SUM - Summerset Group

[Beagle]

I got an answer last week but didn't want to put it on here until after today's result. Basically they don't want to build dementia units on their new sites currently due to over cautiousness in that they don't just want to dump untrained staff into a new dementia unit and just want to get things right in the whole process. I suggested to them that they review this thinking with the villages yet to be constructed for which they hadn't planned a dementia unit and they took it on board saying the whole dementia thing is very much in their thoughts. I highlighted to them the market disadvantage they have with their current thinking and as a shareholder I'm not happy with it,this coupled with the lack of forward guidance shows they are currently lacking a good dose of commercial mongrel compared with Ryman and co. Today's result nothing unexpected and the second half will be better and Q3 sales should show that but I don't expect the share price to increase much over the next while but that goes for the others as well. Disc-Holding and overweight

Is it a coincidence that the board has the highest percentage of woman on it of any on the NZX, the CEO's mentor was a woman and there's too much laser focus on resident wellbeing and not enough commercial mongrel by a country mile ? I really thought with Julian Cook's investment banking background we'd see much more mongrel come out when he finally took over as sole CEO. Hugely disappointing to see their timid approach which is looking increasingly amateurish to me compared to Ryman's.
W69 - the only measure of any importance whatsoever is underlying profit which is down. Second is cash flow which is the lifeblood of any business which is down by an even greater percentage (15%).

[BlackPeter]

Just expanding upon my earlier concerns regarding expenses expansion. Looking at other comments in the results presentation I note higher staff wages being paid. This clearly lines up with their comment of higher operating costs for new villages and leads me to think this issue of ongoing wages pressure for a minimum liveable wage, (now said to be over $18 per hour) is a serious long term headwind for the whole retirement village sector. When you consider the Reserve bank's aggressive approach towards interest rate increases, the cooling property market most notably in the provinces and the general cooling of the economy with substantial income corrections in the dairy and forestry sector, one wonders if the golden period of profit growth has come to an end, at least for the meantime ?
If one takes the view that these headwinds will materially crimp EPS growth going forward one could then ponder whether companies in this sector are really worth a PE of circa 30 ?

Hi Roger, you somewhat lost me. From the announcement:

The company’s net profit after tax for 1H14 was NZ$15.3 million, an increase of 42% in 1H13.

Total assets increased over the last 12 months by NZ$157m, and are 21% higher than 1H13. Over the last three years the total assets of the company have grown by 69%.

Underlying profit for the first half of 2014 was NZ$9.4 million. This includes costs related to new village starts and the start-up phase of new care facilities. In the last 12 months Summerset has opened new villages in Hobsonville and Karaka, and has opened care facilities in Nelson, Dunedin and Hamilton. Summerset’s New Plymouth village will be opening in the second half of this year.


How does this look negative to you?

Yes, underlying profit is slightly down due to starting cost for new villages and car facilities, but how can you call that lack of cost control? Makes sense, if you start a new facility that you first need to invest, before you can reap the benefits.

And increased wages ... I'd say if they do that to retain good and experienced staff, than nothing wrong with that. Better to have loyal and experienced staff able to look after the residents than a minimum wage based workforce with little qualifications and high staff turnover - wouldn't you think so as well?

Discl: quite happy holder.

[winner69]

Just expanding upon my earlier concerns regarding expenses expansion. Looking at other comments in the results presentation I note higher staff wages being paid. This clearly lines up with their comment of higher operating costs for new villages and leads me to think this issue of ongoing wages pressure for a minimum liveable wage, (now said to be over $18 per hour) is a serious long term headwind for the whole retirement village sector. When you consider the Reserve bank's aggressive approach towards interest rate increases, the cooling property market most notably in the provinces and the general cooling of the economy with substantial income corrections in the dairy and forestry sector, one wonders if the golden period of profit growth has come to an end, at least for the meantime ?
If one takes the view that these headwinds will materially crimp EPS growth going forward one could then ponder whether companies in this sector are really worth a PE of circa 30 ?

Good insights

If you segment the P&L into running villages etc and being a property developer again marginal profit in running villages / care centres even though they collected $25m in fees.

Assumption here is all project costs capitalised.

[Beagle]

Hi Roger, you somewhat lost me. From the announcement:

The company’s net profit after tax for 1H14 was NZ$15.3 million, an increase of 42% in 1H13.

