OCA - Oceania Group - retirement villages

[Brain]

The reason that I am positive about the future for OCA is their focus on care. This means higher turnover of the ORAs for the care suites and also the greater attractiveness of the independent apartments because transfer to a care unit within the same village is more likely. Very hard to quantify this but it is part of the trick to investing in identifying the tailwinds

[fish]

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.

Dear Beagle,

After reading your link about closures I still do not understand why this applies to Oceania.In those cases quoted are you not comparing apples with oranges(or lemons)
Is it not possible for Oceania to charge for late stage care and add an appropriate profit margin?

[Beagle]

Dear Beagle,

After reading your link about closures I still do not understand why this applies to Oceania.In those cases quoted are you not comparing apples with oranges(or lemons)
Is it not possible for Oceania to charge for late stage care and add an appropriate profit margin?

Hi fish,
As it currently stands the significant majority of OCA's business model is very similar to the facilities that have closed. The transformation process to be 60 / 40 new occupation right agreement model v old Govt funded care model will take approximately another 4 years to complete and another year after that to be effected, (to sell down most of the transformed units). In five years time the initial phase of the transformation process as outlined in the IPO statements will be complete. Probably take another 5 years after that to convert and sell down the rest of the units. All that time the handbrake of old unprofitable (hence all those closures) model will drag on earnings, albeit gradually at a lower rate as each year as the gradual transformation process proceeds.
Once the transformation is fully complete I believe they will have a very good business model and the demographics suggest late stage care will be in very short supply so its quite possible they will be able ratchet up their occupation licence agreement model costs. In the meantime they are hamstrung by Govt funding for the majority of their business and late stage old folks care is not a sexy vote winner.

[fish]

Hi fish,
As it currently stands the significant majority of OCA's business model is very similar to the facilities that have closed. The transformation process to be 60 / 40 new occupation right agreement model v old Govt funded care model will take approximately another 4 years to complete and another year after that to be effected, (to sell down most of the transformed units). In five years time the initial phase of the transformation process as outlined in the IPO statements will be complete. Probably take another 5 years after that to convert and sell down the rest of the units. All that time the handbrake of old unprofitable (hence all those closures) model will drag on earnings, albeit gradually at a lower rate as each year as the gradual transformation process proceeds.
Once the transformation is fully complete I believe they will have a very good business model and the demographics suggest late stage care will be in very short supply so its quite possible they will be able ratchet up their occupation licence agreement model costs. In the meantime they are hamstrung by Govt funding for the majority of their business and late stage old folks care is not a sexy vote winner.

Thanks so much for that informative reply.
I just wonder if it is not possible to improve the level of government care and improve happiness-of course charge appropriately for it.
For instance whenever I go to a rest home I see basic boring food provided.
Is it not possible to offer more exciting food for those able to pay for it ?
Icecreams,iced drinks ,dvd,internet etc
Potted plants
Massages
Hair dressing nail painting.aromatherapists
There are many things that could improve quality in those twilight times

[Maverick]

Thanks to all here for your very kind responses, I really appreciate it.


Beagle , with the greatest respect , I don't agree with your view that “care”is a handbrake on profit in OCAs case.
We can both agree the govt will never pay a cent more than the bare minimum to keep rest homes just viable, and only just. Chuck in some earthquake strengthening or something and they shut up shop.( As happened at Wanganui's Nazareth rest home mentioned in your article).
I expect OCA will never make much paying nurses and caregivers to look after elderly patients.


Where OCAs model wins is that they make money on the “room” the client is in, not the nurse. This is where I think some here have not picked up that the profit made on the new care suite sale and subsequent resales shows up in the “Village” page of the accounting. In other words the “care profit” page of accounts is rapidly diminishing as the suite profits is now reported under the “village” section and increasing.


Consider the last 3 years of care earnings (plus my updated anticipated 2020 just for fun)
FY17 31.9m, FY18 28.9m, FY19 25m, FY20 20m.
We agree that this looks very bad, now let's add to this the caresuit new sales margins and resale margins reported in the “village”section of accounts.
FY17 34m, FY18 34.9, FY19 34.2m, FY20 38.5
While this is much better it still isn't great. But remember the significant push of making loads of care suits only started 2 years ago and these are only “selling down” now.


Care suits also sell much slower from new delivery than ILUs as they are "needs based". I calculate that right now exactly half of the new deliveries built since the IPO are currently empty. While this sounds terrible , this rate of new sales uptake is actually on track in order to fill over 2-3 years ( from being newly delivered and completely empty) This rate of new suit sales is in fact tracking slightly ahead of where they need to be. One could argue they could have built even more per site. These will then resell at a self replenishing level as each client vacates. Note that they have very few empty suites for resale.


Soooo…. given the caresuit sales are now gaining good traction (and gaining more efficiency of staff too I presume) the care profit combined with the property profit component will go meaningfully upwards from here on.


Then let's not forget OCA will get 30% DMF return on a care suite every 3 years rather than 30% every 7 years that a villa attracts. Once the churn begins things really get interesting.

This is the potential reward for the risk (of execution)and the key difference between OCA and its peers.

[RTM]

Done.
~50% gone at 136. Nice profit on buy of 100.
Will consider buying back should they drop to < 110. Other than that...have some money looking for a new home.
Looking forward to the Jan result with interest.
Sure beats the dividend tho while I wait.

