) as early as possible and then hold them until hopefully they become the victor and have a near monopoly, duopoly or even oligopoly!!

In fact, their are very few businesses anywhere in the world that are true monopolies from what I understand.

[karen1]

Sauce,

A big thank you for an extremely interesting and educational article, and your other posts. The Ryman thread has certainly attracted a lot of attention in the last day or two, and is a great learning tool.

[Beagle]

Yeah I really enjoyed those Saucey posts too. Thanks.

To the best of my knowledge the pertentage of retiree's living in retirement villages in N.Z. is currently quite low compared to overseas, can anyone post some stat's on this please ? So we have what appears to be a very effective moat with low market penetration and then of course there's the huge number of people approaching retirement in N.Z....any wonder Ryman are experiencing strong demand across the country.

[Sauce]

Thanks very much for your kind words Karen & Roger! Hopefully I am not barking up the wrong tree here, time will tell, but its all good learning ! :) I was trying to add to the discussion but it appears I killed it..! :ohmy:

I have been doing some research and with a view to adding some more thoughts to the table for anyone interested, I thought I would post the highlights from today's research here for others to peruse. Hopefully it will stimulate more discussion...

While further researching my thoughts on competitive advantage (influenced by Michael Porter’s five forces and even more so by Bruce Greenwald’s Competition Demystified) I came across these two articles which I believe are perfect for anyone eager to learn more about Moats/Sustainable Competitive Advantages:

http://www.capatcolumbia.com/Articles/measuringthemoat.pdf

http://www.capatcolumbia.com/reading%20packet/All_Strategy_is_Local.pdf

And in reference to my original post, here are two excerpts from Bruce Greenwald’s fantastic book Competition Demystified (not the articles above) that I think are most relevant to the discussion and to RYM:


Barriers to Entry & Competitive Advantages

“Barriers to entry lie at the heart of strategy. The skills and competencies of even the best-run companies are available to competitors, at least in theory. Systems can be replicated, talent hired away, managerial quality upgraded. All these are ultimately parts of the operational effectiveness of the company. Strategy, on the other hand, is concerned with structural barriers to entry. Although often treated as separate aspects of strategy, barriers to entry and competitive advantages are essentially alternative ways of describing the same thing”

“There are really only a few types of genuine competitive advantages. Competitive advantages may be due to superior production technology. They may be due to customer preference (demand advantages) or they may be combinations of economies of scale with some level of customer preference. Measured by potency and durability, production advantages are the weakest barrier to entry; economies of scale, when combined with some customer captivity, are the strongest.”

Economies of Scale & Customer Captivity

“The competitive advantages we have described so far are uncomplicated. An incumbent firm may defeat entrants either because it has sustainable lower costs or, thanks to customer captivity, it enjoys higher demand than entrants. Together, these two appear to cover fully the revenue and cost elements that determine profitability. But there is an additional potential source of competitive advantage. In fact, the truly durable competitive advantages arise from the interaction of supply-and-demand advantages, from the linkage of economies of scale with customer captivity… …the competitive advantage of economies of scale depend not on the absolute size of the dominant firm but on the size difference between it and its rivals, that is, on market share. If average costs per unit decline as a firm produces more, then smaller competitors will not be able to match the costs of the large firm even though they have equal access to technology and resources so long as they cannot reach the same scale of operation.”
So how does this specifically relate to RYM? The most obvious, and (in my opinion) the most important, are the following:

Economies of Scale / Production Advantages


The aged care industry has compelling structural factors that are ideal for economies of scale advantages to exist i.e. very high fixed costs; the more units built, the lower the cost of each unit - it has been noted that RYMs new villages are increasing in size – further entrenching their scale advantage.
The suppliers to RYM are commodity style businesses (i.e. carpets, plumbing supplies etc) meaning RYM benefits on production economies of scale because they get their supplies cheaper (confirmed)
RYMs vertical integration provides the real category-killer advantage of low costs due to everything being done through in-house labour, builders etc providing significantly higher margins.

Customer Captivity:


This is where RYMs scale and production advantages interact to provide strong customer preference: They can offer the highest need-demand driven services such as dementia care and hospital beds, very profitably, where others can not make the same returns. This means they can offer the continuity of care (total exit plan for the elderly i.e. last ever move) which is such a powerful selling proposition it secures customer preference.
Finally, the growing reputation and brand awareness of RYMs top service and ethics cements these demand advantages

Is there any evidence that this thesis is correct?

Aside from the fact that RYM has consistently earned the returns commensurate with sustainable competitive advantages (i.e. barriers to entry) there is a lot of further evidence available that RYM enjoys, and is further entrenching, a sizable MOAT:

There is historical evidence. I.e. When RYMs smaller, and only listed competitor, MET, had earnings smashed by the GFC, yet RYMs more affordable product continued to soak up demand and they actually grew cashflows during the same period.

And this recent study, The Aged Residential Care Service Review launched 8 September 2010 is the most extensive ever undertaken, and is evidence of important structural factors. the 103 page report is available here:

http://www.grantthornton.co.nz/Assets/documents/home/Aged-Residential-Care-Service-Review.pdf

(A very worthwhile read - It’s important to recognise that there are differences to more general ‘subsidised’ Aged Care and the private ‘Villages’ like that RYM offers – but of course they are overlapped and lumped together)

Here are the most relevant excerpts to my thesis (in my opinion of course!):


Supply of facilities

“Overall supply and renewal of facilities has slowed and needs to increase significantly to
cope with projected demand.

Demand estimates indicate that sector bed numbers need to adjust to accommodate an extra 12,000 to 20,000 residents by 2026. This includes an anticipated change in mix toward hospital and dementia care as the average population age grows.”

Costs and investment

- The financial returns being achieved by the majority of existing operators cover operating
costs. However, returns are below those an investor would require to encourage new
investment to replace aging facilities or to stimulate new capacity in rest home, hospital and
dementia services.

- Approximately half of New Zealand’s building stock is now over 20 years old (although 58%
have been refurbished to some extent) and facilities have an expected useful life of 20 to 30
years. The oldest facilities tend to deliver the lowest financial returns. It is noted that
refurbishments have generally not been undertaken to a level consistent with the Greenfield
model described in this Review.

- Earnings vary significantly and are often inadequate to cover interest and depreciation and
provide an adequate return on investment to the provider.

- The most efficient-sized facility is 80 beds plus, while half the sector operate facilities of 50
beds or less. (Note: Lack of sufficient scale!!)

