My long term is running out with retirement looming :) however, I have 10% in ARV, 7% in RYM and 5% in SUM, as it stand ,but look to buy SUM more. Rising tides and all that.
Printable View
For Bars update. Down to Neutral. Was Outperform.
Summerset (SUM) and Ryman Healthcare (RYM) have led the recent bounce in aged care stocks, with share prices up ~+30% over the last three months. This bounce is well deserved and driven by improved housing sentiment; but is there more to come? We still see strong valuation support in the aged care sector overall, but believe that SUM specifically will consolidate recent share price gains rather than outperform the market from here. Specifically we view 2023 as somewhat of a transition year for SUM as it ramps up to deliver its first units in Australia as well as building on three apartment-heavy sites simultaneously in New Zealand. SUM has an excellent track record of cash recovery of capex. 2023 will, on our estimates, see a meaningful step up in working capital driving net debt up considerably, something we do not expect from the remainder of the sector. We downgrade to NEUTRAL with an unchanged target price of NZ$10.55.
What's changed?
Earnings: Annuity EBITDA down 0%/-1%/-2% in FY23/FY24/FY25, underlying earnings down -8%/-7%/-7% on lower new sales.
Rating: Downgrade to NEUTRAL from OUTPERFORM.
Well deserved bounce in valuation; but likely to be tougher from here
SUM is currently valued at a near all time high premium to RYM using our preferred valuation metric of EV/Annuity EBITDA. We acknowledge SUM's best in class track-record of cash recycling and earnings growth, something the market is rightly giving it credit for. However, we note that compared to RYM, SUM is still largely unproven in Australia, no longer has lower leverage and has benefited from a substantially lower care proportion of earnings, something that has been a drag on RYM's earnings. We value RYM and SUM on the same EV/Annuity EBITDA multiple and therefore see more upside in RYM.
1H23 sales; decent re-sales, weak new sales
SUM's 2Q23 sales numbers showed a meaningful bounce back from its very weak 1Q23. Looking at the first half as a whole resales for 1H23 was up a healthy +9% on 1H22, while new sales were down -17%, driven by lower deliveries. In its 2Q23 release SUM highlighted again that its deliveries would be heavily back end loaded, but it was even more skewed than we had expected. Deliveries in the first half were <1/4 of expected full year deliveries. We have reduced our expectations for FY23 new sales accordingly.
Debt likely to build meaningfully through FY23
SUM's debt is almost exclusively project finance and we do not consider the build up of debt to be concerning, in particular given SUM's strong track record of cash recovery of capex. However, we do think that SUM, much like the rest of the sector, is unlikely to re-rate to previous asset multiples unless it can demonstrate an ability to grow organically without adding significant debt.
I have been told last night that Summerset emailed all families to say despite the govt changes, they'll be keeping a whole suite of Covid-19 mitigations in their care homes.
https://www.nzx.com/announcements/416856
SUMMERSET FIRST HALF UNDERLYING PROFIT OF $87.2M, UP 5.7%
• Underlying profit for 1H23 of NZ$87.2m, up 5.7% on 1H22
• Reported (IFRS) profit after tax of NZ$133.1m
• Total assets of NZ$6.3 billion, up 17.2% on 1H22
• Gearing ratio of 35.5%
• Two new sites acquired in New Zealand
• 152 new retirement units delivered
• 483 sales of occupation rights for the half
• Development margin of 33.5%
• Interim dividend of NZ11.3 cents per share
Been a shareholder for a little over 10 years now and I'm happy to be one for many years more if they continue along their track.
For Bars Review....
Summerset (SUM) reported a mixed result, with some strong points but also some weak points. New sales gains were particularly strong, with margins at an all time high, substantially ahead of our estimates. This is particularly impressive as it comes with a backdrop of falling residential house prices and rising construction costs. It was also encouraging to see opex growth continuing to moderate; 12 month rolling opex growth now down to ~+10%, in-line with unit growth, suggesting rapidly receding inflationary pressures. But cash generation was weak. Cash flow from ongoing operations was negative -NZ$30m driven in particular by weak resales cash flow as SUM bought back some units. Debt build up was also substantially ahead of our estimates, up ~+50% versus 1H22 (>+NZ$400m). The increased debt was primarily related to build up of work in progress in Australia as well as some capital intensive villages in New Zealand. We remain NEUTRAL, with a slightly reduced price target of NZ$10.40 (from NZ$10.55).
What's changed?
Earnings: FY23/24/25 underlying profit +11%/+2%/+1%, Annuity EBITDA -6%/-1%/+2%. FY23 driven by higher new sales.
Target price: Reduced to NZ$10.40 (NZ$10.55) due to higher net debt, partly offset by roll forward of earnings.
Strong message and admirable disclosure on cash recovery of capex — steady state cash flow from ongoing operations still opaque
SUM added new disclosure on cash recovery of capex and village cash flow. We were encouraged by the former but left wanting more with regards to the latter. SUM suggested an all in development cash margin of 7.1% and also gave specific disclosure on its eight most recently completed villages, delivering positive +NZ$162m cash flow, or >14% cash margin. With regards to cash generation from ongoing operations, the new disclosure did not shed much light as it was generic in nature, forward looking and included non-cash items. SUM has led the sector with better cash disclosure and we are hopeful that we will see continuous improvement.
Residential property market appears to have bottomed — risk reward in aged care stocks attractive
SUM commented that trading conditions are improving and in some instances very strong, while settlements remain lumpy. To SUM's comments we can add Winton's (WIN) comments from 22 August 2023 of, "there are strong indicators that the housing market is near to, or at, the bottom", and REINZ data showing improving trends for both turnover and prices.
A result driven by new sales gains
SUM's results beat our estimates handsomely on underlying profit but missed on annuity EBITDA. The lopsided result was driven by very strong new sales gains, almost +40% ahead of our estimates, and modest weakness relative to our expectations in relation to DMF and resale gains. That said, annuity EBITDA still grew a very respectable +18% versus 1H22.
As expected result as said on another thread which applies to all RV's re-sales are keeping there head's above water thx to legacy customers departing in droves now. that's why margin is up lots as well.