OCA - Oceania Group - retirement villages

[Maverick]

I think they are focus on the dodging "media" attention , not the market per se. I'm not wanting to make this a hot topic, it will go down the pointless conspiracy path. But I do find the actions line up.

[nztx]

Don't you think Winner that the reduced dividend (WELL below there mandate of paying out 50% of underlying) is a deliberate "slight of hand" to avoid attracting media attention to pay back the wage subsidy? I see no other reason for such a stray from there own policy.....marvelous play OCA, love it!

but they wouldn't need to - would they ..

Eliminating any unrealised fiction would bring the core result down to something that would
be respectable in terms of subsidies anyway ?

Reduced dividend is saying that stakeholders have 'shared the pain' too .. if you like or could be seen that way

Agree with others too -- 1.3 cps before being diced by a further 1/3 for DWT & no imputation credits
is a fairly miserable sort of payout for an Outfit which really hasn't suffered too badly through
Covid 19 times .. possibly incurring a bit of extra cost ..

[value_investor]

My thoughts on the result:

- The biggest thing, and this has already been pointed by some others here is the sharp increase in sales but no corresponding increase in the underlying profit. The development margin hasn't seen a increase and my thoughts on why is below.

I think what you have to remember is that a year ago two of their larger finished developments, The Sands which is in Browns Bay, Auckland and Meadowbank which is in an incredibly affluent suburb in Auckland were the main drivers. The average selling price in Browns Bay is $1.03m and Meadowbank is $1.43m according to Oneroof.

I think the room to have larger development margins there vs the current developments in Tauranga, Nelson and Christchurch where average selling prices are lower explains why realised development margin in ILUs is lower. Even still, a 39% development margin to me which they did report previously in this industry is highly unsustainable. This is probably more of a Auckland house price tailwind at the time more than anything.

- My biggest worry is that a lot of sales have been deferred from the last result due to COVID and lockdowns. I'm not sure whether the increase in sales can be sustained through to future periods, to me this increase could just be a one off. I don't see any other general market factors that would have your new sales increase from 84 to 145 in the same period comparison. If that is the case, then I don't think that the underlying profit is on the upwards trajectory that has previously been said here in the shorter length of time. Now, I think long term the potential is still there but we might have to kick the can further.

- The care side of the business is starting to head in the right direction, which management have been spouting for a while now. This transformation from standard room care to a more premium offering has really been the companies point of difference. This part of their business, is probably more where their long term thesis generating stable revenues is. Interesting slide on page 17 shows this, that the care suite DMF is $5.4m and their growth rate of care revenue is 34% per half year. According to the income statement, their total revenues are $103m so there's a way to go before the premium side management fees become something of a cash machine for the business.

- The cashflow of the business is heading in the right direction, but again I'm not sure how much of this is to do with the unit sales in this period. This might be the first period I've seen that the business can actually afford to pay the dividend they have been declaring for the longest. I'm not really for the business paying it (I understand why they would), but if the management feel as though forgoing the dividend in order to build more care beds and ILUs are going to generate a better long term return, I wouldn't be against it.

Final Thoughts: I hold quite a few of these and will continue too. Reading these results against what some have said on this forum, I think that big ramp up that people were hoping for is still longer away than first thought. I think OCAs core competency is more in building units for a decent development margin and delivering projects on time. I know the care side is what they advertise as their point of difference but there are few companies on the NZX that can deliver like them.

The thing that will help you sleep at night is that they have a huge development pipeline and they've proven their capability to sell. The care side on the other hand, as their "transformation" says, is still something that is 2-3 financial years away from being a big contributing factor. However, with how demographic changes are going in the company, the tailwinds are firmly set to get better.

[The Punter]

Nice view of things VI. I got in @ 93c and will be sticking with it as long as I can...unless the car packs up.

[Waltzing]

Make that car last longer!

walk, electric bike, public transport, borrow someone else's !!!

[winner69]

Big headline in Oceania preso

Aged Care is past the point of inflection

Good buzz word that inflection

Suppose it means they are dramatically exploiting extensible paradigms

[Waltzing]

" dramatically exploiting extensible paradigms"

yes .... well the sun has come up and it looks like a very warm weather week and im sure sun block will be selling fast this week and it will be hats on when bowling at all those clubs near rest homes... before 2 PM. Tea and scones after in the air conditioned suites after..