- The widely recognised demographic pressure New Zealand will face over the next two decades in the over 65 aged group will place significant pressure on all services provided to older people.
In Summary:

With its 10% market share, RYM is by far the dominant player in a highly fragmented industry. They are responsible for greater than 50% of all new beds under construction nationwide. This signals strong growth in market share going forward.

New capacity within the industry has actually been shrinking due to substandard returns on investment in general, yet we are entering a period with a virtual tidal wave of demand.

RYM enjoys scale and production advantages that allow it to offer a complete continuity of aged care at unusually high rates of return.

As their market share and reputation grows, they are further entrenching these incumbent advantages, providing a growing economic MOAT that allows them allocate ever growing amounts of capital at very high returns.

The key benefit of scale is that they are able to offer a better product and service to customers at a cheaper price than their competitors and still achieve high returns.

In other words, significant Barriers to Entry exist for direct competitors.

Many regards,

Sauce

P.s. I am sure POSSUM won’t be arguing that RYM doesn’t have captive customers, aka prisoners… :p

[voltage]

Sauce
thanks for the detail, you are obviously a pro from your discussion. What other stocks on the nzx would have similar qualities. AIA comes to mind

[Sauce]

Hi Voltage,
I don't know to be honest. I really am just pushing my learning in this direction at the moment and reading everything I can get my hands on. I haven't really thought to much about any other NZX listed companies from this perspective. Much more to chose from on the ASX !
Certainly RBD would be worth a look.. that business has achieved very high rates of return on its reinvested cash.
That's usually the best way to determine existence of competitive advantages and value creating economics - check the ROE/ROA/ROIC figures.
Cheers
Sauce

[Sauce]

Voltage

New Zealand Refining. 70% market share and consistent returns to equity well over 20%. Has obvious & significant barriers to entry. Just having more of a look at it now.

Regards,

Sauce

[robo]

Sounds like we need a Moat/Barriers to Entry thread?

[Beagle]

Sounds like we need a Moat/Barriers to Entry thread?

I think its safe to say this is THE definitive one.
Great stuff Sauce, I wish I had the time to spend on research like you have and wish I could add something more constructive than I totally agree with you. Its the only stock on the NZX I really like. From what I've seen with the Evelyn Page retirement village when it opened in Orewa Auckland there's evidence in the retirement industry that due to Ryman's reputation they are able to poach the really good management and staff in any area, snowball momentum effect as good staff as i'm sure you appreciate are the key element in Ryman's sucess. Shortage of really good management and staff in the retirement industry, yet another competitive advantage for Ryman ? P.S. Have I mentioned I love the stock :)
P.S. This article on Ryman just popped up in my inbox:
http://www.sharechat.co.nz/article/6054da8a/daily-sharechat-ryman-healthcare.

[POSSUM THE CAT]

Fans of RYM have a read of this http://www.nzherald.co.nz/staff20accused20of20poor20care/search/results.cfm?kw1=staff%20accused%20of%20poor%20care&kw2=&st=gsa

[COLIN]

Fans of RYM have a read of this http://www.nzherald.co.nz/staff20accused20of20poor20care/search/results.cfm?kw1=staff%20accused%20of%20poor%20care&kw2=&st=gsa

Doesn't tell us much, Possum. I guess there will always be the isolated (no pun intended) case where a relative is not happy with how their loved one is treated, but I doubt if Ryman have a major issue to contend with, given the large numbers of clients they have. Look at the various DHB's - they are happy hunting grounds for reporters running out of ideas for filling a newspaper with sensational stuff.

[COLIN]

Sauce: Have you had a look at IFT, as coming broadly within your criteria? They have a portfolio of major strategic holdings. How often does an opportunity come up like their recent acquisition of all the Shell stations, etc? And their controlling interest in Trustpower? And their controlling interest in Wellington Airport? And their close association (through Morrisons) with the NZ Superannuation Fund, who are now their 50% partner in Shell (now "Z").

Their purchase of the Shell business seems to have been a bargain, judging by today's report of their annual results.

[Beagle]

Sauce: Have you had a look at IFT, as coming broadly within your criteria? They have a portfolio of major strategic holdings. How often does an opportunity come up like their recent acquisition of all the Shell stations, etc? And their controlling interest in Trustpower? And their controlling interest in Wellington Airport? And their close association (through Morrisons) with the NZ Superannuation Fund, who are now their 50% partner in Shell (now "Z").

Their purchase of the Shell business seems to have been a bargain, judging by today's report of their annual results. Also have lots of gearing and 4th rate European airports that lose money not to mention the bus network, gosh I think it would be fair to say their track record is at best patchy, okay they've done reasonably well when the oil price is ballistic with their Australian resource interests, but recent years results during the GFC show them up to be far riskier than RYM which has very strong defensive qualities by any logical comparison and a proven history. Having a moat is useless if the castle has systemic flaws ?

[Sauce]

I think its safe to say this is THE definitive one.
Great stuff Sauce, I wish I had the time to spend on research like you have and wish I could add something more constructive than I totally agree with you. Its the only stock on the NZX I really like. From what I've seen with the Evelyn Page retirement village when it opened in Orewa Auckland there's evidence in the retirement industry that due to Ryman's reputation they are able to poach the really good management and staff in any area, snowball momentum effect as good staff as i'm sure you appreciate are the key element in Ryman's sucess. Shortage of really good management and staff in the retirement industry, yet another competitive advantage for Ryman ? P.S. Have I mentioned I love the stock :)
P.S. This article on Ryman just popped up in my inbox:
http://www.sharechat.co.nz/article/6054da8a/daily-sharechat-ryman-healthcare.


Hi Roger,
I appreciate the response and the insights into RYM obtaining the best staff in Orewa. It makes sense that their reputation would extend to staff treatment and conditions, and that people would want to work for the best in the industry.
I don't have any other investments on the NZX either Roger.
Cheers
Sauce

[percy]

sauce,
Don't worry too much about other NZ shares,You are doing a fine job on RYM.We are all learning from your research.Everything from Moats to customer captivity on the one thread.!!!!!!!

[voltage]

sauce you are doing a fine job, great research and reading, can you give an idea what companies on the asx have qualities like rym.

[COLIN]

Also have lots of gearing and 4th rate European airports that lose money not to mention the bus network, gosh I think it would be fair to say their track record is at best patchy, okay they've done reasonably well when the oil price is ballistic with their Australian resource interests, but recent years results during the GFC show them up to be far riskier than RYM which has very strong defensive qualities by any logical comparison and a proven history. Having a moat is useless if the castle has systemic flaws ?

