RYM - Ryman Healthcare

[Beagle]

Crikey Sauce that'll take a while to digest, excuse the pun

I've been meaning to spend some time this week suring up my thesis that the EPS released by Ryman, i.e. just over 20 cents per share is the correct figure upon which to base one's assessment of earnings but havn't got the time at the minute so let me just put this out there and get some feedback.

My contention is that Ryman's underlying profit, i.e the $72M reported understates their real earnings. The correct figure is the $100m inclusive of unrealised valuation gains. Before you all jump on me and suggest this is ludicrous, let me explain.
We know under IFRS that all property companies are required to revalue their investments each year and include that valuation movement in the financial result and we know how bizarre that's been for some of the real estate investment trusts but my contention is Ryman is a special case in that's its business model involves the certain churn of properties approx every six to seven years so the gains, (which are shown as unrealised becuase they are re-selling a licence to occupy, not the units themselves) are an inextricable part of their business operation, therefore such gains are in fact normal income due to the highly predictable nature of the churn rate.

Now before you take sidesi know this, even the broker's analysts can't agree on this, I've seen one analysts report showing a forward PE of 12 and another over 16 depending on which side of the fence you sit.

My contention is that if the normal churn is factored into earnings (which it should be because its inextricably tied into their business model), i.e. the $100m figure approx 20 cents per share and assumming 15% growth this year = 23 CPS earnings the 12 month forward PE of Ryman is only 11.7 at the current share price of $2.70. Given growth of 15% this puts their price earnings to growth ratio (PEG) at 0.78 which makes Ryman a very cheap growth stock.

So if we assume inflation for the forseeable future is about 3%, which seems to be the general consensus, Ryman revaluing their entire portfolio by about that amount each year based on the units going up by that and churning every seven years for a realised gain of about 21% every seven years or so, all makes good common sense to me.

Is there something I'm missing, as always, I welcome a good debate.
Disclosure, recently bought a lot more Ryman.

[Sauce]

...WOW...Sauce...very very impressive...the "thing" about RYM is that on the face of it ...is well ,its the perfect investment.
But that in itself is a worry...which I believe you have very well articulated spelt out.
To my mind there have been perfect stories...Microsoft,Apple,BHp...where mkt dominance has reigned....in NZ ....we tend to have bursts....BIL,RJI...TEL....then pooph.....

...could RYM be the exception.....our little "Microsoft"...they are off to OZ....a graveyard mostly for NZ companies , but not for NZ indviduals....

I agree Troyvdh. It is best to ignore Australia until they are making money over there... They don't need Australia to continue on their growth path for a very long time. But conversely, it could be a game changer if it works out, just best to wait and see before factoring it in.

...say in 10 years ...could RYM have 10000000 shares ..having had multiple 1 for 5 issues and each share worth what they are now...and all current holders all very happy self satisfied chappies congratulating ourselves that were indeed very wise indeed in believeing .... the odd hiccup of course (sorry...I meant buying opportunities...like a 20 months ago when RYM were just above a dollar......)....

Odds are in favour of it. And yep, bound to be the a few periods of opportunity along the way! I will be waiting patiently for those

[Sauce]

My contention is that Ryman's underlying profit, i.e the $72M reported understates their real earnings. The correct figure is the $100m inclusive of unrealised valuation gains. Before you all jump on me and suggest this is ludicrous, let me explain.
We know under IFRS that all property companies are required to revalue their investments each year and include that valuation movement in the financial result and we know how bizarre that's been for some of the real estate investment trusts but my contention is Ryman is a special case in that's its business model involves the certain churn of properties approx every six to seven years so the gains, (which are shown as unrealised becuase they are re-selling a licence to occupy, not the units themselves) are an inextricable part of their business operation, therefore such gains are in fact normal income due to the highly predictable nature of the churn rate.

Hi Roger, thanks for your post, great to get another angle on their value.

Some readers might remember the discussion about this on the 'owner earnings' thread. I found this confusing when first researching RYM. I think they really could tidy their reporting up a bit so this is more obvious.

But basically its easy to get confused as to what the "unrealised" gains are. It seems intuitive to think they would be the increase in the value of each unit i.e. an increase in the value of the 'license to occupy'. And that they book the unrealised portion to their book of "future resale gains." In which case you would be absolutely correct Roger.

However this is not actually the case. The valuations are literally for the entire portfolio of villages, valued as a going concern. I.e. if they were to sell off one of the villages to another retirement village operator for instance. This is totally different to the capital gain they get when they resell a unit which is actually reselling the "right to occupy".

Since RYMAN are never going to sell their villages, there is simply no tangible benefit to shareholders from a cashflow perspective, so it doesn't really come into the way we assess the value. However, it DOES provide us with an idea of the underlying ASSET value. Which is useful in knowing that the cashflows are backed by very valuable FIXED ASSETS, so from a safety of principal perspective, RYMAN is not just going to evaporate like businesses built on a ton of intangible assets.

So its a good thing, but not really relevant to earnings valuation. This is why the company states very clearly "Our underlying cash profits are what investors should focus on and what you should judge us on"

Regards,

Sauce

[percy]

Ryman Healthcare Valuation.



ESTIMATE OF INTRINSIC VALUE: $2.82 per share



By posting these quotes I am not advocating buying companies at an expensive price. In fact if you read back earlier in the thread, I valued RYM at $2.67 back when it was trading around $2 and I believed a margin of safety existed – I put my money where my mouth is and it has been a wonderful investment so far returning me 39% in less than 12 months including dividends.