It will be interesting to see the numbers for SUM other stocks for a comparison but i think we missed the flying express this winter that was some other stock.

[mike2020]

I think they are focus on the dodging "media" attention , not the market per se. I'm not wanting to make this a hot topic, it will go down the pointless conspiracy path. But I do find the actions line up.

I still think the FY will tell the story, the gain in asset value was not really as much as I expected either and it was attributed to expenditure on the whole, it's all very stable and conservative. Did I miss the massive rerate opposite to which the last result was blamed on a negative valuation in April?

[Zaphod]

but they wouldn't need to - would they ..

Eliminating any unrealised fiction would bring the core result down to something that would
be respectable in terms of subsidies anyway ?

Reduced dividend is saying that stakeholders have 'shared the pain' too .. if you like or could be seen that way

Agree with others too -- 1.3 cps before being diced by a further 1/3 for DWT & no imputation credits
is a fairly miserable sort of payout for an Outfit which really hasn't suffered too badly through
Covid 19 times .. possibly incurring a bit of extra cost ..

If the retained earnings can be put to profitable use, then I'm okay with a small dividend given my long investment horizon. Others however might be chasing higher dividends to offset lower interest rates obtained from banks, so I can appreciate this isn't an ideal situation for everyone.

I'm not sure whether paying a lower dividend is a deliberate slight of hand. I'd need some hard evidence before coming definitively to that conclusion. It's a possibility though.

[WAIKEN]

Oceania Healthcare

1H21 Result — Inflection

link
OUTPERFORM

We walk away from OCA's 1H21 result with increased confidence in our view that OCA has reached an earnings inflection point and are on track to double annuity EBITDA from FY20 to FY23. Specifically, we note three positive developments; (1) OCA reported positive free cash flow and reduced net debt from its FY20 result (May year end), the first aged care operator to do so for several years; (2) annuity EBITDA grew by ~+30% versus 2H20 and +20% versus 1H20 – we firmly believe that OCA's earnings have troughed and will continue to grow over the coming years; and (3) we were encouraged by the large proportion (we estimate 80-90%) of delivered care suites that were sold under an ORA versus care beds with an associated premium accommodation charge (PAC). We reiterate our OUTPERFORM rating with an increased target price of NZ$1.70.
What's changed?

• Earnings: Small increase in annuity EBITDA driven predominately by higher resales gains, underlying earnings are largely unchanged (higher resale gains are offset by slightly higher depreciation & amortisation and lower newsale gains)
• Target price: Increased to NZ$1.70 from NZ$1.65

Proving up the care suite model; an important milestone

The biggest risk to our positive view on OCA centres around the so far relatively unproven care suite model whereby care beds are sold under an ORA. The care ORA model improve the economics of aged care meaningfully for two reasons. Firstly, and most importantly, it reduces the cash drag on growth. The ability to sell care suites, not just independent living units, implies a cash neutral or even cash positive development (growth). Secondly, it improves the profitability of care even with low positive house price inflation. OCA's 1H21 result was encouraging on both fronts as OCA was free cash flow positive for the first time in several years and our estimate of care annuity earnings grew ~+30% versus 1H20, a change in tack following a period of decline across the sector but particularly in the case of OCA.
1H21 reaffirms our positive view

OCA's 1H21 result delivered on our expectations and reaffirmed our positive view given; (1) valuation metrics remain undemanding despite its recent strong share price performance. Trading on 15x P/E and ~22x EV/Annuity EBITDA on our FY22 forecasts, OCA continues to be valued at a significant discount to its larger peers despite, (2) us forecasting it has the fastest annuity EBITDA growth in the sector over the next three years, predominately driven by the frequent recycling of (deferred management fees) DMF and resales gains from the care suite product and, (3) it has the lowest cash drag in the sector, over the past few years the sector has been characterised by rising debt levels as capital recycling has become harder. OCA reported a net debt decline in 1H21 and was free cash flow positive for the first time in several years, a rare occurrence in the aged care sector.

Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024

Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124