Roger, its quite obvious that your appetite for risk is not great. Thats fair enough, but you must appreciate that maybe others are happier to go along with greater levels of risk to receive potentially greater rewards. Its all a matter of timing, too. I held IFT for many years and they served me very well, but I bailed out in 2007 when they were encountering some obvious headwinds. I believe that they have now turned the corner, under Mark Bosgioski (incorrect spelling), and are worthy of fresh interest. Thats all that I was trying to convey to Sauce, in his quest and using his criteria. Yes, the European airports are a disaster, but their share of the total investment portfolio is inconsequential.

For information, RYM is one of my core NZ holdings.

[Beagle]

Colin - Fair enough I guess all I was trying to articulate, (not especially well with the benifet of hindsight) is that Infratil's moat isn't as effective as essentially its a collection of quite a variety of different investment assets. Really any investment company can go out and buy a variety of assets, whereas clearly it would be extremly hard to replicate Ryman's enviable and now heavily established position.

Sauce - You only holding Ryman and nothing else on the NZX has really made my day :) Whilst FBU, MFT, KIP and SKC are satisfactory companies in my opinion I'm very cautious going forward and none of those companies have anything like the defensive qualities or captive market that Ryman have.

Apart from a good holding in RYM and looking to add more pending results tomorrow, and a small holding in KIP I'm currently very liquid so I'd be interested to know what you like on the Aus market.

[Sauce]

Sauce: Have you had a look at IFT, as coming broadly within your criteria? They have a portfolio of major strategic holdings. How often does an opportunity come up like their recent acquisition of all the Shell stations, etc? And their controlling interest in Trustpower? And their controlling interest in Wellington Airport? And their close association (through Morrisons) with the NZ Superannuation Fund, who are now their 50% partner in Shell (now "Z").

Their purchase of the Shell business seems to have been a bargain, judging by today's report of their annual results.

Hi Colin,
I actually owned IFT back in like 2001 or 2002 or something like that. But I had no idea what to look for in a business in those days (of course I still probably don't!)

Just took a quick look at the historical ratios from Morningstar on surface it appears that IFT haven't achieved the kind of (economic) returns I would want if I was to entrust them with my funds. I.e. returns to equity in single digits. Of course I think it depends on how the equity is accounted for, so more effort needed to really work it out. From memory they seem to like to leverage up also, which is a negative in my view.

Cheers
P.s. Good timing on your FGE sale Colin.

[Sauce]

Roger, Voltage

The ASX businesses that I know of with the most obvious economic Moat in my (very limited) opinion is actually JBHI Fi funnily enough...
And secondly Matrix Engineering. They make riser boyancy modules for the global offshore oil & gas industry. They operate in an oligopoly (A good sign in itself that barriers to entry exist) and generate exceptionally high returns on capital. They have highly complex production processes combined with scale and reputation for the highest quality product.

I own Matrix but not JB Hi-Fi.

Cheers

[Beagle]

Thanks for that Sauce.

I think last time I looked JB Hi Fi were trading on pretty demanding fundamental ratio's but I'll have another look and will look into Matrix too.

Due to its size, ability to attact the best staff and have the most resources to acquire the best assets, has BHP built itself something of a moat ?

[Sauce]

Hi Roger,
The biggest and most obvious moats are often the market darlings that sell on the highest multiples of course! Being patient and buying them when the market turns itself upside down and shakes its pockets out is the key.
In fact I believe JBHi-Fi is looking quite attractive as retail getting completely smashed in Australia - and there is some suggestion that the JBHi-fi business might be maturing somewhat (i.e. running out of growth opportunities). I think a thoughtful contrarian would be looking at them quite closely right now. THey have immensge profitibility and cashflow.

Anyway.. to stay on topic. Just one more sleep till the RYM result. I am very much looking forward to digesting that, I can see work might get shoved aside tomorrow. I suspect somewhere between 70m - 72m in cash profits.

Regards,

Regards,
Sauce

[Beagle]

To digress slightly from the moat discussion one of the key attractions, in my opinion with Ryman, is its ability to grow consistently as has been demonstrated in the past and almost without doubt into the future. Management are on record as targeting a 15% growth rate for the forseeable future which I think taking into account the higher demand for advanced care in rest home and dementia with a rapidly aging population should be realistically achievable over the long term.

Take a theoretical example, an investor approaching 50 thinks Ryman's facilities are first class and wants to retire at one of their fine establishments when he's 65.

Here's how the Ryman compounding machine appears to loo to me, $100,000 invested in Ryman now compunded at 15% growth per annum over 15 years = $813,000.
If a fine 2 bedroom independent apartment is currently $400,000 and increses at the rate of inflation, (lets assume 3%) compounded for 15 years = $635,000.

So such an investor by investing $100,000 now would, "in theory" have enough for a fine apartment and say a brand new Merceedes-Benz E class when he retires. Realistic planning ?
P.S. Looking forward to tomorrow.

[Sauce]

To digress slightly from the moat discussion one of the key attractions, in my opinion with Ryman, is its ability to grow consistently as has been demonstrated in the past and almost without doubt into the future.

Well I think its very much part of the discussion Roger! Indeed it is your conviction of the existence of a MOAT, and your assessment of whether it is getting wider or narrower, that allows you to come to the conclusion that their returns are sustainable for a long time into the future.

Of course the first decade of their listed life was an absolute doozy with compounding returns in the mid 20's not even including divis. Of course they were coming off a low base, and had more favorable tail winds - but you simply don't need to hit those returns to do ridiculously well over time.



Management are on record as targeting a 15% growth rate for the forseeable future which I think taking into account the higher demand for advanced care in rest home and dementia with a rapidly aging population should be realistically achievable over the long term.Yes, some years they will do more and some years they will do less. Eventually growth rate will slow down (the bigger they get the harder it will be to maintain), but that is far enough away that it is not relevant to investors at this point in time.


Take a theoretical example, an investor approaching 50 thinks Ryman's facilities are first class and wants to retire at one of their fine establishments when he's 65.I realise its theoretical, but I believe RYM target 80+ which is better for investors, as the turnover is higher. It sounds cold to put it like this, but in my experience people are often not ready for this step until about this age anyway - so its a win win. If people came into the villages at 65 they could have a 20 - 25 year tenure rather than a 5-7 year one, which would be no good for RYMs stockholders.


