RYM - Ryman Healthcare

[percy]

Thats what i like about management they are NOT rushing in, initially building one, NOT buying out other peoples mistakes ; being careful ,despite doing their homework.

Should they get it completely wrong,they will have to right off say approx $30mil.
Should they get it half pie wrong and sell they may loose $10mil.
Either case it is not a lot loose.
However should they get it right,the sky is the limit.
I understand most Aussie villages are more "life style" rather than total care.
If they had n't tried Aussie the market,then I think we would be right to say they should have.
So with little to loose,a lot to gain I think it well worth "going for'.

[percy]

The ODT covers Ryman's increased build rate.

http://www.odt.co.nz/news/business/2...satisfy-demand

Craigs IP put a price of $4.42 on Ryman.

Be interesting if Sauce gives us an update with his valuation, as he has always been right on the money.In the meantime I am very happy with Craig's $4.42.

[Sauce]

Hi Percy,

I like to think I am conservative in valuation, but from what I can ascertain, RYM's share price is now building in some success in Australia.

Based on a DCF methodology with roughly 15% growth in underlying profits for the next 5 years (they will probably beat this hurdle this year) and growth declining to zero and ROE declining to the cost of capital in a straight line over the subsequent 5 years, and a terminal cap rate of 8.5% (which sounds about right for a net return from a mature but high quality property play) I get around $3.80 per share.

If RYM can continue their growth period for a lot longer than this, then they are worth considerably more on a NPV basis.

I think it is prudent to assume they will need success in Australia to add impetus to keep the growth rate in double digits past 5 years.

It is a real shame the market has woken up to the extreme undervaluation that existed a couple of years ago. As a net saver for a couple of decades yet, I would like to put more money to work in RYM. But I won't pay the current price.

No way would I sell my holding however, as this is a rare growth story and the potential for a continuing secular growth period, in NZ and AUS is high. AUS could be a game changer over time. Just no margin of safety; buyers now are to starting to pay for perfection which is risky. And in my view some success in AUS is starting to be priced in.

Cheers

Sauce

[Sauce]

There is something else is note worthy; RYM is undergoing a strategic change of direction that I believe will further enhance and solidify RYMs competitive position over time.

Don't have time to go into the numbers, but the summary is that RYMs care/dementia units are now being built at a scale which are profitable; in the past the care element provided immense intangible value, but on their own were loss making or break even. Indeed this is still the case for Summerset.

RYM have been building larger and larger villages and with the scale they enjoy, they can, and are, switching the mix of units more towards care beds and can do this profitably now. The reason that this is significant is that it positions them very well for the wave of demand that is coming in the full time care space as more baby boomers crap out totally before wanting to move to a village for lifestyle reasons.

I would be highly suprised if they do not enjoy considerable pricing power in this space as demand grows, which could provide a lot of future profit growth from the villages being built now without any additional capital.

They are so far ahead of the competition (besides MET and Summerset, its all tiny fragmented players with no scale and little profitability) in this regard, that no one will be able to offer the same level of care/service or have the same capacity. And, importantly for shareholders, no one else will have the same profitability per bed.

Perhaps Summerset will get there one day, but I personally doubt they will ever be as profitable by a measure of return on shareholders funds. RYM are able to steer the ship in this strategic direction nice and early, and I think it will lead to even more dominance in the future.

With regards,

Sauce

[percy]

Sauce,
Thank you for your update and research.

[troyvdh]

....thanks Sauce...are we/you...implying that this company is trully one of "blue sky"....like a perfect model....gee in this world where can one assume such comfort....constantly in my head i hear "if it sounds like its to good to be true'...blah ...blah....I lost $30k on RJI...in the late 80's.......(..example....we/RJI bought the now Forsyth barr building in CHCH for $40..million in the late 80's).....a mate of mine (and a few mates) bought that building about 10 years ago for $18m......

..what am i saying.....not sure really.....but I am confident that you get my point.

cheers troy

[Sauce]

Hi Troyvdh

Totally understand. And the point you make is very a good. Having an optimism bias can be very expensive!

I think you need to balance my comments about the strength of RYMs model with my discussion that I think the market is pricing that strength into the share price and that I would not buy it at current levels.

To me the risk has gone up with the share price. But at $1.90 when I tipped a large portion of my net worth into RYM, I felt the risk was a lot less because the market was not pricing it for perfection, yet the business model was very strong from both a competitive and a demand perspective.

So the decision back then was that the expected value of the investment was, based on my assessment, positive, even when both the downside and upside case were factored. I do not feel as confident of this now because of the change in price vs the more modest increase in intrinsic value.

RYM is not without risks. There is the risk of regulation in the future that could undermine the business model. They could stumble and execute poorly while growing so fast. In the future development land might be too expensive to build their villages profitably. Perhaps someone will find a more outsourced rental model, that generates good returns on lower capex, and use that to compete more effectively with RYM in the future.

These are just some of the potential risks that need to be considered and weighed up with the positive outcomes as described in other posts. I think hard about these scenarios all the time and none of these, at this stage in time, and in my view, significantly alter the investment case for RYM. But from a probability perspective the odds of something coming from left field make a further commitment of funds at current prices to risky for me as my exposure is already large.

Basically what I am getting at (the short version!) is that my optimism for RYM is balanced by the price I am willing to pay for it.

I hope this helps

Cheers

Sauce

[troyvdh]

cheers and thanks...as an...aside I have an inherent issue ...totally nonsensical i agree ....I should buy more at these prices...I i bought in when you did.....I should and i know it...but i cannot...how pathetic am I !!!...have you bought any more.....?

In all likely hood the SP will assume $10 plus status..again...and again there will be 5/1 split......cheers......

[Sauce]

Hi Troyvdh

I know how you feel. Consider this:

RYM trades on a PE of about 27 x underlying cash earnings. That is a very hefty multiple, even if there is unrealised cash generation locked into the portfolio.

Last time it traded this high (relative to earnings) was at the peak of the market in 2007. From memory the all time high was about 2.70 and, if I am not mistaken, it was also on a multiple of underlying cash earnings of about 27. If you had paid that peak price you would have, until recently, been feeling pretty silly with yourself; taking about four years just to break even. But if you had not capitulated at any time and stayed the course, you would now, just 5 years later, be sitting on a 9% compound return EXCLUDING dividends.

$2.70 * (1.09) ^ 5 = $4.15

With dividends its a double digit compound return. Time is the friend of a wonderful business as the saying goes.

Over even more time that compound rate for the 'unlucky' souls who paid $2.70, will undoubtedly look even better. So even a high price can look good with enough patience.

The caveat is that you have to be right about the business.

Cheers

Sauce

[Sauce]

Hi Troyvdh.

No I have not bought any more. And I must also admit to selling a few off the top at much lower prices.

But I won't be selling any more, and as previously disclosed, my RYM holding is the largest asset I own by a large margin now..

Cheers

Sauce