Originally Posted by
Greekwatchdog
For Bars update this morning..
1H22 Result; Costs Overshadow Strong Trends
OUTPERFORM
Oceania Healthcare (OCA) reported a solid 1H22 result, slightly ahead of our expectations on underlying earnings and
EBITDA but below our expectations on annuity EBITDA. There were some clear positives at the revenue line with strong
growth in DMF and robust development margins, both driven by strong underlying trends within OCA's pioneering care
suite model. However, cost growth outpaced revenue growth within the care segment and on an overall basis driven by
increased overhead costs and the well flagged care cost inflation, as has been experienced by both Arvida (ARV) and Ryman
Healthcare (RYM). OCA is currently valued at one times last reported net tangible assets (NTA) and FY23 P/E of 12x; we
continue to see it as one of the most attractive risk/reward propositions across the NZ market.
What's changed?
Care suite model; from additional extra to a must have
OCA has pioneered the use of care suites in New Zealand, something we believe is becoming increasingly necessary to run a
profitable aged care business in New Zealand. Care suites deliver on two fronts; firstly, it increases the cash recovery of capex
materially, we estimate by 15–20% for an integrated operator. Secondly and increasingly importantly, it gives OCA an ability to adjust
pricing to offset what appears to be very strong cost inflation within aged care staff costs. We forecast OCA's care EBITDA to grow
by a CAGR of >20% over the next three years, helped by the maturity of the care suite model.
Inherent lack of productivity gains leaves care earnings exposed to the full force of inflationary pressures
There is an inherent lack of ability to improve productivity within the provision of care. This leaves care operators exposed to the full
force of wage inflation with increasing revenues the only lever to offset this, revenues that are to a large degree dependent on
government funding. We estimate that OCA's expenses per care bed is increasing by 7% per annum currently, something it is able to
somewhat offset due to the transition to care suites. However, at some stage we believe funding for care will need to increase.
Valuation and our view
We view OCA as one of the best risk rewards in the NZ market currently. It has sector leading cash recovery of capex, its care suite
focussed model provides some insulation against potentially stalling or falling house prices while it still provides strong growth in
underlying earnings as its villages mature. It is currently valued at 1x last reported NTA, 12x FY23 P/E and 20x FY23 EV/annuity
EBITDA — all of which are at an approximately 50% discount to its larger peer, RYM.