Here's how the Ryman compounding machine appears to loo to me, $100,000 invested in Ryman now compunded at 15% growth per annum over 15 years = $813,000.Yes! But you are forgetting one important factor, and that's dividends. During that time they will also have paid you $130,370 less tax in dividends. And at that time you will be getting about 22,000 - tax a year (and still growing) from your corporate coupon :)


P.S. Looking forward to tomorrow.
Me too. Not that the short term result makes much difference, but its one of the few times a year you get to really chew over the progress and comments.

[troyvdh]

....gee you guys are good.....RYM is a great Co.....its accepted....do you guys have real jobs......

[Sauce]

That's a strange comment to make while lurking on a forum which has been specifically created for people to talk sh it about shares... !

[voltage]

Sauce good stuff. Growth in dividends is really what you want at the end of the day. RYM has grown at 19.8% over the last 11 years, Trust power 15%, cochlear 21.3%, ramsay health 19.2%. (taken from research Craigs)

[voltage]

those were dividend growth rates per annum

[Beagle]

....gee you guys are good.....RYM is a great Co.....its accepted....do you guys have real jobs......

Some of us like to make constructive comments to help each other along and in the process actually add something to the thread and most of us I assume like to plan for our retirement, of course if you wish to rely on the Government, then I wish you all the luck in the world. In case it wasn't obvious the purpose of yesterday's "theoretical" excercise regarding prospective compounding returns was to illustrate how someone like me approaching 50 could be well on their way to having a secure retirement by investing approx $100,000 now.

Sauce, as always you've articulated your viewpoint extremly well and you're quite right its exactly because of the ever increasing moat along with a range of other factors not the least of which is the old age population expansion, that we can be assured of excellent growth over the forseeable future. I plan to re-invest my dividends so that will no doubt add a little extra probability to expected long term returns. Maybe I'll be able to buy an S Class Mercedes-Benz :)

Would appreciate any insights you have as soon as you've digested the annual result today. Regards

[Beagle]

RYM
19/05/2011 08:30
FLLYR

REL: 0830 HRS Ryman Healthcare Limited

FLLYR: RYM: Ryman announces 17% profit increase

Ryman announces 17% profit increase

Christchurch based aged care and retirement village operator Ryman Healthcare
today announced a 17% increase in underlying profit, posting a new record of
$72 million for the year. Unrealised valuation gains lifted the reported
profit after tax to $100 million.

The underlying profit growth has prompted the directors to lift the annual
dividend by 18% to 7.2 cents per share, with the remaining 50% of the
company's profits being retained for investment in new villages both in New
Zealand and Australia. The final dividend of 3.8 cents per share will have a
record date for entitlements of June 10, and will be paid on June 24.

Operating cashflows were again strong at $133 million for the year, and the
increasing value of the village assets helped boost shareholders equity by
24% to $566 million.

"This is a very strong performance from the company, ahead of our own
expectations, and in the face of a weak economy" said chairman Dr David Kerr,
"It's a result that reinforces the defensive nature of the company's trading
activities and reflects the company's growing reputation for looking after
its residents."

The company recently announced a lift in its build rate to 550 units or beds
per annum in New Zealand.

"We have escalated our expansion plans to meet the growing demand we are
experiencing," said Dr Kerr. "We achieved our new build rate this year,
which boosted our new sales by 50%, and allowed us to beat our medium term
target of 15% underlying profit growth."

"This year's expansion will also spark profit growth in the year ahead, as it
also establishes new income streams from care fees, management fees and
resales gains."

A new village was successfully opened in Dunedin during the year, and work
commenced on new villages in both Gisborne and Tauranga. The company is
currently building across nine sites, has increased its landbank to over 2100
units or beds, and is well placed to continue building at the new rate of 550
units or beds per annum for the foreseeable future.

The company recently acquired a site in Waikanae and is actively seeking a
site for its first village in Australia.

Statistics NZ estimates the number of New Zealanders aged 75 plus will more
than double from 250,000 to 516,000 over the next twenty years. Ryman is
well positioned to cater for the accommodation and care needs of this rapidly
growing group.

Ryman currently owns 22 villages nationwide, which each offer a combination
of retirement living and resthome care.

The company is a six times winner of Best Retirement Village in New Zealand,
serves over 5400 elderly New Zealanders, and employs over 2600 staff.

Ends

Media advisory: For further information, photos, interviews or comment please
contact Ryman chairman Dr David Kerr on 021 362 403, or Ryman managing
director Simon Challies on 03 3664069 or 0274 968 762

CONSOLIDATED OPERATING STATEMENT FOR THE YEAR ENDED 31 MARCH 2011

Audited.

Current Year NZ$; Up/(Down) %; Previous Corresponding Year NZ$

UNDERLYING PROFIT:
72,143,000; + 17.5%; 61,389,000

OPERATING REVENUE:

Trading Revenue:
129,149,000; + 18%; 109,148,000
Other Revenue
501,000; (9 %); 549,000
Total Operating Revenue
129,650,000; + 18%; 109,697,000

Fair value movement of investment properties:
80,796,000; + 22%; 66,327,000

TOTAL INCOME:
210,446,000; + 20%; 176,024,000

NET PROFIT BEFORE TAXATION:
102,772,000; + 23 %; 83,816,000

Less tax on operating profit:
2,595,000; (52%); 5,399,000

NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF LISTED ISSUER:
100,177,000; + 28%; 78,417,000

Earnings per share (basic and diluted):
20.1 cps; + 27%; 15.8 cps

Final Dividend
3.80 cps; + 12%; 3.40 cps
Record Date: 10 June 2011
Date Payable: 24 June 2011
Imputation Tax Credit: No Imputation Credit
End CA:00209241 For:RYM Type:FLLYR Time:2011-05-19 08:30:43

My initial thoughts:- Very impressive performance in light of the very difficult economic conditions. Very happy, will be buying more. Will definitly be investing much more than the initial $100,000. How well will this company perform when the country starts enjoying real growth again ?

[mamos]

Predictable result in-line with 15% underlying growth targets.

Flat 2H. Probably was expecting little stronger.

New sales: 1H/2H: 196 / 152.

Existing sales: 1H/2H: 154 / 197.

Good to see healthy increase in average $ value of new units from $308k to $359k and slight increase in existing units from $306k to $314k. However new sales average price was mainly a result of 1H where the average sales prices in 1H was $370k. 1H the average sale price was $312k for re-sales.

Churn of the existing units y/o/y lower which was mainly from a much lower 1H.

Disc some #'s obtained from research reports so cant verify accuracy.

[buns]

Truly great stock to hold.

I’m back in for good at $2.50

And Sauce - great insight, I wish I could add something useful to the discussion but am out of my league!

[percy]

Truly great stock to hold.



