OCA - Oceania Group - retirement villages

[Maverick]

After 2 weeks of ENORMOUS effort to figure out what went wrong between my estimate and actual HY results I've made it to the end of the rainbow. In my defence I always stated my prediction seemed too good to be true but I couldn't see where my workings might be wrong... well now I have.
There where 3 key mistakes/ assumptions I made which may be of interest to others here;
1. The emptying of beds at Lady allum has started ( I thought it was programmed further out). This obviously hurts revenue while maintaining staff costs. This is not a problem per se , just my own anticipated timing of it.
2. Here is the biggie …..I thought ILU new sales would be linear. In fact new ILU sales happen mostly in HY2. I've learned old clients don't venture out in the cold. This explains why the HY2 result is always MUCH stronger. ( I assumed it was always just a delivery, timing thing)So the large Sands and Meadowbank new sales margins ( and large DMFs thereafter)won't really show until the upcoming HY2.
3. On the negative side, “Depreciation” is rapidly rising and will get much greater as they deliver more new stuff. At least this is a non cash expense.

I have spent several weeks on it now and projected out the full pipeline development to completion and FWIW I see care profit declining substantially further for one more year before swinging back upwards as care suits exponentially fill up. These new care suit sales , then DMFs, will increasingly overcompensate for future care beds being decommissioned.


IMO is that OCA’ s reconstruction model is too complex for anyone with a real day job to apply the required focus to fully understand it ( those in meaningful employment can always just take Earls word that things are hunky dory, or otherwise follow the directors lead who are substantially buying up lately). OCAs current overhaul programme is just a beast with many moving parts and with many combinations of deconstruction,revamping, rebuilding methods which all take a lot of separate consideration.
It's not possible to communicate how this complex model works in a chat room using only a few paragraphs at a time, even this post is too long.
One really needs visuals, laser pointers and a break for morning tea to get how this will most likely play out.
For anybody less than “advanced “ in NZ retirement stocks I recommend studying SUM instead. It's much easier to understand buying a paddock and building “monopoly” type units. They are obviously proving an extremely successful model too with lots of history.


So with what ever credibility I have left, my revised prediction for FY20 is underlying 60-61m.
And beyond that it just goes from strength to strength so I'm a very happy long term holder. I wish I had more moola to buy even more in the current opportunity Maccas has just presented us.

[Grimy]

Thanks Maverick. Appreciate the time you put into this. I am a holder and always look forwards to your thoughts.
Cheers.

[winner69]

Good post Maverick. No doubt you are heaps wiser for the in-depth stuff.

Professor Aswath Damodaran known as ‘The King of Valuation) has a saying - Values don't come from models, but from stories (good or bad).

That mantra seems to apply here in that ‘the story’ is far important and a better guide to what Oceania might be worth than those fandangled things like short term earnings growth, PE ratios, PB ratios etc etc.q

Not one of my better investments but I still hold ...for the story

[Snow Leopard]

I would not beat yourself up too much over the slight mismatch between your prediction and the reality on the day.

In many ways making correct short term predictions is harder than making long term predictions partly because precise timing of events can affect results significantly but mostly because everybody forgets what you said 3 years ago .

Oceania is a company, that to a large degree, is transforming itself from a less profitable to a more profitable care model and in the longer term is currently looking good. [Wait 3 years before condemning that statement], but in the short term that does come at a cost.

The question that we will start need to ask, and finding the answers to is where does OCA go once the current transformation is complete?
If the decision makers get that right then this is not [slightly under] fair value so much as cheap as.

[Beagle]

Hi Mav, Don't sweat it mate, predicting the future is always fraught with risk. For what its worth I think underlying profit will only match or just exceed FY19...my best guess is about $50-55m.

Growth will happen in the years ahead but it will be slow and hampered by ongoing significant increases in the cost of providing intensive care services. I prefer the business model of SUM which as mentioned before has the tremendous natural advantage in that it is much less dependent on human resources.

Don't put all your eggs in one basket mate as it does turn out, you can have too many. My view is that very late stage care is not going to give the best return on capital no matter what pricing model one uses. So many have closed due to the very steeply rising cost of providing services.
https://www.nzherald.co.nz/business/...+February+2020
I think these guys are going to have to take a haircut on their thinking of what their facility is really worth.

[Snoopy]

I would not beat yourself up too much over the slight mismatch between your prediction and the reality on the day.

In many ways making correct short term predictions is harder than making long term predictions partly because precise timing of events can affect results significantly.

The question that we will start need to ask, and finding the answers to is where does OCA go once the current transformation is complete?

After 2 weeks of ENORMOUS effort to figure out what went wrong between my estimate and actual HY results I've made it to the end of the rainbow. In my defence I always stated my prediction seemed too good to be true but I couldn't see where my workings might be wrong... well now I have.

There were 3 key mistakes/ assumptions I made <snip>

IMO is that OCA’ s reconstruction model is too complex for anyone with a real day job to apply the required focus to fully understand it ( those in meaningful employment can always just take Earls word that things are hunky dory, or otherwise follow the directors lead who are substantially buying up lately).

