OCA - Oceania Group - retirement villages

[couta1]

I think winner is just looking to start a debate & 1.04 could be a good entry point if not wait till it goes lower

Ah yes I see that now, winner bored and having a Friday pot stir.

[Beagle]

Deleted...

[Maverick]

Ferg and I have been comparing notes lately and since I've got tons of time waiting for the interislander why not share a bit of it during this pre report void.
It is admirable the large effort Ferg has also put in to build his own model, plus he's a top bloke too! I share this with his permission.

Winner has previously suggested NPAT could be $60m, Beagle about the same (but he is more focused on comprehensive income???) then Ferg and I have separately arrived at $58m , both of us agreeing there is ' risk ' to the upside.

So between all 4 estimates we are agreeing on a healthy NPAT rise of 16%-20% after the last 4 flat years of flat c.$50m. Winnner and Beagle , if you are willing, I would love to know what has caused you to deduce the leap in NPAT this year after 4 flat years of profit?


Despite this forecasted jump, touch wood, the market may still not be too impressed as there are now 12.5% more shares issued which soak up most of this EPS growth leaving only 5% visible EPS growth.

Brent tells us there Will be accretive growth from the FY22 2X acquisitions but Im not so sure, maybe he means it's just for future years. Of the 2 acquisitions that these new shares bought Im struggling to see how the purchase of a rest home on a large paddock will be accretive (unless there's oil underneath). Therefore I haven't allowed for any earnings from either of these so any, and surely there will be some at least, will be additional to my $58m estimate.

Next thing from discussions with Ferg is our differing expectations of costs. His are pleasantly lower than mine. Logically he is likely right ,at some point costs should not increase at the recent fast pace relative to growth as they have as there has to be future efficiencies by maturing villages. ( a tiny example is the recent Green Gables-Nelson delivery no longer employs their sales lady as all units are now sold) This especially applies to the high growth of corporate overheads costs as things level off to satisfy the new , higher delivery rates. We are probably already there. Again , I have not guessed when this moment might happen so any slowdown of cost growth will be a bonus on top of my own expectations if and when it occurs.

What is very clear from the last 4 years is the significant growth happening with “ annuity like income”- care DMF,village DMF, and PAC fees. Here's what I'm talking about...

Village DMFs 3 yr CAGR are 29%. Forecast result c. $33m
Care DMFs 4 yr CAGR are 42% Forcast result c.$14.8m
PAC fees 3 yr CAGR are 11% Forcast result c.$11m

Consider this growth , which has been linear to date, is now happening on quite large numbers now as opposed to 3 years ago, the 2 main drivers, care and village DMFs, are now double from only 3 years ago.
The constant focus here on ST of burgeoning care costs / wages that will forever be killing any profits IMO are now being dwarfed now that the handsome revenue figures above are beginning to overwhelm them. Even if the “care” side, nurses looking after clients ,made absolutely nothing for FY23 (ie all DHB income were fully paid out in costs) the growth rates above still give us 20% NPAT growth. Rising house prices of course assists this growth but is only a part of it so even a downturn in HPI isn't the disaster most seem to think it will be.

I do acknowledge ,Beagle , as you have correctly loudly barked untill this point, that costs have risen sharply for years and that has indeed swallowed the growing DMF profits to date.
From here though I wil argue that these annuity revenues are strongly increasing on a much larger base now ,as above. While potentially at some point surely corporate cost rises should plateau. Well at least not grow at such pace as the built rate apex’s to its new increased level. The upcoming result will shed some light on that.

Every time I really dig into the spreadsheets ,I get enthused like really enthused. It's as clear as day when you look at this with well laid out figures but that takes a lot of work to do. Unfortunately reading too much ST which has a much shorter time horizon than this puppy needs to shine or just looking at the daily share price that enthusiasm evaporates pretty quickly.

The math is all there with plenty of data now for anybody who puts in substantial effort and it will be interesting how a nice result next month will be met by the market given how negative market sentiment currently is.
I do think, due to so many personal site visits, it's easy for me to view this as a real business that I own a piece of and can touch rather than just a disappointing NZSX share chart.

