OCA - Oceania Group - retirement villages

[bull....]

How low below NTA does this go? Essentially liquidate and still get some..

nta doesnt mean much contrary to what many on here say.

[Maverick]

Back to OCA. I'll give Maverick a chance to chime in here with some number crunching, as I don't like using my steam powered abacus on the weekends.

Hey Mav, if they're developing about 180 units this year (going from memory) and the average run rate about doubles from that going forward and at prices that are heading higher, if we assume that development margin stay's around the mid 20% mark what does that do to their development profits in the years ahead ?

Half year result part 2 - apartments
Ok Beagle, you've dug up the one nugget that matters most to OCAs short term profitability . So let's put care suites aside for now and move on to the main event - apartments. As I've always said , this is where the gold is. All RV companies get a major short term sugar boost from new build margins. The more they build the bigger the rush. SUM has been the master of exploiting this but have painted themselves into a corner as they can`t just keep building in ever increasing volumes to maintain their impressive growth,( IMO they have also previously cut corners too by not keeping up the care building rates which will ultimately bite them when the market is eventually satiated with RVs and it all gets more competitive). Hence RYM and SUM have shifted abroad to keep driving the growth. I suspect OCA remains listed on the ASX for this future reason as well, but I'm just guessing on that. While DMFs will ultimately be the measure of the business in the years ahead, for now it's all about new build margins boosting the bottom line while care and village DMFs will naturally follow.

You ask about quantifying the new build profit effect of the higher build rates ahead
A bit of background first will be helpful...
Every year is different depending on the mix of offerings and location .OCA are very good at telling us what's coming up in the next 2 years but nothing beyond that. I do note that Brent, who repeats twice in his video Q&A, of a future build rate of 300-350, would have a significantly positive effect on the bottom line as they normally build about 210 per year and the known rollout for the next 2 years is still at this older/slower pace. So there's a big question mark there from me that these 2 future build rate expectations do not line up. Brent's projection doesn't even come close to current activities. ( PM me Brent to tell me I'm wrong ,I want to be)

Here are the approximate average profit margins OCA make on their new stuff:
Villa$75k
Caresuite $80k
Apartment in Nelson/ Christchurch $120k
Apartment in Auckland $360k.

You will all see there is bugger all profit on villas unless you are bulk building them and IMO the days of mass building evermore than the previous years are over in NZ. OCA can sell 1 apartment for the same profit as 5 villas. ( while we are at it , just have a think about the overall DMF 30% return when the average tenure of an apartment is only 5 years as opposed to a cheaper villa which is 8 years- but that's for another day). OCA is hardly bothering to build any villas in its pipeline.

Currently OCA is in a flat spot of having a large amount of its empty apartments outside of Auckland so that's not great for record profits for now as they are a lower sell price and margin in comparison. On the flip side they do have a lot of them ( due to inability to sell during lockdowns so no worries) so they should be able pull a rabbit out of the hat this FY. That's as long as more covid lockdowns don't keep f**king sales up like it has for the last 2 years now.

You can see they have really upped their capex lately. That surge is the same amount as when they built the Sands and Meadow bank combined. BTW OCA achieved its record new build margin profit , 2 years after that capex surge ( see highlighted text below as to why the 2 years is noteworthy) but the excellent result never made it to the bottom line as it was unfortunately nullified by the falling care profits at the time because so many old rest home buildings were being decommissioned.
No doubt at all, a big chunk of today's capex will be for Waimarie`s construction. From my graphs and workings the profit reward for this capex spend always shows up on the books 1.5-2 years down the track…no surprise that's also about when Waimarie will be selling down.

So after saying all that, my best guess summary to your question Beagle…
today's increase in capex spend from $50m to $70M , particularly in AKL where they have always gotten a 35% build margin, will produce handsome rewards 2 years from now of about $20m profit for new build margins for the HY - easily setting a new record. (And this time care profits are also increasing rather than falling as in the past, so finally a double positive whammy for shareholders, in fact a triple whammy as DMFs are steadily growing too.)
We can also work your question out a different way …..by using historical average mix of deliveries and historic average margins blah blah blah . So if they are delivering Brent's verbal guidance of , say, 325 a year that's a new building total margin profit of $46m per year. To save folks doing the math's , that's $18m extra on the underlying profit each year. (36% more profit than now)
If they achieved this then that's not a sugar rush , that's cocaine!
Frankly, Despite the recent factual uptick in capex, I'll only believe the higher deliveries Brent speaks of when I actually see it. For now I will stick with the documented build rates....Brent you still havnt PM`d me yet???

