RYM - Ryman Healthcare

[Te Whetu]

You have to be very careful with RYMs equity figure because it is loaded up with asset revaluations. When they changed their accounting from GAAP to IFRS they were forced to book village revaluation gains as profit that ends up as equity on the balance sheet. So ROE is not the right figure to use to understand the economic benefits to shareholders. And it's easy to see right? If their ROE was 14% and their retention rate was 50%, their implied growth rate would be 7% - yet they growth is over 17%. What you have to do is strip out all the revaluation gains from the equity figure, and you are left with all true contributed equity and retained earnings. The return on this figure is 30% if you beginning numbers or 27.5% if you use average of end/start. Which then makes sense as 30% - (1 * 50%) = 15% or approximately RYMs growth rate.

Quite right you are. Really have not been in RYM accounts long enough to pick items like this up...

You also have to be careful with their operating cashflow, as the operating cashflow includes cash from residents which are effectively an interest free loan. The 'cash' left over that could actually be considered 'take home cash for owners' is the 72m reported (and as an aside RYMs depreciation of about 5m is spot with their annual maintenance schedule costs).

Finally, their true cost of capital would be very because their villages are self funding through resident's right-to-occupy fees, which as mentioned are basically an interest free loan to RYM. That said, in my estimates of value for RYM I build in a 10% discount rate, as I feel that is a conservative estimate, and because I feel a rational investor would likely expect a 10% after tax return for the risk of owning RYM.

10% to an equity holder would mean less for WACC. What I've done is treat the fees from occupiers as effectively partly working capital, which is a big positive that needs to be accounted for. Could put this in the WACC or the FCFF... I put it in FCFF and assumed the WACC is just for bank debt and equity holders. In any case this is a far from complete analysis, my question is has any investor done the complete analysis?

Unfotunately I am away until monday night.. If I get time from work today I will post some numbers. I disagree that you need to opt for such precision in your modelling, and I will put forward a simpler (but no less like to be wrong) way to think about their economics, future prospects and value, that I believe is more than sufficient to make an investment case, and will avoid the false precision inherent in DCF valuations (i.e. garbage in = garbage out as Bruce Greenwald would so aptly say). For interests sake I get a current valuation of $2.48 - $2.86. And since my tendency now is to use the more conservative figure I would say RYM is certainly no bargain anymore, but I believe it was an obvious value buy last year when it was trading around $2.

Yep, this is why I have not built a simple DCF, if you build a DCF it needs to be done properly. Rather I've used derivations of the Gordon Growth Model to take a high level veiw on "what would need to be true".