One last unrelated thing, a quick shout out to "Artemis "and " Sonny o Share" whom I thoroughly enjoyed meeting at their monthly water cooler meeting in Wellies. Very nice to meet you both.

[Goose]

Thanks Maverick and Ferg for your hard work and your willingness to share some of your thoughts and analysis - it is these kinds of posts that really add value to the forum. I am looking forward to 20 May and some more information to be revealed.

[couta1]

Re Nursing costs over the last couple of yrs, in order to retain nurses costs have risen significantly. Just over a year ago $30/hr was the starting rate for a junior, it is now $38, senior nurses are now commanding $43/hr. Competition is fierce between the players in the sector due to the huge shortage as well as with the DHB and as an example SUM are offering 50c/hr above the DHB plus a 5k sign up bonus, this is all due to the Govt's border policies but thankfully they are starting to open up.
All this is of course separate from the ongoing funding shortfall in the sector from the Govt via the DHB's but as unit sales increase this will become less of a problem as it has with SUM others, just a bit more patience required here to obtain the reward but it will happen.

[Beagle]

Thanks for your thoughts Maverick and Couta1.

Sorry Maverick, I have tempered my expectations and see no underlying eps growth this year. Headline underlying profit may grow a little but as you say there's a lot more shares on issue. I don't want to be too prescriptive on the numbers because as you allude too, there's many different ways to look at the "dog's breakfast" that is, OCA financial reporting.

There's a number of new indicators that have emerged recently that concern me.
House sale prices have declined about 8% from the peak in November.
More importantly volumes are very weak and most notably we just had the weakest sales volumes in March in many, many years.
Plenty of evidence from other companies in the sector that they are incurring many millions per annum extra in healthcare costs due to Covid
Huge pressure on staff resources and demands from staff and huge competition in the sector to get staff, as Couta1 has alluded too. Pay rates can only go one way and at real speed and Government underfunding is likely to remain a real issue for basic care services. Doctors for example were reported this week to have only received a bulk funding adjustment of just under 3%, this against a backdrop of inflation at 6.9% and huge pressure on doctors to find staff ands deal with Covid pressure. Andrew Little should be ashamed of himself signing off on such a pathetic adjustment and the signs for chronic ongoing Govt healthcare under funding for this sector appear ominous.

We are going to be five years into this with no underlying eps growth is how I see it as a snapshot at this point which is a pretty sobering situation to be in. Half a decade is certainly not an inconsiderable amount of time for a company to be able to show it can grow its earnings so my belief it hasn't yet makes me very cautious about the future. There is the unimputed ~ 4% yield though so I suppose that's something, although it should be noted these days that many good quality corporate bonds are yielding ~ 5% (ironically, including OCA bonds themselves, OCA 020 traded and closed at 5% yesterday with substantial volume on offer at 4.9%). With bonds generally having the toughest start to the year in decades with yields rising at an incredible rate, I can't help but feel that good corporates bonds are now starting to provide real competition for shares. TINA or TRINA as its sometimes referred too (There really is no alternative) to shares appears a mantra that's no longer applicable.

An alternative - Most rental properties struggle to net you 4% return after all the work involved, maintenance and deep cycle maintenance, the risks (meth contamination, malicious damage and water ingress damage to name just 3 risks are far more common than many people realise) and the prospect for capital losses with rental properties in the short to medium term appear very, very real indeed. Against that backdrop, by comparison with OCA trading at a significant discount to NTA and especially NAV, investment in OCA, which is ostensibly an investment in property makes a lot more sense however I expect the systemic problem they have with serious wage cost increases will prove to be a problem that's both enduring and exceptionally difficult to tame.

The fact is this problem has proved exceptionally enduring for all of the five year life of OCA and right at the minute the healthcare workforce is highly stressed and facing a cost of living crisis with 6.9% inflation so why shouldn't they ask for even more money ? The plain fact of the matter as I see it is Nurses are the most "in demand" professional group in the world at present and it matters not if you're opening up the borders, in fact its probably going to exacerbate the problem if Nurses can get say $60 an hour working in say Perth where housing is less than half the cost of Auckland. I think skilled Nurses and staff are more likely to leave the country than come here and the problem will prove to be really enduring.