Topped up again @ $1.19.
Wasn't sure they would drop again to 110’ish, and some nice cash to help with the boat anti-foul later in the year.
Thanks Maverick, Beagle etc for your considered analysis.

[King1212]

Topped up again @ $1.19.
Wasn't sure they would drop again to 110’ish, and some nice cash to help with the boat anti-foul later in the year.
Thanks Maverick, Beagle etc for your considered analysis.

u made a right decision, out of many stocks at NZX..i think OCA is in the best position now as no matter what happen, trade war, virus etcs...these oldies need to be looked after..people are getting old and money are kept coming from the government.

Good on u!

[MauroNZ]

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.

Hey Mav this is an outstanding post. I have to say is still a work in progress the kind of analysis people like you and Beagle do and sometimes I don't have the brain energy to go through all the things I can only imagine you guys do (because of a day job). In saying that I couldn't consider OCA as it seems very entangled but this was only my suspicion.

I hope you go to the SUM AGM. Thank you!.

[Beagle]

Beagle , with the greatest respect , I don't agree with your view that “care”is a handbrake on profit in OCAs case.
We can both agree the govt will never pay a cent more than the bare minimum to keep rest homes just viable, and only just. Chuck in some earthquake strengthening or something and they shut up shop.( As happened at Wanganui's Nazareth rest home mentioned in your article).
I expect OCA will never make much paying nurses and caregivers to look after elderly patients.
Hi Mav. Firstly let me say that I have a ton of respect for all the time you put into analysing this stock and I know you have built a comprehensive spreadsheet model to model out the various aspects of their operation.
Given that for the next few years basic Govt funded operations form the bulk of their business model how is this not a handbrake on their growth ?
They have to change, Earl has admitted returns on the traditional care model are inadequate so the "pain" of the transition process itself is also a handbrake, until its not. By pain, clearly I refer too having to keep staff on retainer while old facilities are demolished and new ones rebuilt and possible inefficient staffing level's while new blocks of care suites gradually fill up


Where OCAs model wins is that they make money on the “room” the client is in, not the nurse. This is where I think some here have not picked up that the profit made on the new care suite sale and subsequent resales shows up in the “Village” page of the accounting. In other words the “care profit” page of accounts is rapidly diminishing as the suite profits is now reported under the “village” section and increasing.


Consider the last 3 years of care earnings (plus my updated anticipated 2020 just for fun)
FY17 31.9m, FY18 28.9m, FY19 25m, FY20 20m.
We agree that this looks very bad, now let's add to this the caresuit new sales margins and resale margins reported in the “village”section of accounts.
FY17 34m, FY18 34.9, FY19 34.2m, FY20 38.5
While this is much better it still isn't great. But remember the significant push of making loads of care suits only started 2 years ago and these are only “selling down” now.


Care suits also sell much slower from new delivery than ILUs as they are "needs based". I calculate that right now exactly half of the new deliveries built since the IPO are currently empty. While this sounds terrible , this rate of new sales uptake is actually on track in order to fill over 2-3 years ( from being newly delivered and completely empty) This rate of new suit sales is in fact tracking slightly ahead of where they need to be. One could argue they could have built even more per site. These will then resell at a self replenishing level as each client vacates. Note that they have very few empty suites for resale.


Soooo…. given the caresuit sales are now gaining good traction (and gaining more efficiency of staff too I presume) the care profit combined with the property profit component will go meaningfully upwards from here on.


Then let's not forget OCA will get 30% DMF return on a care suite every 3 years rather than 30% every 7 years that a villa attracts. Once the churn begins things really get interesting.

This is the potential reward for the risk (of execution)and the key difference between OCA and its peers.

This I totally agree with but we are probably 5-6 years away from really meaningful (in the context of the size of their total operation), churn really making its presence substantially felt. From about 2027 or more likely 2030 when a full transition of all facilities has been effected there's a chance this model outperforms the sector due to the churn rate. For at least the first half of this decade I think there's every chance this underperforms the rest of the retirement sector simply because others are not carrying the legacy issues of substantial parts of their business being under-funded and others don't have to suffer the financial pain of the transformation process. That's how I see it but I do acknowledge that they are staying on track and executing the transformation of their business model in a timely and profitable manner and they have a vast amount of their future planned transformation already consented. I think with a stronger / more commercially minded CEO this could really fly at some future stage, probably much later this decade but I will observe from the sidelines at this stage. I hope I survive the coronavirus (late 50's high blood pressure, I am vulnerable) to see the day this really takes off in terms of profit and share price growth.

I think we are looking at this from different perspectives. I am NOT saying OCA is bad value here. I am NOT saying the transformation process isn't working and won't be effective in the years ahead. I AM saying SUM other sector participants are NOT handicapped by having such a large percentage of their business model giving such a grossly inadequate return on investment, until years later it isn't.

In terms of our market at a macro level, and the global markets generally, I think 2020 is shaping up as a very difficult year and to be honest CASH looks very good to me as an asset class at present.
Best wishes to holders

[LAC]

Trimmed a few SUM and OCA and added some RYM today.
I like all 3 so just thought I should build a position in the 3rd