With Regards,

Sauce

At the time you researched and came up with your valuation of $2.67 "THE MARKET" with every bit of information available,valued RYM at around $2.00.
On charts it did not look too flash.
Your have proved that knowing the "true" value of a company,saves losses, and makes for very profitable returns.It has been fun,of interest,and profitable for all us to follow your posts.It also gives us the knowledge of what the "true" value of RYM in case "THE MARKET", with momentum decides to over pay.
Thank you.

[Sauce]

At the time you researched and came up with your valuation of $2.67 "THE MARKET" with every bit of information available,valued RYM at around $2.00.
On charts it did not look too flash.
Your have proved that knowing the "true" value of a company,saves losses, and makes for very profitable returns.It has been fun,of interest,and profitable for all us to follow your posts.It also gives us the knowledge of what the "true" value of RYM in case "THE MARKET", with momentum decides to over pay.
Thank you.

Hi Percy,

Thanks - I suspect i don't deserve such kind words - I am writing things down here as I learn.. so please treat my views with utmost suspicion !! .

With the share price somewhere in the region of the companies intrinsic worth, share price appreciation should (in theory) slow down to approximate the current rate of growth. Although as you say it might overshoot. And then intrinsic value could receive a boost from Australia in a few years time. I see some analysts are picking another build rate increase from 2016 - I am guessing they are factoring in the first stages of a parallel roll out in Australia around that time - I am speculating as I can't remember the rationale off the top of my head.

And don't forget what needs to pan out in the future is pretty substantial for my approximation of their value to hold.. In the end it's all a big guess, which is why its so important to focus on the MOAT and keep the crystal ball gazing to a minimum (apart from all important reality checks).

Remind me of another Munger Quote - when asked what made him one of the worlds most successful investors he replied "Because my guesses are better than yours"

To give you an idea of how sensitive this valuation model is, if you use the average of the shareholders equity at the start of the financial year, and the shareholders equity at the end of the year - which for RYM is about 27.5% - instead of the 30% ROE calculated on beginning equity, you end up with a valuation of about $2.48 per share. Some would say this is more appropriate figure to use as the end of year profit is a product of cash re-invested throughout the year as well.

In other words.. (note to self... !) "if you can pinpoint it you are kidding yourself"

Regards,

Sauce

[percy]

I just loved the Munger quote.Do not know what it has to do with what we are talking about, but my favourite quote at present is from Benjamin Disraeli "What we anticipate seldom occurs;what we least expected generally happens."

[Sauce]

I just loved the Munger quote.Do not know what it has to do with what we are talking about, but my favourite quote at present is from Benjamin Disraeli "What we anticipate seldom occurs;what we least expected generally happens."

Ouch Percy! Lol, if I was superstitious I might be unhappy you posted that quote during this discussion! haha ;-)

[Sauce]

Actually, percy, I think your quote has perfect relevance to my latest dribble (post) !

The best summary I can think of my view of complex financial modelling is this:

People spend all this time trying to anticipate the effect - i.e. modelling growth in cashflows based on things like industry growth, inflation etc

And not enough time trying to understand the cause - i.e. the true reasons why a company makes high returns in the first place (competitive advantage/barriers to entry)

Once you understand the true cause of the outsized returns of a successful company, you make a rational and informed guess as to its sustainability. I.e. you can handicap the odds.

This approach provides a higher probability that what you anticipate will occur, and what you least expect wont.

For those focused upon forecasting, I believe, your quote aptly applies.

How does that sound Percy?

With regards,

Sauce

[percy]

Actually, percy, I think your quote has perfect relevance to my latest dribble (post) !

The best summary I can think of my view of complex financial modelling is this:

People spend all this time trying to anticipate the effect - i.e. modelling growth in cashflows based on things like industry growth

And not enough time trying to understand the cause - i.e. the true reasons why a company makes high returns in the first place (competitive advantage/barriers to entry)

Once you understand the true cause of the outsized returns of a successful company, you make a rational and informed guess as to its sustainability. I.e. you can handicap the odds.

This approach provides a higher probability that what you anticipate will occur, and what you least expect wont.

For those focused upon forecasting, I believe, your quote aptly applies.

How does that sound Percy?

With regards,

Sauce

Exactly. the cause, Ratios are figures.We project the numbers,but we seldom look at what the business does to produce those figures.Two companies in the same sector can be totally different.I think of the fish and chip shop I go to.Why do I drive past 3 or 4 other fish and chip shops? The cause, is because I like their's best. I notice that other people do the same.

[Beagle]

Thanks for bursting my bubble on the revaluations gently Sauce. You're a gentleman

Not sure what else I can constructivly add to the Ryman discussion at this point other than all the elderly folk I've met at Ryman's facilities when I've visited my Dad there seem very content and I've always believed that word of mouth recommendations are always the best form of advertising. The market seems to have found its own level around $2.70 for now after quite a stellar performance in recent months, I suspect we'll settle down to 15-17% gains per annum from here and I will be happy with that. Brokers seem to have seetled in to around $3 for their DCF valuations which seems about right to me.

My best guess is that the market is somewhat underestimating the long term demand for the secure and comprehensive retirement solution Ryman's offer, its a pretty compelling solution for those who want peace of mind and the highest standards of care. It will be very interesting if they can crack the Australian market, at this stage I'd say the current share price has nothing factored into it for possible Australian Growth, which is of course correct until they can prove otherwise...but here's the thing, I think they'll do exactly that so I'm happy to be in for the long term.

Regards