SUM - Summerset Group

[BlackPeter]

I think you Guys are looking at this with rose tinted glasses. NZ and the rest of the World are in a start of a down trend (e.g. NZ looking at lowering interest rates again and other countries are too even Trump calling for lower interest rates) House prices will drop in NZ and it will take longer to sell houses. Retirement sector will do the same and drop prices for units, villas etc. They did go up when house prices went up. It is not a Blip it is a start of a trend. I said it first SUM will be $5.00 by Christmas.

We agree that interest rates are from here more likely to go down than they are to go up.

What I don't understand is, why you think that this means property prices will go down? Low interest rates mean that people can afford higher loans and this means demand (and with that prices) for properties will go up.

This was how it worked the last couple of hundred years anyway.

Why do you think that this time it will be different?

[King1212]

House price will not go down..will be stable for the next couple year before the run again...low interest means more people afford new mortgage

[winner69]

To highlight the impact of property prices on SUM’s underlying profit let’s see what happened between 2013 and 2018

In 2018 sales were 60% more than 2013 and 2018’s underlying profit of $98.6 was 344% higher than 2013. So 2018 underlying profit was $76.4m than 2013

Of the $76.4m higher profits $13.3m came from selling more units and the balance of $63.1m came from making more per unit sold (price in other words, might be bigger units and more favourable mix but probably is a reflection of overall price increases)

So while selling more units is one driver of growth the price (profit) per unit is critical

As beagle says whatever happens to property prices (even if they crash) SUM underlying earnings will be ok for the next few years as the embedded value is realised In 3 to 4 years might be another story

That’s how I see it anyway

[Beagle]

https://www.radionz.co.nz/news/busin...tinues-to-cool Nothing wrong with national average rising 2.5% per annum. "Affordability a key concern"
Mortgage wars broke out this week which saw 3 year fixed interest mortgages available for 3.95%, the lowest in 50 years to the best of my knowledge https://www.nzherald.co.nz/business/...ectid=12219508
Kiwibank at 4.29% for 5 years, the lowest ever.
OCR predicted to drop heaps https://www.interest.co.nz/bonds/989...ntinue-cutting
Immigration still growing at a fast pace. All the ingredients are there for the market to stabilise and continue to grow at a very modest rate on a nation average price basis.
Those fearmongering over some potential big correction have very little factual basis for their beliefs other that the rate of growth has slowed, but so what, its slowed from years of very high growth rates and had to do so sooner or later...

I maintain the number of units to be resold per annum will rise dramatically over the years ahead and we know the company is lifting its build rate to 600 units oer annum in the next 2-3 years.

[Ggcc]

House price will not go down..will be stable for the next couple year before the run again...low interest means more people afford new mortgage

When you say couple of years it will happen after 5 years at least as incomes need to catch up.

[winner69]

https://www.radionz.co.nz/news/busin...tinues-to-cool Nothing wrong with national average rising 2.5% per annum. "Affordability a key concern"
Mortgage wars broke out this week which saw 3 year fixed interest mortgages available for 3.95%, the lowest in 50 years to the best of my knowledge.
Kiwibank at 4.29% for 5 years, the lowest ever.
OCR predicted to drop heaps https://www.interest.co.nz/bonds/989...ntinue-cutting
Immigration still growing at a fast pace. All the ingredients are there for the market to stabilise and continue to grow at a very modest rate on a nation average price basis.
Those fearmongering over some potential big correction have very little factual basis for their beliefs other that the rate of growth has slowed, but so what, its slowed from years of very high growth rates and had to do so sooner or later...

I maintain the number of units to be resold per annum will rise dramatically over the years ahead and we know the company is lifting its build rate to 600 units oer annum in the next 2-3 years.

Good way of assessing SUM’s underlying profit is to assess (guess) how many sales they’ll make multiplied by profit per sale

Current numbers are 604 sales times $164k profit per sale

If sales increase that’s good and if profit per sale (mainly price) goes up that’s even better

Reckon 2019 will be another good year as both numbers gomup.

[Beagle]

Agree 100%. 3-4 years out I see new and resales close to doubling and I see no reason to think the profit per sale will materially decline so underlying profit growth will continue on its merry way like it always has for SUM. Difference is this time, at this point, the forward PE has never been this cheap. What happens to the share price over the next 3-4 years if all the naysayers are wrong and the market ticks along steadily ?

[The Rocket]

King 1212 Houses prices will not go down

In Hamilton prices fell 4% and in Gisborne 14% and the West Coast 8% figures just released it was on the 6 O’clock news on TV one last night as well. If you want to sell you need to take the lower price it’s called a buyers’ market. We have seen a sellers’ market for a few years now. When people were jumping in because houses that were selling so fast and were $20k dearer a few months later.

Black Peter:
The share market goes in cycles and so does the housing market I feel both cannot keep going at this rate. Retirement villages are one of the first to get hit by the down turn in both. The result out is just the start. I spent 10 years in the retirement sector and have seen times when selling houses were holding up sales with no buyers. older people don’t like dropping their price to sell their houses so there were plenty of empty villas because of it. When the sale of houses boomed, and the prices of the retirement villages shares climbed on fast growth and on new high property values. Fast growth and property values climbing are a thing of the past. They are hardly attractive for their low dividends. This will hit the shareprice because they are a stock that will get hit by a slow down in both selling houses and retirement villas etc and the company’s slowing growth.

[James108]

Some thoughts from a Long term holder who just sold some of his holding:

1) The sales data was disappointing, especially considering the impression of a better than normal 1st quarter SUM gave last year.
2) Favorable demographic tail winds doesn't mean above average returns on capital. Every man and his dog knows about the tail winds and a lot of capital has flooded the market fighting for these returns.
3)Its possible that SUM's earnings will flat line or decrease in the near future. I don't see them being able to maintain their construction/resale margins indefinitely. It is looking more and more like they are having difficulty selling units at these high margins. Having said that the recent house price increases will take several years to flow through the accounts propping up underlying NPAT.
4) I believe the construction margins and underlying NPAT do not reflect FCF or the margin earned in constructing a new village. For starters the cost of constructing communal areas are not included, these costs are capitalized. I would have liked to see cost for communal areas portioned our to each unit.
5) I have held since 2014, I created a very detailed model for this company in 2016 but haven't updated it since 2017. However my impression is that at current SP SUM is trading around fair value.
6) Points 1 through 4 don't necessarily mean SUM is overvalued but I decided to decrease my exposure as I perceive risks have increased. Even after the sell down SUM is still my largest holding.

[winner69]

Great chart below

Yes house prices did tough 2007/2010

The boom in the early 00’s helped by low interest rates which were followed by 13 OCR hikes between 2004 and 2007 (that culminated in a recession and major housing market downturn before the financial crisis arrived in H2 2008). Just coincidence there was a Labour Government then.

Our OCR cuts will be reversed in next year or two. Maybe not 13 hikes but several and no doubt it will hurt the property market like it did in 2007/2010.

House prices collapse? Not really but will dip and eventually continue their increases.

This is SUM thread and SUM are continuing to build new units and they will continue to resell rights as residents move on. So sales numbers probably go up. For a few years they might get less for each sale but not to the extent underlying earnings will collapse. If that did happen I think we’ll be more worried about other things than the SUM share price.