SUM - Summerset Group

[macduffy]

Was great to meet you and talk to you as well as with Beagle, Maverick, Artemis and a few other who only read the forum. Thanks for the knowledge shared guys.

I believe Beagle had an anesthesia with the flight as he didn't barked as expected hence why I couldn't identify him.

Must be the nucleus of a new village there. I trust you all put your names on the waiting list?

[Beagle]

Okay, all aboard, pack up your suitcases and jump about this little journey with the Dog.
First lets time travel back 6 years to the time when the annual meeting was held in early 2013 and have a look at a snapshot of how things were as at 31/12/2012 and journey forward from there to 31/12/2018.
Underlying profit $15.2m underlying eps 7.15 cps, NTA $1.10 Net Assets $249m PE 43
Underlying profit $98.6m underlying eps 44.65 cps NTA $4.38 Net Assets $978.9m PE 12.5

But wait I hear the naysayers insist, this growth was over a period of unprecedented growth in real estate prices in N.Z. and cannot possibly be replicated going forward ! Well no I don't think so either. Rather than net assets nearly quadrupling I expect they will simply double or thereabouts.

Auckland is the problem, most of the rest of the country is chugging along just fine.
So what are SUM doing to recalibrate their business model to mitigate this Auckland risk ?
1. They're not buying more land in Auckland at present.
2. They diversifying their villages out into the provinces.
As at 31 December 2018 they held land for development for enough units that exceeds the total units they have on hand already !
Since then they have acquired even more land in the provinces https://www.nzx.com/announcements/332408

So before we extrapolate forward where they might be in six years time from now lets have a little recap on yesterday's meeting.
Very happy with the calibre of the board and senior management. Their track record of very strong underlying eps growth since listing on the NZX is to the best of my knowledge unmatched by any other company including the much revered Ryman.

In a nutshell they recalibrating their business plan with more focus on single level units in the provinces going forward. They will be offering a much wider spread of product over a wider geographical area.

Build target this year is a case of moderating the build rate so as to ensure there isn't an oversupply of stock.
After the meeting Julian advised me:-
Effectively two development blocks that were going to be very late stage FY19 have been shifted into early FY20.
He is confident of underlying profit growth in FY 19 despite the lower build rate this year - remember that underlying profit is based upon sales numbers not build numbers.
Sales last year were just 339 so its quite possible they will be higher in FY19.
Resales are at a historically low level for the number of units on hand.

The business model works well and has been constantly refined and improved over the years. I have gone to every annual meeting since early 2013 covering FY12 year and talked with Julian and the directors afterwards every time. I recall the days when the development margin was just 12% for the FY12 year.

Now lets journey even further back to the bad old days of the GFC. What did we learn from RYM during that time.
1. Their underlying profit improved every year throughout the GFC.
2. The lowest forward PE the company ever traded on was from memory just 12.

Where are we now then in terms of SUM's metrics.
First lets have a look at NTA, because that forms the building blocks of the companies ability to drive underlying profit.
FY12 NTA $1.10 - share price $3.08 at the time of the annual meeting covering this year's operations and historical PE was 43.
NTA has improved from that to ~ $1.20, ~ $1.50, $1.89, $2.49, $3.47 and $4.38 as at 31/12/2018 and I believe it will be just over $5.00 by 31/12/2019.
Fact - Every year I have attended AGM's the share price to NTA has been a minimum of double the NTA and at times nearly triple, (apart from yesterday when it was just 1.28 times NTA).

I believe the NTA will be ~ $5.20 at year end and the shares are extremely well supported at that level technically.
The historic PE has come down from 43, to 33.9, 30.7, 25.4, 20, 18.7 and was just 12.5 yesterday.
I am forecasting approx. ~ $110m underlying profit for FY19, underlying eps of ~ 50 cps. Forward PE just 11.2 at $5.60.

I think this is very close to a bottom for SUM.
Looking forward I expect more like RYMesque type growth in underlying earnings going forward as the business has been through a super normal 7 years of growth and is more mature. Extremely favourable long term demographics and a well proven development model concentrating primarily on their well proven single level developments going forward mostly in the provinces, (along with strongly growing resales in future years capturing previous years huge IFRS revaluation profits) should see them able to sustainably grow underlying eps at circa 15% per annum on average. 15% compound growth as we know doubles underlying earnings every 5 years.

Six years from now I think SUM's underlying earnings will be somewhere in the vicinity of $1 per share and even on a somewhat normal but quite conservative PE for a company growing earnings at this rate of say 15 this should see the share price in the region of $15, 5-6 years hence. I think the shares are currently at, or very very close to the bottom and the downside risk is very minimal and extremely modest compared to the upside potential over the medium term

Finally the 350 v 600 build rate thing which has seemed to cause some confusion.
600 build rate was always a 3 year target, up from 450 last year. As mentioned earlier late stage development blocks from FY19 and being shifted into FY 20 for planning and other reasons. I think the build rate for FY20 should be somewhere in the 450-500 zone and FY21 an uplift from there.
FY22 could see it in the 550-600 zone as their well proven business development model is rolled out through a wide range of locations in regional N.Z.