You are absolutely correct Beagle when you say dogged patience is required with OCA. This company will deliver growing and stable profits with a high degree of investor safety, no doubt at all, and is enhanced nicely with higher capex like this, or even turbo charged if Brent's stated new build rates come true , but it won't be any time soon. It will still continue to be an incredibly unexciting share most of the time.

[Muse]

Superb work Maverick.

[justakiwi]

As usual, you have put an extraordinary amount of time and effort into this Mav, and I for one am truly grateful. I don't have the skills (or patience) needed, to effectively analyse reports, so the fact that you are always willing to do so and share with us, does not go unnoticed.

Half year result part 2 - apartments......

A high degree of investor safety is important to me personally, so I am happy to sit back and be patient. There will eventually be "life after the pandemic" and our elderly folk will continue to need aged care of one kind or another. The need for quality aged care will be greater in the future, than ever before. Lots and lots of opportunity for OCA to take advantage of that.

This company will deliver growing and stable profits with a high degree of investor safety, no doubt at all, and is enhanced nicely with higher capex like this, or even turbo charged if Brent's stated new build rates come true , but it won't be any time soon. It will still continue to be an incredibly unexciting share most of the time.

[Chinesekiwi]

Thank you to all key poster on OCA - and most recently the very generous Maverick.

I simply don't have the nouse or the background smarts to do or even understand some of the mechanics of what you guys share with us. I am very very grateful that you care to share.

I simply like this company and the sector and have a reasonable understanding of it all - enough that over these past 4 or so years I have gone very heavy into OCA for a long term hold.

I see there has been some real argy bargy lately and apologies offered and accepted - I do love reading the jousting of the smart people here - but not so much when it gets heated. Glad that cool heads always prevail.

I love that people have opinions and I don't hold anyone to what positions they have previously held as thoughts change and no ones feet should be held to the fire due to their changing outlooks- robust discussion is so valuable to help us all maintain some sense of objectivity.

Thank you once again to all posters and of course to those who really really dig deep to the benefit of all followers and investors of OCA.

[Greekwatchdog]

Thanks Maverick for sharing, that's some analysis

[Mudfish]

Thanks for sharing all your hard work Maverick. Very much appreciated. I haven't a ****e show of understanding the workings of OCA by myself. Probably speaks volumes as to why the SP doesn't take off. As you have said in the past, OCA is just too hard for an 'average' investor to get a handle on. I'm just thinking about the positives, Greg bought a huge amount of shares @ 1.40 not long ago. Liz just bought a sneaky 50k worth. From memory, F&Barr stated they believe OCA to be one of the safest shares on the NZX. Brent's Q&A video, IMO, showed a competent leader who knows what he is doing. And, your in-depth analysis working the facts and figures helps clarify things enormously. Therefore, I'm comfortable OCA's future looks bright indeed. I'm a happy holder. Obviously, I'll be even more happier to see the market respond in a more positive way but I guess it's just a waiting game.

[Beagle]

Thanks Maverick. I know you are very heavily invested here and I am happy for you to be my wingman anytime but if you don't mind I will add some counter points for others to consider

