As i mentioned on the EBO thread, Huntleys have today just commenced coverage on a large number of NZSE stocks.
Ryman is another one that they have as a sell:
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We initiate coverage on RYM with a Sell rating. Valuation appears rich at 23x P/E FY08E EPS
Investment Risks
RYM could potentially face occupation risk if it is unable to find buyers of its retirement homes. This could occur on account of higher competition or a deterioration in the level of service rendered. RYM incurs the cost of maintenance, refurbishment and marketing of a vacated unit until such time a new resident is found. Hence higher vacancies can squeeze margins.
House price inflation has a significant bearing on the company’s profits. Since RYM sells occupation rights based on the current market value of the property a rising housing market will considerably increase resale value of existing properties. It is estimated that RYM is sitting on NZ$84 m of unrealized gains spawned by a three year property market boom. These will be realized as and when units are vacated and are re-priced to new occupants. However a falling market will have an adverse impact on resale gains and therefore profits. It will also impact sale of new units because potential residents will hesitate to sell their own properties in a weak market and move into a retirement home.
RYM’s care fees are quite dependent on DHB’s ability to fund subsidised patients. DHB also control licences for retirement hospitals and beds. Any change in the amount of subsidy or legislation will negatively impact RYM’s lucrative care fee revenues.
RYM lacks management bandwidth. Managing Director Kevin Hickman’s involvement in the business remains critical.
Construction delays and cost over runs could undermine profitability and returns. Fortunately RYM has a very good track record of project execution and management.
Ryman does not pay any income tax. Gain on sale of occupation rights forms the biggest component of profit. This is presently treated as capital gains for tax purposes. For instance as per the company tax rate of 33% RYM should have paid NZ$11.5m in taxes during FY06. However this was completely offset by gain on sale of occupation rights of NZ$7.54m and depreciation and interest shelter of NZ$3.2m. There remains a risk that profit from occupation rights could be taxed in future.
Valuation
At the current valuation of 23x P/E FY08E earnings RYM is trading well ahead of historic valuations of between 13x and 16x forward P/E. We reckon that the market is banking on the company besting its 15% long term EPS growth target. Notwithstanding RYM’s strong reputation and attractive sector opportunities we find the valuations demanding. Our fair value of $NZ1.61 is based on 16x P/E FY08E EPS