I think SUM makes a very good case for itself as a value growth company trading on compelling metrics.
I have 100% confidence in the board and senior management.

I think we should see about a 15% increase in the share price in the year ahead consistent with earnings growth, (I think the PE has already bottomed out)
By way of independent cross check of my expectations the average analyst 12 month price target is $7.00. https://www.marketscreener.com/SUMME...438/consensus/

Happy holder and happy to add SUM more on any more irrational weakness.

[macduffy]

Thanks for your thoughts, Beagle, and for braving the hazards of Hurricanes country to get them!

Without putting hard numbers to it I agree with your conclusions.

Another happy holder.

[Maverick]

Fabulous summary Beagle! Thank you for taking the time to type all that up. I managed to spend plenty of time myself driving home today chewing over yesterdays information/opinions gained pre, during and post the meeting also.
I spoke to a good mate on the way home and my own conclusions to him were almost identical with your well written summary. The only exception is I think their FY20 underlying profit will be more like $115-125 million.

One thing of value I learned yesterday is that when these large developments get finished it takes a long time for the community (usually within 5 km radius) to "digest" the empty rooms. (this will be particularly relevant to OCA). Julian said there is no evidence of any oversupply, basically sales just take time. He said it is better to use resales in an established complex (rather than new sales) as a oversupply barometer. Of which are healthy for SUM.

My overall conclusion is that SUM is doing just fine but just need time to do keep their job. As a result of yesterday I have since bought more SUM and will continue to do so. (by the way I am not selling OCA)

It was great to meet in person Couta, Beagle, Artemis,Winner, John Boscawen and MauroNZ

[winner69]

Thanks for your thoughts beagle ...well thought out


One thing for certain ...Summerset not going broke ...and will continue to make good profits into the future.

[Ggcc]

Okay, all aboard, pack up your suitcases and jump about this little journey with the Dog.
First lets time travel back 6 years to the time when the annual meeting was held in early 2013 and have a look at a snapshot of how things were as at 31/12/2012 and journey forward from there to 31/12/2018.
Underlying profit $15.2m underlying eps 7.15 cps, NTA $1.10 Net Assets $249m PE 43
Underlying profit $98.6m underlying eps 44.65 cps NTA $4.38 Net Assets $978.9m PE 12.5


But wait I hear the naysayers insist, this growth was over a period of unprecedented growth in real estate prices in N.Z. and cannot possibly be replicated going forward ! Well no I don't think so either. Rather than net assets nearly quadrupling I expect they will simply double or thereabouts.

Auckland is the problem, most of the rest of the country is chugging along just fine.
So what are SUM doing to recalibrate their business model to mitigate this Auckland risk ?
1. They're not buying more land in Auckland at present.
2. They diversifying their villages out into the provinces.
As at 31 December 2018 they held land for development for enough units that exceeds the total units they have on hand already !
Since then they have acquired even more land in the provinces https://www.nzx.com/announcements/332408

So before we extrapolate forward where they might be in six years time from now lets have a little recap on yesterday's meeting.
Very happy with the calibre of the board and senior management. Their track record of very strong underlying eps growth since listing on the NZX is to the best of my knowledge unmatched by any other company including the much revered Ryman.

In a nutshell they recalibrating their business plan with more focus on single level units in the provinces going forward. They will be offering a much wider spread of product over a wider geographical area.

Build target this year is a case of moderating the build rate so as to ensure there isn't an oversupply of stock.
After the meeting Julian advised me:-
Effectively two development blocks that were going to be very late stage FY19 have been shifted into early FY20.
He is confident of underlying profit growth in FY 19 despite the lower build rate this year - remember that underlying profit is based upon sales numbers not build numbers.
Sales last year were just 339 so its quite possible they will be higher in FY19.
Resales are at a historically low level for the number of units on hand.

The business model works well and has been constantly refined and improved over the years. I have gone to every annual meeting since early 2013 covering FY12 year and talked with Julian and the directors afterwards every time. I recall the days when the development margin was just 12% for the FY12 year.

Now lets journey even further back to the bad old days of the GFC. What did we learn from RYM during that time.
1. Their underlying profit improved every year throughout the GFC.
2. The lowest forward PE the company ever traded on was from memory just 12.

Where are we now then in terms of SUM's metrics.
First lets have a look at NTA, because that forms the building blocks of the companies ability to drive underlying profit.
FY12 NTA $1.10 - share price $3.08 at the time of the annual meeting covering this year's operations and historical PE was 43.
NTA has improved from that to ~ $1.20, ~ $1.50, $1.89, $2.49, $3.47 and $4.38 as at 31/12/2018 and I believe it will be just over $5.00 by 31/12/2019.
Fact - Every year I have attended AGM's the share price to NTA has been a minimum of double the NTA and at times nearly triple, (apart from yesterday when it was just 1.28 times NTA).