Half year result part 2 - apartments
Ok Beagle, you've dug up the one nugget that matters most to OCAs short term profitability . So let's put care suites aside for now and move on to the main event - apartments. As I've always said , this is where the gold is. All RV companies get a major short term sugar boost from new build margins. The more they build the bigger the rush. SUM has been the master of exploiting this but have painted themselves into a corner as they can`t just keep building in ever increasing volumes to maintain their impressive growth,( IMO they have also previously cut corners too by not keeping up the care building rates which will ultimately bite them when the market is eventually satiated with RVs and it all gets more competitive). Hence RYM and SUM have shifted abroad to keep driving the growth. I suspect OCA remains listed on the ASX for this future reason as well, but I'm just guessing on that. While DMFs will ultimately be the measure of the business in the years ahead, for now it's all about new build margins boosting the bottom line while care and village DMFs will naturally follow. SUM a great complimentary holding to OCA as their business model is very lite in care as you've noted. I wouldn't rule SUM out. They have a number of material advantages over OCA. Firstly they have a vast land bank. Secondly they do far more of the build themselves, as opposed to contracting out. Thirdly their care lite model obviously has its advantages with rampant increases in the cost of care and last but certainly not least I believe that most people want villages with all the bells and whistles (bowling green, swimming pool, gym sauna e.t.c.), the whole 9 yards, as opposed to the often more boutique style villages OCA build. Its great to see OCA buy a full feature village like the Waterford in Hobsonville as this could easily be a template for them with future greenfield developments. I think OCA are chasing an older demographic. SUM have vast expansion abilities within Australia. I like them and am hoping they pullback some more and
I am looking for a reentry point.

You ask about quantifying the new build profit effect of the higher build rates ahead
A bit of background first will be helpful...
Every year is different depending on the mix of offerings and location .OCA are very good at telling us what's coming up in the next 2 years but nothing beyond that. I do note that Brent, who repeats twice in his video Q&A, of a future build rate of 300-350, would have a significantly positive effect on the bottom line as they normally build about 210 per year and the known rollout for the next 2 years is still at this older/slower pace. So there's a big question mark there from me that these 2 future build rate expectations do not line up. Brent's projection doesn't even come close to current activities. ( PM me Brent to tell me I'm wrong ,I want to be) Its a little disappointing to me that Brent couldn't have articulated OCA's future build rate in the analysts call. I think he has work to do in terms of his communication with investors

Here are the approximate average profit margins OCA make on their new stuff:
Villa$75k
Caresuite $80k
Apartment in Nelson/ Christchurch $120k
Apartment in Auckland $360k.

You will all see there is bugger all profit on villas unless you are bulk building them and IMO the days of mass building evermore than the previous years are over in NZ. OCA can sell 1 apartment for the same profit as 5 villas. ( while we are at it , just have a think about the overall DMF 30% return when the average tenure of an apartment is only 5 years as opposed to a cheaper villa which is 8 years- but that's for another day). OCA is hardly bothering to build any villas in its pipeline.

Currently OCA is in a flat spot of having a large amount of its empty apartments outside of Auckland so that's not great for record profits for now as they are a lower sell price and margin in comparison. On the flip side they do have a lot of them ( due to inability to sell during lockdowns so no worries) so they should be able pull a rabbit out of the hat this FY. That's as long as more covid lockdowns don't keep f**king sales up like it has for the last 2 years now.

You can see they have really upped their capex lately. That surge is the same amount as when they built the Sands and Meadow bank combined. BTW OCA achieved its record new build margin profit , 2 years after that capex surge ( see highlighted text below as to why the 2 years is noteworthy) but the excellent result never made it to the bottom line as it was unfortunately nullified by the falling care profits at the time because so many old rest home buildings were being decommissioned. Yes....the rebuilding of brownfield sites has certainly come with some serious challenges, not the least of which is carrying huge excess human resource cost during the process.. Thank goodness that's behind us.
No doubt at all, a big chunk of today's capex will be for Waimarie`s construction. From my graphs and workings the profit reward for this capex spend always shows up on the books 1.5-2 years down the track…no surprise that's also about when Waimarie will be selling down.