And Sauce - great insight, I wish I could add something useful to the discussion but am out of my league!

I think a lot of us feel the same way buns.
I too am very pleased with the result.All that growth,from retained earnings,yet paying a dividend.

[MANDRAKE]

RYM steadily approaching all time high territory! All time high was $2.75, and highest closing price was $2.67 I believe (May 2007). Still, with RYMs growth prospects it has to be good buying at a PE of 13 odd, and surely there's a lot more value in the company than there was in 2007!

[Sauce]

In case it wasn't obvious the purpose of yesterday's "theoretical" excercise regarding prospective compounding returns was to illustrate how someone like me approaching 50 could be well on their way to having a secure retirement by investing approx $100,000 now.


Hi Roger
I enjoyed your theoretical exercise. It might just be me (or us!) but there is something emotionally satisfying about the idea of setting your self up for retirement by investing in retirement villages! Rationally it makes little difference what your vehicle is of course. But the premise to your exercise is absolutely right; The time to start compounding your wealth is always yesterday. The earlier you start the easier life will be later on. That is literally the definition of 'investment' in my view. Giving up consumption now for the expectation of the ability to consume more in the future. And odds are good that RYM will be the best 'compounding vehicle' on the NZX during my lifetime.
Cheers
Sauce

[Sauce]

Predictable result in-line with 15% underlying growth targets.

Agreed, but great result in that this one should finally put the naysayers crowing about RYMs demise due to falling property prices to rest.



Flat 2H. Probably was expecting little stronger.All due to timing of village settlements. Result was always going to be loaded towards 1H. That's why management re-iterated FY 15% estimate at the half year even though H1 was way up on that. Represents a 29.63pc Return on contributed equity (shareholders funds excluding re-valuations).



Good to see healthy increase in average $ value of new units from $308k to $359k and slight increase in existing units from $306k to $314k. However new sales average price was mainly a result of 1H where the average sales prices in 1H was $370k. 1H the average sale price was $312k for re-sales.This is much appreciated.. As always, enjoy your balanced and rational assessment Mamos.

[Sauce]

And Sauce - great insight, I wish I could add something useful to the discussion but am out of my league!
Thanks Buns. Your thoughts are always useful.

[Sauce]

RYM steadily approaching all time high territory! All time high was $2.75, and highest closing price was $2.67 I believe (May 2007). Still, with RYMs growth prospects it has to be good buying at a PE of 13 odd, and surely there's a lot more value in the company than there was in 2007!

Hi Mandrake
Be careful with the PE. It's actually about 18 - you have to use the cash profits that are announced i.e. 72.1m not the 100m that includes gains in valuation (i.e. non-cash profits). But PE is really is a terrible proxy for valuation of RYM anyway. I will post my (possibly misguided, misleading and easily misinterpreted) thoughts and rationalisation of RYMANs intrinsic value when I gather some energy.. . !
Cheers
Sauce

[Sauce]

I too am very pleased with the result.All that growth,from retained earnings,yet paying a dividend.
You hit the nail on the head Percy. a 15% growth rate and a 50% dividend payout implies a 30% return on the retained earnings and vice versa. Only exceptional businesses make those kind of returns consistently. And for anyone who wishes they would reinvest the other half at 30% rather than pay out the dividend: it's an ideal view, however the reality is that it would be very hard for RYM to grow any faster than it is and still execute well. The policy of the 50% dividend and 15% growth target is no accident. This is a carefully selected sustainable reinvestment rate that the company feels they can execute over the medium term without tripping themselves up in the process - in my opinion.
Regards,
Sauce

[Sauce]

Hoteliers used to be like this too. Ah, those were the days.
The difference is that the economics of the hotel business is terrible in comparison.

[buns]

Do you value these companies who have a moat/competitive advantage different to a company without it?

Because on the face of it, companies like RYM are usually overvalued on conventional metrics used by many personal investors and brokers. Most prospective investors never expect to come across a company who holds such advantages, so in many ways ignore the historicals (the historical YoY Roic increase which proves the moat) when doing valuations.

In RYM’s case, once knowing it holds these advantages, do you then add different criteria to the valuation test, or soften some of the requirements? Standard PE’s and EV ratios are forms of in direct valuation, or comparable valuation. As only one company in the industry can hold a moat/advantage is it right to compare?

I'm kind of answering my own question here, but I'm guessing that is why smart money i.e. The Buffets, have done so well out of these investments, as they can go un noticed to many prospective investors using techniques they don’t really understand or know the meaning of.

Anyhow, keen to understand if there is anything different you do with a RYM when investigating the investment decision/calculating their fair value.

Because, you can not fall in love with a stock, everything has a value! The NZX is a small market, RYM could really shine as a darling in years to come and become overvalued. In coming overvalued you are only going to love those excess returns and the company more, hence struggle to sell it.

[voltage]

i wish to top up my holding is this stock under valued or fully priced at its present PE 18.

[buns]

voltage - I will wait for Sauce's reply before I cast to much judgement on valuation, but a single PE won't value RYM or any stock.

It totally ignores RYM's strong BS, and abilty to grow from retained earnings. RYM could in a hole of debt and capt raisings and the PE would totally ignore that.

I'm not saying its a poor valuation method, I'm saying stand alone it's a poor valuation method.

[Sauce]

Do you value these companies who have a moat/competitive advantage different to a company without it?

Because on the face of it, companies like RYM are usually overvalued on conventional metrics used by many personal investors and brokers. Most prospective investors never expect to come across a company who holds such advantages, so in many ways ignore the historicals (the historical YoY Roic increase which proves the moat) when doing valuations.

In RYM’s case, once knowing it holds these advantages, do you then add different criteria to the valuation test, or soften some of the requirements? Standard PE’s and EV ratios are forms of in direct valuation, or comparable valuation. As only one company in the industry can hold a moat/advantage is it right to compare?

I'm kind of answering my own question here, but I'm guessing that is why smart money i.e. The Buffets, have done so well out of these investments, as they can go un noticed to many prospective investors using techniques they don’t really understand or know the meaning of.

Anyhow, keen to understand if there is anything different you do with a RYM when investigating the investment decision/calculating their fair value.

Because, you can not fall in love with a stock, everything has a value! The NZX is a small market, RYM could really shine as a darling in years to come and become overvalued. In coming overvalued you are only going to love those excess returns and the company more, hence struggle to sell it.

Fantastic post Buns, I thoroughly enjoyed it, so much for not adding anything of value!