The big unknown as I see it in the medium term is what direction will our new CEO take the company in and will he try and change the culture of the company ? Are new developments like the Pukekohe one that's probably currently in the planning and design phase still going down the high care focus route or are they going to try and change the focus a bit more towards independent living that's been so successful for SUM ?

On the culture front, are they going to try and initiate tighter cost disciplines the likes of which have been so successful for SUM or do they run with the cultural roots of this company which stem way back to when many of the healthcare facilities were run as charities by Presbyterian support services ? A culture of care is all that matters regardless of cost seems prevalent within the company to me.

What we know for sure is that at this point the company still has about 50% of its rooms mired in the old basic care model which make ostensibly nothing and the promised 6 year transformational program they promoted at the time of listing seems to be dragging out and looking like another 5 years (10 in total), until they get down to 30% basic care facilities. That's "Glacial pace" in anyone's language.

30% is still quite a handbrake on future growth so again it comes back to the culture and direction that management take this company in the future and frankly it worries me that the early signs of some new joint venture with a district health board suggest their focus is still very much on low profit, (if any), care. Sometimes the culture of a company never changes, in fact in my experience, this happens more often than not.

Sure I concede that the steadily rising DMF fees and resale profits, (which is where the real money is) do give some scope for encouragement but the headwinds I've alluded too at considerable length remain and in my opinion will be enduring and very serious.

My main other reservation is on the demand side. I think most people want the full feature "cruise ship" experience with their retirement village lifestyle. The bowling green, swimming pool etc and the "boutique" type facilities that OCA provide are somethign I foresee as being less attractive and remaining so.

For at least the next decade due to population demographics as the baby boomers thrive in the earlier stages of their retirement I think the full feature villages that RYM, SUM and to some extent ARV provide will be in much higher demand. SUM in particular have the lowest level of care and are the least affected by the human resource cost challenges, have a well proven business model with strong cost disciplines and appear well placed to really thrive in a high demand for full feature retirement villages type environment. In addition they are already rolling out their model in Australia and have an experienced and highly competent development team and their CEO is a very bright man with a long proven track record in this sector. (Many will not know this so I will share, (Scott was responsible for price setting of units for many years while Julian was CEO and he's still doing a splendid job of that with three price increases last year...they can do this because their villages are in such high demand).

Looking further out, about a decade from now as the baby boomer population bulge moves in their late 80;s and early 90's I think OCA's care suites will really be an area of rich reward for OCA.

That's my long term view of it. I am not expecting much from OCA in 2022 other than a 4% unimputed dividend yield, about the same you'd get on rental property investment but with OCA, with less downside risk.

Lets hope the base its built at around $1.05 holds until there's better times ahead.

Disc: Remaining with a modest 3.6% portfolio allocation and not inclined to change that up or down any time soon.
If you want growth I'd go with SUM...they are unencumbered with the handbrake OCA have.
Disc: I am waiting for the TA on SUM to look attractive and intend to take a larger position in SUM than I have in OCA when the time is right).
If OCA bonds get to 6% I think that will be a very attractive and lower risk alternative investment than OCA shares, for those looking for a stable low risk return on some of their portfolio allocation.

Finally, the problem with building models to try and foresee the future is they're only as good as all the assumptions that go into them. Not intended to disrespect Maverick or Ferg who are both fine, likeable and astute chaps but if I was to build up a DCF model for OCA I would be making the assumption that human resource costs increase at the same 7.5% per annum they have for the last 5 years, for at least the next 5 years, probably ten years. I suspect including that assumption into their model's would make their future outcomes look a lot less attractive. Why continue to use such a high rate of human resource growth ? Because the past proves the company are completely incompetent with their attempts, (if any), to control this, their biggest cost. Sorry, but from a shareholders perspective that's the ugly truth of it right there !
I'll believe that this rate of increase can subside, only when I see it and not before because at this point it would appear its simply not within their corporate culture that discipline regarding costs is important.