Total assets increased over the last 12 months by NZ$157m, and are 21% higher than 1H13. Over the last three years the total assets of the company have grown by 69%.

Underlying profit for the first half of 2014 was NZ$9.4 million. This includes costs related to new village starts and the start-up phase of new care facilities. In the last 12 months Summerset has opened new villages in Hobsonville and Karaka, and has opened care facilities in Nelson, Dunedin and Hamilton. Summerset’s New Plymouth village will be opening in the second half of this year.


How does this look negative to you?

Yes, underlying profit is slightly down due to starting cost for new villages and car facilities, but how can you call that lack of cost control? Makes sense, if you start a new facility that you first need to invest, before you can reap the benefits.

And increased wages ... I'd say if they do that to retain good and experienced staff, than nothing wrong with that. Better to have loyal and experienced staff able to look after the residents than a minimum wage based workforce with little qualifications and high staff turnover - wouldn't you think so as well?

Discl: quite happy holder.

Key point here is that they're always starting new villages, they did last year and they will be next year and so on. They make next to nothing from actually operating the villages as they're too timid to invest in the lucrative dementia units.
They're essentially a property development company who run retirement villages at very, very close to cost price, sell licences and make money again on re-sale. They'll always be starting up new villages and opening new care centres so these costs they've highlighted inferring they are one-off's are anything but one-off. That's my main point. That and underlying profit is the only measure by which these companies can be valued and with growth clearly slowing are they worth a PE of 30 ?

W69- Very safe assumption of development costs being capitalised.

The trend is down, why fight a clearly defined trend until its over...

[winner69]

You are right Roger

Employee expenses up $2.0m (from $7.7m) - that's 26% increase

And revenues were only up 19%

And they borrowed heaps more - ok for expansion - but paying a divie as well - hoping everybody will take the DRIP

[BlackPeter]

...
If one takes the view that these headwinds will materially crimp EPS growth going forward one could then ponder whether companies in this sector are really worth a PE of circa 30 ?

As well not quite sure, how you computed SUMs P/E (circa 30). If we look at the earnings for 1HY14 - they are something like 7.2 cps. Assuming an improved second HY will we get to something like 20 cps (potentially more if I assume for the whole year a similar rise like that for the first half year).

290 cts (current SP) / 20 cps earnings makes a PE of 14.5. If I assume however (really conservative) that the 2014 full year earnings ends up like last year (16 cps), than I still get a PE of 18 - much better than the 30 you claimed.

So where is this PE of 30 coming from?

[winner69]

methinks share price will be back to yesterdays close by the end of today

[JayRiggs]

You are right Roger

Employee expenses up $2.0m (from $7.7m) - that's 26% increase

And revenues were only up 19%

And they borrowed heaps more - ok for expansion - but paying a divie as well - hoping everybody will take the DRIP

The dividend is tiny, so I will be taking up the DRIP. If I take the cash, it'll just feel too underwhelming.
I was hoping for a bigger dividend, like 2c.
Does anyone know the percentage of shares that are on the DRIP?

[BlackPeter]

Key point here is that they're always starting new villages, they did last year and they will be next year and so on. They make next to nothing from actually operating the villages as they're too timid to invest in the lucrative dementia units.
They're essentially a property development company who run retirement villages at very, very close to cost price, sell licences and make money again on re-sale. They'll always be starting up new villages and opening new care centres so these costs they've highlighted inferring they are one-off's are anything but one-off. That's my main point.

Yes, they will always build new units (as long as they are a growth company) and during that time they are worth a somewhat higher P/E. If the growth slows down, than it is time to ask for a lower P/E. This years growth in (total ) units is roughly 13.5% (edited after using the full year numbers).

Agree with your question of not fighting the trend. If I wanted to buy more shares, than I probably would wait as well for the trend to turn. However selling at this stage a fundamentally sound share just because the price may or may not fall a bit further seems not sensible to me. I guess time will tell - maybe I say in 6 months "why didn't I sell and buy in back cheaper", but maybe not?

[BlackPeter]

Is it a coincidence that the board has the highest percentage of woman on it of any on the NZX, the CEO's mentor was a woman and there's too much laser focus on resident wellbeing and not enough commercial mongrel by a country mile ?

Not sure about you, but I (as customer) prefer to work with companies who look after my well-being. Funny thing is - most customers do, and therefore companies with a higher Customer Satisfaction Rating make in the long run larger profits.

Quite happy with my board being focussed on resident well-being.