OCAs current overhaul programme is just a beast with many moving parts and with many combinations of deconstruction,revamping, rebuilding methods which all take a lot of separate consideration.
It's not possible to communicate how this complex model works in a chat room using only a few paragraphs at a time, even this post is too long.
One really needs visuals, laser pointers and a break for morning tea to get how this will most likely play out.
For anybody less than “advanced “ in NZ retirement stocks I recommend studying SUM instead. It's much easier to understand buying a paddock and building “monopoly” type units. They are obviously proving an extremely successful model too with lots of history.

So with what ever credibility I have left, <snip>

Hey Mav your credibility has just gone sky high. Real credibility is not gained by constantly explaining how right you are or how complex your modelling is. Real credibility is being able to learn from mistakes which often only appear as mistakes with the benefit of hindsight. And of course we all make mistakes even if some are more forthcoming at admitting that than others.

Good words of wisdom too from the wise old Snow Leopard, except I would go further. It is much easier to predict the long term future of a company than the short term future. That is why I treat broker reports, that tend to focus on the next twelve months by nature with a healthy degree of scepticism. The timing of one off developments, and sometimes even those developments themselves when considered as part of the bigger picture can end up being long term irrelevant.

I am glad you have shared what you have done with this community. The education of the 'Oceania Ignorant' of which I count my self one, has been greatly enriched by your work. Sorry it ended up costing you your job, but we all make sacrifices eh!

SNOOPY

[petty]

Thanks Mav, as someone with a busy day job and limited accountanting nous I appreciate your time to research and willingness to share. I’m looking to accumulate more over the next year where opportunity presents.

[value_investor]

Re: Maverick

It happens to everyone, I know that once you get passionate about something it gets hard for others to pull you out and there's no shame in that. A lot of analysis was done from you and you weren't the only one that was led astray from the difficulty of the care side of the business.

I'm still holding my position and not accumulated from the report, I still think that the care side of the business will take years to adjust and there will be even more transitional pain for a longer time than originally anticipated. While still a excellent long term hold, I think its going to be longer than the current FY and the next one too. Then in future, I'm not sure that the side of the business will even guarantee the desired returns. Unfunded government wage costs is not a term you want to be associated with.

The real core competency for me is actually the development side of higher end ILU's imo. The fact that the timelines of these projects have not slipped, like we have seen in other companies is excellent. The acquisition of land in desirable areas and the ability to execute is hard. They've obviously got a very good team of project managers and development team.

I see a underlying profit in the range of $55-60m. The discrepancy is range is due to the unknown of the care business and the cost creeping up. At $60m is still gives a 20% gain in underlying profit and a forward PE of 12.2 which is excellent. I'm just not seeing enough to see them executing this FY but I've been wrong before on plenty of things.

[Baa_Baa]

So with what ever credibility I have left, my revised prediction for FY20 is underlying 60-61m. And beyond that it just goes from strength to strength so I'm a very happy long term holder. I wish I had more moola to buy even more in the current opportunity Maccas has just presented us.

Thanks for posting Mav, if I could give another Rep I would but it says I have to share it around. So in the open, thank you for your analysis and honesty. My OCA enjoyed a 2.3c ex-divi (unimputed) on Friday which will DRP into my holdings on 24 Feb.

Happy as

[Beagle]

Re: Maverick

It happens to everyone, I know that once you get passionate about something it gets hard for others to pull you out and there's no shame in that. A lot of analysis was done from you and you weren't the only one that was led astray from the difficulty of the care side of the business.

I'm still holding my position and not accumulated from the report, I still think that the care side of the business will take years to adjust and there will be even more transitional pain for a longer time than originally anticipated. While still a excellent long term hold, I think its going to be longer than the current FY and the next one too. Then in future, I'm not sure that the side of the business will even guarantee the desired returns. Unfunded government wage costs is not a term you want to be associated with.

The real core competency for me is actually the development side of higher end ILU's imo. The fact that the timelines of these projects have not slipped, like we have seen in other companies is excellent. The acquisition of land in desirable areas and the ability to execute is hard. They've obviously got a very good team of project managers and development team.

I see a underlying profit in the range of $55-60m. The discrepancy is range is due to the unknown of the care business and the cost creeping up. At $60m is still gives a 20% gain in underlying profit and a forward PE of 12.2 which is excellent. I'm just not seeing enough to see them executing this FY but I've been wrong before on plenty of things.

Good post but I am south of your underlying profit so see the PE differently. Fact is OCA are 4 years away from being 60/40 new model v old model, probably 5 years away because its one thing to build new model facilities and another to sell them down. So in the 2026 financial year we should see the real effects of the change in business model make their presence felt by which stage my thinking it will be perfectly obvious that returns on old Govt funded model beds will be so bad they'll simply have to roll out their new development model throughout the rest of their facilities.

Therefore the complete transition of their business plan could drag on very late into this decade. In all that time profit growth is being handicapped by the exceptionally high costs of providing late stage care, albeit this is being recovered slightly better as each year rolls by.

My long range radar suggests they underperform the sector (for the next decade) until their business model is fully transitioned to an occupation right agreement model. Only then will be see if their model is more effective than SUM others.