SUM - Summerset Group

[BlackPeter]

I think the underlying profitability remains good for SUM....and it has those demographic tailwinds...

However the government's continual downplay imo of the unaffordability of the Auckland housing market cannot conceal the fact that the fulsome values in Auckland are based on historically low interest rates. Some shareholders in SUM had possibly been holding their shares based on the continuing of the gravity defying strength of the Auckland housing market.

Disc: happy long term holder

Just look at these Aussies working hard to kick the Kiwis out of their promised land. They started with the convicted crooks, than they sent the people who they didn't like (i.e affiliation to some gang, even without conviction), than they send back the sick (Aussie take tax but does not pay for Kiwis .... ) and now they are sending home the people with children (or else they have to pay a penalty on education across the ditch). Given that there are still more than 600.000 Kiwis on the other side of the ditch - if only 10% of them come back every year (and I think it will be more) we don't need to worry about dropping property prices in New Zealand any time soon !

[couta1]

How keen are the sellers, will they take it down to $5 or below, let's see how irrational the market will behave.

[artemis]

Most of those returning Kiwis will be welcomed with open arms by employers who can't fill vacancies. And the other side of that is those who live here staying rather than heading across the ditch.

At some point the resources sector over there will pick up again, and guess which experienced and hard working families won't be going.

[couta1]

How keen are the sellers, will they take it down to $5 or below, let's see how irrational the market will behave.

I'm kicking myself in the pants for not taking the que from the meeting re pressure on their AK developments. No problem long term but I could have got them cheaper, shouldnt have disobeyed my Gutometer, I very rarely do that these days.

[Bjauck]

Just look at these Aussies working hard to kick the Kiwis out of their promised land. They started with the convicted crooks, than they sent the people who they didn't like (i.e affiliation to some gang, even without conviction), than they send back the sick (Aussie take tax but does not pay for Kiwis .... ) and now they are sending home the people with children (or else they have to pay a penalty on education across the ditch). Given that there are still more than 600.000 Kiwis on the other side of the ditch - if only 10% of them come back every year (and I think it will be more) we don't need to worry about dropping property prices in New Zealand any time soon !

I guess the lenient "special" category for Kiwis can mean whatever the Oz government wants it to - as it has sovereignty over its own migration policies as does NZ. The NZ Government presumably can adjust immigration from other sources to enable housing and infrastructure to develop to cope and not be overwhelmed in order to provide affordable housing for its citizens...I think it is in the interest of Sum to have a stable property market and society. In the long term imo it would be interest of SUM to have a broad base of home owning Kiwis to supply a large potential market of future retirees for its villages

[dobby41]

How keen are the sellers, will they take it down to $5 or below, let's see how irrational the market will behave.

Irrational or some people put different weightings (and readings) on the same things.
Goes up - fair call and reasonable.
Goes down and irrational.

[couta1]

Irrational or some people put different weightings (and readings) on the same things.
Goes up - fair call and reasonable.
Goes down and irrational.

Irrational based on the current PE, deep imbedded value in the stock and huge tailwinds. Selling pressure due to huge volume of money that has come out of the sector, a lot of that being recycled to Oceania IMO, combined with the negative comments re AK portion of Sum's portfolio.

[Beagle]

For what its worth after the SUM meeting I have
1. Left current year forecast at an underlying profit growth of 25% for $70m based on no change in development margin for FY17 22.2% (2017 underlying PE 15.9 on 32 cps at $5.08) Note average analyst forecast underlying is 31 cps.
2. Wound back my expectations of build rate in 2018 from 500 to 450.
3. Reviewed my development margin expectations for FY18 down from 23% to 22.2% unchanged from FY16 and FY17. This gives underlying profit of approx. $80m for growth of approx. 15% based solely of increased volume and value of resales.
4. Left my FY19 build rate target unchanged from original expectations of 500 units and I am modelling a 23% development margin that year. Its a long way out but I see FY19 as $95 to $100m underlying profit.

As you can see from the above my expectations of super normal growth continuing at around half the previous 48% growth rate, (around 25% for the foreseeable future) have been pared back quite a bit. I think their average growth over the next three years is late teens, (percent per annum).

These assumptions are based on a stable housing market with nominal growth in prices matching the inflation rate.

I believe there is the real possibility that development margins could exceed my expectations if the company can be convinced to take advantage of the pricing power of fixing the weekly fees for life. After speaking with Julian after the meeting in this regard I will follow him up in writing in due course outlining my thesis in respect of this point in significantly more detail.

Worth remembering that SUM have a total of only 6 developed or proposed retirement villages in Auckland. Not the heavy concentration that some on here are implying and the cost pressures only affets proposed new villages and those currently under construction in Auckland.

Aucklanders in ST John's and Parnell moving from their cold old villa's worth circa $2m into a nice brand new well insulated apartment / condominium/ unit for circa $1.2 - $1.5m and supportive community are going to have to accept that the cost of construction in Auckland is at a record high and they might not free up as much capital as part of their downsizing / change of circumstances move as they would have perhaps liked too but nonetheless all the other benefits of retirement village community living are still there and they still have plenty left over. Part of the answer is educating the sales force to be prepared to answer difficult questions that may occur due to higher pricing and part of the answer is probably in fixing weekly fees for life so people have the certainty of their outgoings for life. By doing this I think they can command circa $50,000 more per apartment than their current variable fees for life methodology.

Our elderly brethren crave the security of fixed weekly fees for life. As I explained to Julian after the meeting my Mum is in a retirement village where they were able to vote for and chose either fixed weekly fees for life at a 6% increase on the current rate or stay with the status quo. Bearing in mind the average resident is approx. half way through their 10 year approx. stay I found it incredibly useful market evidence that a full 99.6% of residents chose the fixed weekly fee for life option.
Offer this option to new potential residents at SUM villages at an appropriate cost neutral rate to SUM itself and you dramatically increase the attractiveness of a SUM's community living. Leverage that attractiveness to eliminate the cost pressures the company is currently facing. That's the guts of it.

I will outline in specific detail how I believe this fixed weekly option will be cost neutral from an operational viewpoint and significantly advantageous from a development margin and pricing power viewpoint to SUM in my letter to Julian in due course.

[RTM]

I'm kicking myself in the pants for not taking the que from the meeting re pressure on their AK developments. No problem long term but I could have got them cheaper, shouldnt have disobeyed my Gutometer, I very rarely do that these days.

So so easy looking backwards Couta, I got a few at $5.11 and thought I was clever as well. And I was for a week or two.

[dobby41]

Irrational based on the current PE, deep imbedded value in the stock and huge tailwinds. Selling pressure due to huge volume of money that has come out of the sector, a lot of that being recycled to Oceania IMO, combined with the negative comments re AK portion of Sum's portfolio.

I don't doubt that you have a rational for your view.
I also don't agree, or disagree, with your view.
My comment was around the idea that if the market had a view that differed from your is must be irrational - ie your view is the only rational one.

People who don't share your view would probably consider it to be irrational.