I think the issue is not that investors don't expect to find durable competitive advantages (although I question if the average investor knows what that really is, since I consider myself an average retail investor and I am only just starting to get a minor minor inkling of what this means) but more a fundamental issue with the PE as a valuation tool to begin with - the price to earnings ratio tells you nothing about the underlying economics of the business so is not a proxy for valuation. It's more of a (as you rightly say) comparison tool or rule of thumb that has little practical use, and even worse is incredibly dangerous because of its simplicity and ease of use and prolific following among investors.

And when I think about it, even using it for comparison is actually rather absurd. Like the following example:

Take two business in the same industry. Company A has $1,000,000 of equity earning $200,000 of net profit, and Company B has $1,000,000 of equity and earns $100,000 of profit.

I.e. One of them makes a 20% return on equity and the other makes a 10% return on equity.

Both businesses are able to reinvest 100% of their profits at their respective ROE's.

Company A trades on a PE of 15 and company B trades on a PE of 10.

Which one is more expensive? Since they are in the same industry does the use of the PE ratio make sense as a comparison tool?

Of course the answer is that the one trading at the PE of 15 is a bargain (assuming the outsized ROE is sustainable).

The reason is due to the difference in compounding and value creation. If you require a 10% return the PE of 10 is actually fair value for company B. And the compounding growth ads no value at all. Company A compounding at 20% means growth ads a lot of value and is probably worth as much as 4x the price of company B.

And I have to say, I completely agree that everything has a value and you should not fall in love with a stock. Those two statements alone, if understood and followed with dispassionate focus, are in my opinion enough to make you a great investor over time (combined with a lot of hard work). And yes, RYM has done EXACTLY what you just described back in 2007 it was overvalued. But it has grown considerably since then. And hey, if you bought it then with a 15 year focus and didn't capitulate at the bottom of the GFC and sell, you probably won't be too disappointed in the long run !! but your right, RYM will have to sustain its returns for an extraordinary amount of time for that to be the case. I think they have a good shot.

Will post more on my thoughts on Rymans value tomorrow (The idea being to reverse engineer the share price to see what assumptions the market is placing on future performance at the current price)

Regards,

Sauce

[Te Whetu]

Hi Sauce

Been liking your posts in this thread. Thought I might contribute.

Basic finance calc which Sauce eluded to in his previous post is the calculation of growth... I.e. g = ROE * Retention Ratio.

Now care needs to be taken with this formula. The return on equity needs to be what the new funds (those which have been retained) can be invested at. This does not necessarily equal what the companies current investments are at. That said it's a good start if you believe the company will be able to use future funds to the same extent as past funds (which may be reasonable in a growing industry in the short to medium term).

Now to Ryman, from their latest report ROE = 72 / 511 = 14% (using average equity over year). Now firstly, let me say 14% growth is never available into perpetuity, however it is impressive and as long as there are opportunities there will be strong earnings growth.

Now for the growth the market seems to be factoring in... this is easy if you assume a WACC, I'm going to assume 9.6% but use whatever you feel the MARKET is using at the moment (i.e. this may NOT be what you personally feel it should be). Note the 9.6% is from the PWC document (http://www.pwc.com/en_NZ/nz/cost-of-capital/cost-of-capital-december-2010.pdf) gregrday was kind enough to link me to in another thread, I don't agree with all the WACC in this document, and the truth is I don't think the market does either... however it's a good place to start for an example.

Now a formula (there are a number which can be applied, but I like this one partly because we are using WACC):

Equity = Free Cash Flow to Firm / (WACC - growth rate) - Debt + Cash

Note that FCFF = Operating CF + Interest * (1-tax rate) - Capital Investment.

What we already know:

Equity = $2.68 per share * 500m shares = $1,340m
FCFF = $133m + c.$8.5 * (1 - 0.30) - c.$120m = $20m
WACC = 9.6% (assumed)
Net Debt = c.$152m

Therefore:

1340 = 20 / (9.6% - growth rate) - 152
growth rate = 9.6% - 20 / (1340 + 152)
growth rate = 8.26%

Now this represents the rate of growth in FCFF after being weighted for time-value-of-money (i.e. growth this year is more valuable than growth in 5 years). Also note that RYM could have growth in FCFF tomorrow by cutting capital expenditure down to just that associated with replacement, this will reduce to roughly depreciation by the time they finish growing.

Now assuming RYM has growth of c.14% and then this drops all at once to a long term growth rate of 2% (i.e. inflation) at some point in the future then we can also calculate the number of years the market expects FCFF will grow for. In reality the shift will be progressive, which I can calculate but is more complex without a spreadsheet. This also assumes growth in FCFF = growth calculated earlier for earnings... this will not exactly hold but lets keep it for the example.

enterprise value = annuity at high rate + perpetuity at low rate discounted back to present

enterprise value = FCFF*(1+g)/(WACC-g)*[1-{(1+g)/(1+WACC)}^n] + FCFF*(1+inflation)*(1+g)^n / (WACC - inflation) / (1+WACC)^n

1492 = 20*(1+15%)/(9.6%-15%)*[1-{(1+15%)/(1+9.6%)}^n] + 20*(1+2%)*(1+15%)^n / (9.6% - 2%) / (1+9.6%)^n

now i can't be bothered doing the algebra, so I'm going to use excel to solve for "n"

n = 21.1 years

i.e. FCFF would need to grow by an average of 15% p.a. for more than 20 years to justify the current price... now is this reasonable? Maybe, the truth is FCFF should grow quicker than the return on equity due to leverage... so lets re-run with 20% growth, it's 13.7 years. This means it's highly sensitive to the growth rate, but that's no surprise.

Now I'm going to get REALLY rough and see what will happen with the following two assumptions: 1) 20% growth in FCFF over "n" years, and then 2) FCFF ads another 30% in the first year of the perpetuity (to account for reduced capital expenditure from this point forward). With these assumptions it takes 12 years of supernormal growth to justify the price.

This is largely why I'm personally not buying RYM... It's not that it's a bad company (it's seems fantastic). Also it's not that it won't grow (it should grow fast). It's not that it may not be worth it's price, or even more (it very well may be)... The reason I don't buy RYM is that I can't easily forecast what growth it will have and for how long into the future. Now with a full model taking population demographics into account etc I could have a very good stab, but I'll generally not build a full model for a business unless I can already tell there is a good chance a business is undervalued, and here I can honestly say, I have no idea what RYM is worth without a full model.

NOTE: A full model would be useful as it would take into account when the reduction in capital expenditure which would occur near the end of the growth period.