All that matters is care standards and costs are completely irrelevant appears to be the culture at present. Will that culture ever change ?

[BlackPeter]

Wow! Looks like sharetrader is maturing ... great discussion on this thread - and not just Maverick and Beagle raised some real important points. This is a discussion forum at its finest ... I hope its not just the Easter spririt - long may it last!

As usual - any thing has a front and a rear side ... and it is good to be able to see both sides of the coin.

How one weighs these observations is then up to the individual - nobody can look into the future.

Just looking into two of the main issues raised ...

Property price development - yes, it is right, currently property prices go down. Having said that ... Real estate sells currently for roughly the same price it sold 6 months ago (with a wee peak between these points) ... does this really mean house owners are today that much poorer than they used to be? If your house did raise by some 20% in 2021 and dropped in the last handful of months by 5% - are you really a poor bugger now and can't afford anymore to buy into a retirement home?

Given that properties are normally hold for many years I'd say - it does not matter at all to most of the owners and they will happily go into a retirement home if and when they need to. Sure - alarmist messages about property prices might impact on the day to day hype of share trading, but I don't see them being material for the long term price of any retirement village.

We bought our last home in 1995 - and the GV roughly five folded since then. To be honest - it does not make any difference to us, whether it will fall back to just quadrupling our purchase price or whether it will go up further - so, maybe we can stop worrying about a (light) pull back in property prices. Last time I checked they didn't produced more land - i.e. I don't expect a drastic fall.

Staff costs Sure - they did increase and might get another top up this year, but I see what we have now pretty much as the peak. Borders are opening and most of the care roles in any retirement home don't need fully qualified nurses (sure, some do). Given that NZ belongs to the 10% of richest countries in the world (on a per head income basis), there are logically 90% of the world population pretty happy if they are allowed to come here and work here ... and not just the Philippinos and Indonesians but as well the Ukrainians (to mention just one other group of poor buggers) have plenty of fine and well trained nurses who would love to work here for our salaries if we allow them to do that. I am sure we will get rid in the next election of our anti immigration government - and then it will be no problem to hire outstanding care staff for a reasonable (nota bene - I didn't say cheap) price. So - I don't see the rise in staffing costs as a long term problem for this or any other retirement village.

Now - I have no clue how the short term income development of OCA will look like, but for what it is worth, analysts forecast for the coming years in average 10 cents per share (for this year even a tad more). I think this is a good income for a share costing just above one dollar - and it clearly gives us all the future growth for free.

Happy holder.

[Habits]

With all the factors that Beagle has pointed out above for the sector, wow I am glad to be running my agri business. Started a year ago and its been a big learning curve. There are decisions around operational needs and I make decisions on whether to invest back into the business with more equipment repairs and upgrades. Ultimately that impacts the profit number for this financial year to 31 May. It is still a whole sight simpler than trying to understand OCA

[Beagle]

P.S. Two more key unknowns.
1. How long is the Covid "tail" (really long like a Kangaroo's tail or worse), or is there a tail at all and we go from one variant to another ? https://www.msn.com/en-nz/news/natio...c7cf273b620c41
2. How does construction cost inflation in the last year of a whopping 18%, (some developers are foreseeing an increase of a similar magnitude over the next year too !) affect their development profits in the medium term ? (acknowledge a lot of their current construction contracts are fixed price but the next time they ask for a fixed price construction contract on a new village it could be a real shocker !).

[Greekwatchdog]

1. As far as I am concerned the Covid tail is here forever. Sooner we realise that the better. Move on.

2. No one will give you a fixed contract unless there are pricing clauses in contract. Prices will only increase from here. As of 01/11 this year all new homes will require Thermally Broken Windows and Low E Glass. This effect All S.I and Central Plateau. It falls on councils at consenting when they direct this. Nov 1, 2023 remainder of N.I. This is MBIE over speaking a house. So on windows alone from start of this year to when this example takes effect will result in 50% increase in windows. The answer to #2 is if companies don't adjust there pricing model they get what they deserve.