SUM - Summerset Group

[Beagle]

Good questions. I do not have too much of a problem with Development Margin assumptions in the 20-25% range despite it being a drop from 28% (MET shareholders would love that level). Over the last 5 years from 2016 SUM development margins have been 20%, 22%, 27%, 33% and 28% and they have said for a long time that their long run expectation remains 20-25%. By way of comparison RYM development margins have been 24%, 19% and 30% over last three years and were as low as 20% in most recent half year partly due to Malvina Major partial demolition/rebuild. I suspect that SUM are factoring in a need to sharpen their pencil on pricing and/or incentives to lift sales in 2020 impacting margins. Cost and mix may also be drivers.

The larger concern for me is weak new unit sales which has been going on for four years already. As noted in a previous post, I think they must only be factoring in modest sales growth to around 370 units in 2020 (up from 329 in 2019 result), assuming a 24% development margin, to arrive at a flat underlying net profit forecast for 2020. It is concerning that SUM do not seem to have the confidence to back themselves to achieve a step up in new sales when they have acquired a land bank of over 5,000 units. It would be nice to see a bit more Mainfreight style frankness in SUM's shareholder communications, being transparent about what has not gone to plan and more direct on how they will address challenges.

The business is clearly not broken, but the issues around declining/flat new sales have added some uncertainty to the investment case. The "good news only pr style" shareholder communications are not helping build confidence for me.

Excellent post, I couldn't agree more. Julian and the board are well overdue to take a humility pill and I agree, do a "Mainfreight" and own up to what isn't working and where they need to improve. Their unrelenting appetite for more land (more than 15 years supply at last years sales rate), is starting to look like a very questionable strategy.

You'd better buy back that million shares, Beagle!

LOL, What's the minimum shareholding

[Beagle]

Stats NZ data

There were 1951 consents for retirement units in 2017 and then 1829 in 2018

But in 2019 a big increase to 2381

So plenty of ‘supply’ coming on stream in next year or so.

To add to all the unsold stock currently on the market.

[RTM]

To add to all the unsold stock currently on the market.

Yes...currently Beagle.
But the story hasn't really changed. Real Estate is slowly marching up in price as it always seems to. People are getting old and retiring. More and more of them. And a % of them are going to move into retirement villages. And the supply will adjust to the number that are. May be a bit slower transition than some of us anticipated. But I really don't think the sky has fallen in. My glass is half full.

[winner69]

Yes...currently Beagle.
But the story hasn't really changed. Real Estate is slowly marching up in price as it always seems to. People are getting old and retiring. More and more of them. And a % of them are going to move into retirement villages. And the supply will adjust to the number that are. May be a bit slower transition than some of us anticipated. But I really don't think the sky has fallen in. My glass is half full.

....my glass is almost flowing over

[Beagle]

Yes...currently Beagle.
But the story hasn't really changed. Real Estate is slowly marching up in price as it always seems to. People are getting old and retiring. More and more of them. And a % of them are going to move into retirement villages. And the supply will adjust to the number that are. May be a bit slower transition than some of us anticipated. But I really don't think the sky has fallen in. My glass is half full.

Yes BUT, (you knew there was a BUT coming eh mate ) underlying eps growth has never been slower than in 2019 before and forecast at the profoundly shocking rate of NIL in 2020 and the forward PE on $106m for 2020 is 17.6 ! By comparison based on my research today the forward PE of these companies who are growing underling eps nicely is ARV 16 (assumed forward growth rate 16%), OCA PE 13.6 (assumed underlying eps growth rate 5%, my own forecast of $55m underlying).

To make the comparison even more stark both these two comparative companies are well into their current financial year and SUM just started theirs's so maybe we should be comparing FY21 PE's of OCA and ARV with SUM's FY20 PE, which would make it worse as I doubt ARV and OCA will stop growing.

Last year for much of the year, (when we all assumed it had a far better eps growth outlook) it was trading on a PE in the very low teens, as low as 12 at one stage.

Primarily I have sales execution and valuation concerns. Regarding the latter I couldn't pay more than a PE of 15 at present given the new and MUCH WEAKER outlook so 15 x 46 cps = $6.90 and that assumes they can articulate a reasonable game plan to actually sell 400 units this year so the ever increasing stock of unsold units doesn't grow further still like their land bank. PE of 13-14 is where I would need to see it to get SUM back on board to give me some margin of safety in case they stuff up 2020 sales so 13 x 46 = $5.98 is all I really want to pay.

Maybe the game is up on building these villages with pretty "economically" sized care facilities like trader Jackson is suggesting ? SUM sales results for years now suggests potential residents are taking a very deep dive into looking very hard at whether SUM really does provide a robust degree of continuum of care services ? If its not that, something else is wrong and what do you think that is ?

The worry with SUM in FY21 is that they are going to carry huge human resource cost in Australia in 2021 with little sales progress over there that year so growth even if it does resume that year could be quite anemic.

The Glass is definitely half empty at the current price.

[Beagle]

My units are only half sold.

Exactly and therein lies the nub of the problem. Cash flow is going to be king and if they can't sell them then...

SUM correction now gaining momentum but is still in the very early stages in my opinion.

[bull....]

always said retirement stocks risky ( whoops mean property development stocks) credit will become harder to get soon and if virus arrives NZ and you get one go in lock down price probably be walloped

[Food4Thought]

Exactly and therein lies the nub of the problem. Cash flow is going to be king and if they can't sell them then...

SUM correction now gaining momentum but is still in the very early stages in my opinion.

I have a weird gut feeling this is only the start.

Yes, I let emotions get in the way and previous experiences. I exited all stock with the recent drop.

What I hear from overseas is not news I've ever experienced before.

I wonder what the people who experienced WWII know in regards to the current turbulence. And it's only a couple of weeks of fear setting in.

House prices are the next thing... and yes that will certainly take impact on SUM and some others in this sector.

Disc... sold out

[Beagle]

I have a weird gut feeling this is only the start.

Yes, I let emotions get in the way and previous experiences. I exited all stock with the recent drop.

What I hear from overseas is not news I've ever experienced before.

I wonder what the people who experienced WWII know in regards to the current turbulence. And it's only a couple of weeks of fear setting in.

House prices are the next thing... and yes that will certainly take impact on SUM and some others in this sector.

Disc... sold out

My sense is the same. Average bear market is 10-11 months according to our resident expert Hoop. There's a real chance this could be worse than average.
I am in no hurry whatsoever to buy anything on the NZX at present. The whole market could easily halve in the year ahead, or worse.

[Ggcc]

Any ideas where we will see this share in the months to come?? I sold most of my holding in SUM, not due to the virus but more due to the lack of results. Quietly waiting on the sidelines for an entry point, but value it at less than this on the figures provided and the mentioning of no growth on the future underlying profits. I value it at roughly $6.50-$7, just an opinion, but love other ideas