So after saying all that, my best guess summary to your question Beagle…
today's increase in capex spend from $50m to $70M , particularly in AKL where they have always gotten a 35% build margin, will produce handsome rewards 2 years from now of about $20m profit for new build margins for the HY - easily setting a new record. (And this time care profits are also increasing rather than falling as in the past, so finally a double positive whammy for shareholders, in fact a triple whammy as DMFs are steadily growing too.)
We can also work your question out a different way …..by using historical average mix of deliveries and historic average margins blah blah blah . So if they are delivering Brent's verbal guidance of , say, 325 a year that's a new building total margin profit of $46m per year. To save folks doing the math's , that's $18m extra on the underlying profit each year. (36% more profit than now) They're going to need more land to achieve that in the medium term and that's easier said than done.
If they achieved this then that's not a sugar rush , that's cocaine! I want to see them building more independent living apartments, not care suites. There is no money in care. If they don;t tweak their business model they will always be an underperformer, in my opinion
Frankly, Despite the recent factual uptick in capex, I'll only believe the higher deliveries Brent speaks of when I actually see it. For now I will stick with the documented build rates....Brent you still havnt PM`d me yet??? I think you are right to have a degree of, I'll believe it when I see it about the incresed build rate. Talk about lifting build rate by 50% is one thing, achieving it is another

You are absolutely correct Beagle when you say dogged patience is required with OCA.Dogged patience is not one of my key strengths but this is very cheap at $1.30, at least 12 cents below fair adjusted value of current NAV and the dividends should increase in the years ahead so I am happy to keep a moderate stake This company will deliver growing and stable profits with a high degree of investor safety, no doubt at all, and is enhanced nicely with higher capex like this, or even turbo charged if Brent's stated new build rates come true , but it won't be any time soon. It will still continue to be an incredibly unexciting share most of the time. All stocks have risks but there is certainly good value here which usually confers a degree of lower risk

Thanks for your post mate, I always enjoy your work. Some counter points above for others to consider. I remain of the view that human resource cost increases are going to be a real drag on profit growth going forward and OCA are the most exposed in this sector to the extraordinary and sustained rate of care cost inflation. Stocks that will do well in an inflationary environment, (let's not pretend inflation especially in the care and construction environment is transitory..no point in deluding ourselves) are those with pricing power.

Unfortunately OCA has no pricing power with the basic care side of their business and also with the Govt funded weekly care fees they receive on care suites. They have pricing power with their independent living units and as mentioned above they must redirect more of their efforts in villages they develop in the future towards independent living units if they want to drive satisfactory shareholder returns . The Waimarie greenfield development is a fabulous example of the type of development I'd like to see wherein the significant majority of the village is independent living units. Likewise the Waterford acquisition in Hobsonville is another superb template to replicate going forward. This recipe is a well proven, (SUM and RYM) way to generate huge gains for shareholders. Much more of this, please. I will watch with considerable interest what ratio of independent living to care suite units they develop from the blank canvas that is the Pukekohe site as this will give a valuable indication of their future direction.

Over time the market may accord a higher degree of satisfaction with the care suite model such that they can be repriced further or maybe this remains a drag on future profit growth, only time will tell. At this point I think its crystal clear OCA are not getting a satisfactory return for shareholders with the care side of their business so the market is discounting them well below their peers, and rightly so in my opinion. Its not screaming value...its just fair value as a value stock because the current business model amounts to driving a moderately powered car with the handbrake on. There is value here but it will be like watching grass grow which is why I will stay with just a moderate stake.

Not trying to be a sour puss here, just to highlight there are reasons this is currently cheap and those reasons aren't going to evaporate anytime soon. Happy to hold at $1.30 because the value is clear enough for anyone to see. I think that about SUM's (excuse the pun) it up for me at this point. Not much else for me to do or say about this one for now.

I'll probably get some more hate from someone for not being super duper positive...I suppose that goes with the territory of trying to be truly objective but where would the value be in the forum if all we did was pump each others tyres about the stocks we own ?
Its time for me to have a super long nap with this one

PS If the Govt force this sector to share capital gains then this is a taste of what people will get...but is that what people really want ? https://www.nzherald.co.nz/business/...19b12a0d7d7338

[Onion]

Its time for me to have a super long nap with this one

Thanks Beagle and Maverick. Your work, thoughts, opinions, etc. are greatly appreciated.

[Muse]

looks like we might have a rights issue on our hands soon if all the gos on the SKT thread pans out. What's an appropriate rights issue discount to fund the purchase of Sky's Mt Wellington property to you reckon?