The reason for this post: Since this particular thread seems to be mostly fundamentalists, and many seem to be holding shares... a quick question, does everyone who has shares also have an idea of what they think the value is? I don't mind if you share the value or not, just curious if anyone has forecast what they expect growth to be before purchasing. (Not relevant question for any TA in here)

Note: I won't be buying either way, stick to stuff you can understand... well I struggle to forecast retirement villages. I know the industry will grow, but know little more than that. However I do worry that others are buying knowing less than me, some will certainly know more... but I doubt all will.

Also I agree wholeheartedly with previous posters re PE multiple based valuation. Just don't do it. Having ranges of PE as one of your selection criteria for what stocks to invest in is ok... but using it to value a firm is fundamentally flawed.

*Analysis done late at night, if there are mistakes then please be polite in correcting them.

EDIT: Oh and one sense check. 12 years of 20% growth is a total growth factor of almost eight times. Is eight times the number of villages, revenue etc. reasonable? Not sure if it is but could look to how many people are forecast to be over the age of 80 at any one point in time into the future (vs. currently). For this comparison it would be better to have growth changing over time as opposed to just stopping (easy enough in excel).

Cheers
Te Whetu

[percy]

Te Whetu.
I think sauce's post No. 459 on this thread covers your concerns.
I see RYM as being in the right place at the right time.Ageing population,wanting total care,in a safe environment.
Old people can't stop the ageing process,they can only make it more comfortable.

[Snow Leopard]

...,a little, of the NZO thread, which it appears to have taken over from.

A deluge of daily posts by the faithful, the odd negative comment with the slap-down reply.

best wishes
Paper Tiger

DISC:
Have held NZO, but currently do not.
Hold RYM big-time.

[percy]

...,a little, of the NZO thread, which it appears to have taken over from.

A deluge of daily posts by the faithful, the odd negative comment with the slap-down reply.

best wishes
Paper Tiger

DISC:
Have held NZO, but currently do not.
Hold RYM big-time.

Paper Tiger,
Please join me on the POT thread. I am a bit lonely there.!!!!!

[Sauce]

Hi Te Whetu

Thanks for your great post, very much enjoyed it and the time taken is appreciated. Your knowledge of DCF will leave me for dead and I might get lost here but I have some points to add before I head off to work:

You have to be very careful with RYMs equity figure because it is loaded up with asset revaluations. When they changed their accounting from GAAP to IFRS they were forced to book village revaluation gains as profit that ends up as equity on the balance sheet. So ROE is not the right figure to use to understand the economic benefits to shareholders. And it's easy to see right? If their ROE was 14% and their retention rate was 50%, their implied growth rate would be 7% - yet they growth is over 17%. What you have to do is strip out all the revaluation gains from the equity figure, and you are left with all true contributed equity and retained earnings. The return on this figure is 30% if you beginning numbers or 27.5% if you use average of end/start. Which then makes sense as 30% - (1 * 50%) = 15% or approximately RYMs growth rate.

You also have to be careful with their operating cashflow, as the operating cashflow includes cash from residents which are effectively an interest free loan. The 'cash' left over that could actually be considered 'take home cash for owners' is the 72m reported (and as an aside RYMs depreciation of about 5m is spot with their annual maintenance schedule costs).

Finally, their true cost of capital would be very low because their villages are self funding through resident's right-to-occupy fees, which as mentioned are basically an interest free loan to RYM. That said, in my estimates of value for RYM I build in a 10% discount rate, as I feel that is a conservative estimate, and because I feel a rational investor would likely expect a 10% after tax return for the risk of owning RYM.

Unfotunately I am away until monday night.. If I get time from work today I will post some numbers. I disagree that you need to opt for such precision in your modelling, and I will put forward a simpler (but no less like to be wrong) way to think about their economics, future prospects and value, that I believe is more than sufficient to make an investment case, and will avoid the false precision inherent in detailed DCF valuations (i.e. garbage in = garbage out as Bruce Greenwald would so aptly say). For interests sake I get a current valuation of $2.48 - $2.86. And since my tendency now is to use the more conservative figure I would say RYM is certainly no bargain anymore, but I believe it was an obvious value buy last year when it was trading around $2 (no need to mention the lows of the GFC when most were of course).

Regards,

Sauce

[Sauce]

...,a little, of the NZO thread, which it appears to have taken over from.

A deluge of daily posts by the faithful, the odd negative comment with the slap-down reply.

best wishes
Paper Tiger

DISC:
Have held NZO, but currently do not.
Hold RYM big-time.

Haha, I hope you don't consider me 'faithful' to RYM!! I certainly wouldn't consider myself a person of any kind of 'faith', particularly when it comes to stocks! (Perhaps I have some faith in my dog, but with her never ending desire to do nothing but be at my side, how could you not!)
Regards,
Sauce

[Te Whetu]

percy

Post No. 459 is excellent, and it shows Ryman should coast along with strong growth. However I'm not sure it addresses the concern "does RYM have a share value greater than its share price". Now I don't have time to read the entire Grant Thornton report right now, but I think I can grab a couple numbers and hopefully not get it too wrong.

As at 30 Sept RYM had 4,524 beds/units so I'll assume 4,750 as of full year end. I note 12,000 to 20,000 new beds needed by 2026. Now I note Sauce said the following: "[RYM] are responsible for greater than 50% of all new beds under construction nationwide". Lets assume present industry players continue to refurb/renovate/rebuild as their existing building reach end of life (with returns less than RYM but high enough to justify), this means the potential for growth is 12,000 to 20,000 beds. Also lets assume RYM build 60% of all new beds, this implies RYM will build another 7,200 to 12,000 beds over 15 years. This corresponds to a real compounded annual growth rate of 3.0% to 6.8%, if we add inflation it becomes 5.0% to 8.8%

Now this misses a couple of points. Firstly RYM may be able to increase prices by beyond inflation, either through lack of supply, higher margin units/beds sold, or general market dominance. However these could be accounted for if you wanted to put in the work (I don't). I'm curious, has anyone built an integrated model for RYM? I could, but without the ability to short a share it's generally not worth it unless there is already a strong suspicion of undervaluation. Currently I have little idea of value.

Cheers
Te Whetu

[Sauce]

To save anyone the time working it out, the 'shareholders equity' figure for 2011 is $279,290,000 and for 2010 it was $243,218,000

Regards,

Sauce

[buns]

Hi Sauce

Been liking your posts in this thread. Thought I might contribute.

Basic finance calc which Sauce eluded to in his previous post is the calculation of growth... I.e. g = ROE * Retention Ratio.

