SUM - Summerset Group

[Beagle]

Who would have thought SUM would be $9 by the end of the year (2 days trading to go)

Still relatively outrageously cheap

Beagle needs to revise his expectations

Bull case, suppose 51.5 cps ($117m) this year grows by an average of 30% per year for the next 3 years, (this is still a slower growth rate than their average of 37% per annum over the last 5 years) = $1.13 eps in 2022. Put even a market median PE of 19 on that you get $21.50 !

Revise that up as SUM's track record would then be longer than a decade and it might finally get SUM recognition as one of the NZX's preeminent growth stocks to a PE of 24 and you get $27. My bullish case is the share price could triple from here over the next 3 years.

[SailorRob]

Hi Beagle, thanks for all your insight on Sharetrader in general.

Wondering how you value the two other factors of these businesses, one being the change in value of property already built (which is at the whim of the market ultimately) and the other being the fact that they are creating value by developing new property, which is down to their efficiency. It seems like most of the analysis goes to the underlying business and not much to the development side, which when taken into account just makes things better. I mean when you crunch the numbers on the total income rather than underlying they are incredible.

Also your current no growth PE of 11, it being 8.5 in Benjamin Graham's day (say 1970) priced off bond yields etc.. 11 would be pretty conservative today would it not? Implying a 9% earnings yield and some going to (non growth) re investment and some for the risk, I guess the no growth yield could in fact be even higher today?

Thanks again.

[Beagle]

Hi Beagle, thanks for all your insight on Sharetrader in general.

Wondering how you value the two other factors of these businesses, one being the change in value of property already built (which is at the whim of the market ultimately) and the other being the fact that they are creating value by developing new property, which is down to their efficiency. It seems like most of the analysis goes to the underlying business and not much to the development side, which when taken into account just makes things better. I mean when you crunch the numbers on the total income rather than underlying they are incredible.

Also your current no growth PE of 11, it being 8.5 in Benjamin Graham's day (say 1970) priced off bond yields etc.. 11 would be pretty conservative today would it not? Implying a 9% earnings yield and some going to (non growth) re investment and some for the risk, I guess the no growth yield could in fact be even higher today?

Thanks again.

Hi SailorRob. Thanks for your questions. International financial reporting standards (IFRS) captures the full profit of the company for the year, inclusive of all increases in property values for that year. Most analysts tend to focus on underlying profit (which is what I do) which captures the realised portion of IFRS profit, knowing that the difference is carried forward and represents the embedded value, i.e. value embedded within the books ready to be released when existing units are resold to new incoming residents. Hope that makes sense mate.

As you quite rightly point out if one starts to simply look at the total profit each year, (the IFRS profit including revaluation of all properties) the numbers become quite extraordinary. Ultimately the total IFRS profit is realised at some point down the track as the life cycle of each unit gets recycled so there is some validity in crunching the numbers based on headline total profit but I tend to stick with underlying profit as its far more conservative.

I continue to like my own version of Ben Graham's valuation methodology and as you may know use 1g as opposed to 2g that Ben used. Back then the risk free 10 year Government stock was 4% and its currently ~ 1.5% here so I add 2.5% or a PE of about 2.5 to his no growth PE of 8.5 to get 11. This implies an earnings yield of 1/11 = 9.1% compared to a 1.5% risk free rate or a 7.6% risk premium for the market as a whole. In his day it was 1/8.5 11.76% - 4.0% = 7.76% so about the same and I am comfortable with a PE of 11 for a no growth company.

Adding 1g to that (where g is a very conservative average 15% growth rate for SUM for the next 7-10 years which I note is well under half their average growth rate of the last 5 years which ahs averaged 37%) gives me a fair PE of 11 + 15 = 26.

Using that PE and some moderately bullish eps growth numbers for the next 3 years you can pretty easily build a case for the share price tripling over the next few years.
I believe SUM's growth rate is being significantly under appreciated by the market. One day the market will really wake up...

[winner69]

Beagle - last SUM press has underlying earnings 8 year growth at 36% pa

But real profit has been 60% pa in those 8 years

Pretty good eh.

[Beagle]

Thanks for pointing that out mate. Its more than pretty good and gives an interesting insight into future underlying profit growth.

[winner69]

Beagles pretty excited about past SUM financials and how they’ll probably continue into the future for years to come

You can’t but be impressed by the numbers in column headed 8 Year CAGR in this slide from half year result.

Most impressive

[winner69]

And in those 8 years the share price has increased at 27% pa as well

That’s pretty good.

[Beagle]

Much better numbers than RYM over the last 8 years.
SP has not grown at anything like the rate of earnings growth, YET. Share prices eventually follow earnings as in the long run the market is a weighing machine, not a voting machine.
SUM has a massive and geographically very well spread land bank and is also expanding into Australia. The size of their land bank provides a valuable clue as to their expected future growth rate.

SUM's long proven track record of very strong growth, (easily the fastest average eps growth rate in the sector over the last 8 years), is still not reflected in the current $8.90 share price.

[SailorRob]

Thanks Beagle, all makes sense

[Baa_Baa]

Has always been a great time buy SUM when share price <40% of RYM

Traders would have sold when it reached 60% ....that’s a really healthy trade

This for Winner69, you'll see that the 60% sell 40% buy is not a reliable trade indicator, you'd have made a couple of $ between 2014-2016 then be out and have missed all the action with no subsequent buy signals.

Try as you might, and I have, there appears to be no reliable recurring % sell indicator, and there's no corresponding buy % extreme that is reliable either.

A fun fact about reversion to the mean, but as a buy/hold/sell indicator, more a curiosity than anything particularly useful.


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