I believe the NTA will be ~ $5.20 at year end and the shares are extremely well supported at that level technically.
The historic PE has come down from 43, to 33.9, 30.7, 25.4, 20, 18.7 and was just 12.5 yesterday.
I am forecasting approx. ~ $110m underlying profit for FY19, underlying eps of ~ 50 cps. Forward PE just 11.2 at $5.60.

I think this is very close to a bottom for SUM.
Looking forward I expect more like RYMesque type growth in underlying earnings going forward as the business has been through a super normal 7 years of growth and is more mature. Extremely favourable long term demographics and a well proven development model concentrating primarily on their well proven single level developments going forward mostly in the provinces, (along with strongly growing resales in future years capturing previous years huge IFRS revaluation profits) should see them able to sustainably grow underlying eps at circa 15% per annum on average. 15% compound growth as we know doubles underlying earnings every 5 years.

Six years from now I think SUM's underlying earnings will be somewhere in the vicinity of $1 per share and even on a somewhat normal but quite conservative PE for a company growing earnings at this rate of say 15 this should see the share price in the region of $15, 5-6 years hence. I think the shares are currently at, or very very close to the bottom and the downside risk is very minimal and extremely modest compared to the upside potential over the medium term

Finally the 350 v 600 build rate thing which has seemed to cause some confusion.
600 build rate was always a 3 year target, up from 450 last year. As mentioned earlier late stage development blocks from FY19 and being shifted into FY 20 for planning and other reasons. I think the build rate for FY20 should be somewhere in the 450-500 zone and FY21 an uplift from there.
FY22 could see it in the 550-600 zone as their well proven business development model is rolled out through a wide range of locations in regional N.Z.

I think SUM makes a very good case for itself as a value growth company trading on compelling metrics.
I have 100% confidence in the board and senior management.

I think we should see about a 15% increase in the share price in the year ahead consistent with earnings growth, (I think the PE has already bottomed out)
By way of independent cross check of my expectations the average analyst 12 month price target is $7.00. https://www.marketscreener.com/SUMME...438/consensus/

Happy holder and happy to add SUM more on any more irrational weakness.

Thanks for the feedback and it is much appreciated. I am a happy long term holder that will remain holding for the long term. I see the similar view as this share price is an optimistic position to get into now for the longterm. Again thanks for your feedback

[Timesurfer]

Heard a good report today about what SUM is doing with moving toward clean and green and carbon neutral.
Wonder if they are recycling residents emissions?

[Baa_Baa]

Resales are at a historically low level for the number of units on hand.

remember that underlying profit is based upon sales numbers not build numbers.

Thanks @Beagle for the comprehensive summary and your thoughts.

Notwithstanding the focus on moderating build numbers, it seems they acknowledge the underlying problem, of ongoing declining sales as a % of total stock. In real terms their sale performance is what keeps my holding very modest, whereas I would acquire a lot more if I had some confidence that they had a remedy for improving sales performance.

Was there anything said that gave you confidence that sales performance improvement per se is in their sights, as opposed to just building less stock?

TIA.

[Blue Skies]

Thanks for sharing your thoughts & analysis Beagle, very much appreciated.

Wishing you a smooth return flight.

Long term holder (and OCA).

[pierre]

I'm writing on this thread because

Beagle's superb analysis following the SUM ASM stimulated some thinking about my holdings in the Retirement sector generally. I would appreciate some opinions and recommendations about what to do. (Let me know if this should be moved to another thread.)

I have a reasonably substantial and mostly diversified share portfolio and generally, I am a long term

patient

investor - not a trader. (I must be patient - I've been holding and adding to BLT since 2005!) I'm happy to have some income from my investments but that's not my prime motivation - I'm more interested in SP growth over a 5+ year time frame.

15% of my portfolio (by $value) is in Retirement stocks. That's bit high, but

I like the sector and feel that there are sound reasons for my holdings in it to be slightly overweight.

The 15% is spread over 3 companies - OCA (70%) , SUM (18%) and RYM (12%) in order of current value. I'm showing good gains on RYM and to a lesser extent on SUM - having been in and out of the latter a couple of times - but I've held them both for 7+ years. OCA is a relatively recent investment and is just at break even today.

Beagle's forecast suggests around 250% growth for SUM over the next 5-6 years. I would be more than happy with that if it comes to pass. A similar growth rate for the other two companies would see RYM at around $30 and OCA at about $2.70 in 2024/25. Will that happen?

I'm tossing up whether to reallocate my funds in this sector so my questions are:
a) which of my three companies do you think has the greatest growth potential over the next 5-6 years?
b) in which order would you rank the other two?
c) is there another listed retirement sector business which you think will outperform all three of my companies.

Thoughts and comments are welcome.
Merci beaucoup
Pierre