Now care needs to be taken with this formula. The return on equity needs to be what the new funds (those which have been retained) can be invested at. This does not necessarily equal what the companies current investments are at. That said it's a good start if you believe the company will be able to use future funds to the same extent as past funds (which may be reasonable in a growing industry in the short to medium term).

Now to Ryman, from their latest report ROE = 72 / 511 = 14% (using average equity over year). Now firstly, let me say 14% growth is never available into perpetuity, however it is impressive and as long as there are opportunities there will be strong earnings growth.

Now for the growth the market seems to be factoring in... this is easy if you assume a WACC, I'm going to assume 9.6% but use whatever you feel the MARKET is using at the moment (i.e. this may NOT be what you personally feel it should be). Note the 9.6% is from the PWC document (http://www.pwc.com/en_NZ/nz/cost-of-capital/cost-of-capital-december-2010.pdf) gregrday was kind enough to link me to in another thread, I don't agree with all the WACC in this document, and the truth is I don't think the market does either... however it's a good place to start for an example.

Now a formula (there are a number which can be applied, but I like this one partly because we are using WACC):

Equity = Free Cash Flow to Firm / (WACC - growth rate) - Debt + Cash

Note that FCFF = Operating CF + Interest * (1-tax rate) - Capital Investment.

What we already know:

Equity = $2.68 per share * 500m shares = $1,340m
FCFF = $133m + c.$8.5 * (1 - 0.30) - c.$120m = $20m
WACC = 9.6% (assumed)
Net Debt = c.$152m

Therefore:

1340 = 20 / (9.6% - growth rate) - 152
growth rate = 9.6% - 20 / (1340 + 152)
growth rate = 8.26%

Now this represents the rate of growth in FCFF after being weighted for time-value-of-money (i.e. growth this year is more valuable than growth in 5 years). Also note that RYM could have growth in FCFF tomorrow by cutting capital expenditure down to just that associated with replacement, this will reduce to roughly depreciation by the time they finish growing.

Now assuming RYM has growth of c.14% and then this drops all at once to a long term growth rate of 2% (i.e. inflation) at some point in the future then we can also calculate the number of years the market expects FCFF will grow for. In reality the shift will be progressive, which I can calculate but is more complex without a spreadsheet. This also assumes growth in FCFF = growth calculated earlier for earnings... this will not exactly hold but lets keep it for the example.

enterprise value = annuity at high rate + perpetuity at low rate discounted back to present

enterprise value = FCFF*(1+g)/(WACC-g)*[1-{(1+g)/(1+WACC)}^n] + FCFF*(1+inflation)*(1+g)^n / (WACC - inflation) / (1+WACC)^n

1492 = 20*(1+15%)/(9.6%-15%)*[1-{(1+15%)/(1+9.6%)}^n] + 20*(1+2%)*(1+15%)^n / (9.6% - 2%) / (1+9.6%)^n

now i can't be bothered doing the algebra, so I'm going to use excel to solve for "n"

n = 21.1 years

i.e. FCFF would need to grow by an average of 15% p.a. for more than 20 years to justify the current price... now is this reasonable? Maybe, the truth is FCFF should grow quicker than the return on equity due to leverage... so lets re-run with 20% growth, it's 13.7 years. This means it's highly sensitive to the growth rate, but that's no surprise.

Now I'm going to get REALLY rough and see what will happen with the following two assumptions: 1) 20% growth in FCFF over "n" years, and then 2) FCFF ads another 30% in the first year of the perpetuity (to account for reduced capital expenditure from this point forward). With these assumptions it takes 12 years of supernormal growth to justify the price.

This is largely why I'm personally not buying RYM... It's not that it's a bad company (it's seems fantastic). Also it's not that it won't grow (it should grow fast). It's not that it may not be worth it's price, or even more (it very well may be)... The reason I don't buy RYM is that I can't easily forecast what growth it will have and for how long into the future. Now with a full model taking population demographics into account etc I could have a very good stab, but I'll generally not build a full model for a business unless I can already tell there is a good chance a business is undervalued, and here I can honestly say, I have no idea what RYM is worth without a full model.

NOTE: A full model would be useful as it would take into account when the reduction in capital expenditure which would occur near the end of the growth period.

The reason for this post: Since this particular thread seems to be mostly fundamentalists, and many seem to be holding shares... a quick question, does everyone who has shares also have an idea of what they think the value is? I don't mind if you share the value or not, just curious if anyone has forecast what they expect growth to be before purchasing. (Not relevant question for any TA in here)

Note: I won't be buying either way, stick to stuff you can understand... well I struggle to forecast retirement villages. I know the industry will grow, but know little more than that. However I do worry that others are buying knowing less than me, some will certainly know more... but I doubt all will.

Also I agree wholeheartedly with previous posters re PE multiple based valuation. Just don't do it. Having ranges of PE as one of your selection criteria for what stocks to invest in is ok... but using it to value a firm is fundamentally flawed.

*Analysis done late at night, if there are mistakes then please be polite in correcting them.

EDIT: Oh and one sense check. 12 years of 20% growth is a total growth factor of almost eight times. Is eight times the number of villages, revenue etc. reasonable? Not sure if it is but could look to how many people are forecast to be over the age of 80 at any one point in time into the future (vs. currently). For this comparison it would be better to have growth changing over time as opposed to just stopping (easy enough in excel).

Cheers
Te Whetu

Nice work Te Whetu

I think RYM will get pretty close to achieving the 15% FCFF growth needed to justify its current value

On valuation specifically:
- Yes I have valued RYM, not there exact market value (direct valuation) but have done so on a combination of metrics (mostly comparable types) which give me an indication of RYM’s Earnings value, stability and risk. I usually do this on a 1year forward basis, so for FY12 for RYM. If the numbers look alright, and I know they aren’t going to get worse from here I see this point to do more research on where they could go past FY12. I will continually do this until I feel RYM is overvalued.

- I think RYM will always be a touch overvalued (because it’s on the NZX, nature of its shareholders, and its position in the market), and am prepared to take that into account when buying. I asked sauce about it earlier but I think these companies trade on higher multiples than others, so I was asking if there is another way to value such companies. Your post points our direct valuation (the only other way).

- Obviously you have a very low risk tolerance, which is 100% fine! Do you not feel safe assuming RYM can grow by say 10% YOY, with anything above 10% being upside or a bonus? Unless you are some kind of genius, I don’t know how one can understand a variety of markets/industries the detail you require, hence must get stuck with a conservative (companies which grow understandably/slowly) and narrow portfolio (as you shy away from so many industries)