OCA - Oceania Group - retirement villages

[Davexl]

Please no.
Bad enough with goodwill and intangibles valuations.
Think we are best to make our own "valuations" of brands.

On that basis Percy Coca-Cola would be worth next to nothing. Brands are definitely valuable, they just need to be done right...Just sayin'

[Beagle]

Underlying Net Profit after tax 2018 $52.1m
Underlying Net Profit after tax 2019 $49.7m
Underlying Net Profit after tax 2020 $54.0m* *My estimate if they can do about $30m in the second half this year

It occurs to me that all the bells and whistles they ring about how they're changing their business model amount to ostensibly nothing as the increased costs of operations eat up all the gains. The real worry is the easy gains from sales of prime units with stunning views at the Sands and Meadowbank have already been booked and now they're into the secondary units with poor or no views which will be a much harder sell.

Growth company or just a good honest stable care service provider that's doing a good job looking after elderly residents ?, you be the judge.

Please don't start me off on the intangible asset valuation debate...oh okay I will go there just for others amusement...all I will say is as a bean counter I have never seen a value put on intangible assets that I believe in and the value has a truly remarkable habit of simply disappearing if you try and realise it. The other curious thing about intangible assets is that if you don't keep advertising to support your brand asset the brand value goes down. So yes they're an asset or sorts, but they're also a liability because intrinsically if you don't support the brand value asset with extensive amounts of expensive advertising it loses value. So that's settled then, and its clear as mud, they're an asset that confers upon the owner a liability to spend huge sums of money on a regular basis so they're both an asset and a liability... therefore what seems like a good idea is to actually net the asset off against the liability and we've come full circle and there is no value at all lol... and with that remarkable exercise in double entry accounting and offsets its time for another drink

In conclusion, be VERY CAUTIOUS of any company who's balance sheet is made up predominantly of intangible assets.

[value_investor]

My thoughts on the result:

- Overall a mixed result, obviously a 17% gain in underlying profit is not a bad thing. It shows the company has promise but kinks that need to be sorted out.

- A core competency is care, and the care segment has really been hampered by a staff cost that is increasing faster than the revenue on a percentage basis. Not something that you want to see, considering the care side has dipped in FY19 and FY18. The conversion of standard beds to care suites is not going to be lucrative at all for the company in a few years time I feel.

- The biggest driver for growth then falls on the development side, and the margins. The company has done unbelievably well to deliver so many projects concurrently and on time, with such 88% gain in realised margins (perhaps this is their real core competency). While, sales of new units aren't as strong as some might have hoped I understand why. A new unit in Meadowbank or Browns Bay is not accessibly to I'd say 90% of retirees. We've seen a similar thing with SUM committing to increasing their build rate and dropping it back again. The market might be a bit too saturated right now.

- Operating cash flow is up by 21% as per the cash flow statement which is very positive, supports paying a dividend a bit more which I wasn't a fan of previously considering all the spending. I'm not a fan of straddling more debt but its lesser of a factor when you can borrow at a rate with a 2 infront of it and you need it. I'm just not sure when you plan to build 265 units in the FY, and only sell 84 in the half year and you have unsold units as per the above. Its not a time to accelerate building to me but doubling down on selling them.

If you assume a YE gain of 17% underlying profit, that gives you $58.1m underlying profit. Which gives me a EPS of $0.094 and a forward PE of 14 (rounded). At the current climate, its a solid buy for the future if you see it through. The equation is if they can sell units and realise development margin faster to cover the falling care profits.

Disc: Continue to hold a small position

[trader_jackson]

Oceania has mentioned how their development margin is about 30% in Auckland... along with seeing how this margins continues to track (and among several other things) it will be interesting to see how 2 key Auckland developments (also both higher priced complexes) are going:

I will be interested in how sales are going at The Sands (64 apartments and 44 care - completed May 19)
It seemed to me this morning there were at least several units still not occupied... given it has been several months since the facility re-opened and the previous talk about "strong demand", it would be (for me) a bit of a disappointment to still see, say, over a quarter of them not yet settled

Will also be interesting to see how Meadowbank stage 4 (64 apartments and 44 care - completed May 19) sales are going, and stage 5 (26 apartments - due this FY20) is progressing

seems sales in both of these premium areas are indeed a bit slow... development margins okay at least

[Blue Skies]

Beagle ...."The real worry is the easy gains from sales of prime units with stunning views at the Sands and Meadowbank have already been booked and now they're into the secondary units with poor or no views which will be a much harder sell. "

Much as I hesitate to disagree with you Beagle, on this point I don't see this as an issue.
Whether it's St Marys Bay or Parnell or Remuera etc, not all properties have sea views, yet we know there is always strong demand & never any bargains because location is everything & not everyone can afford to buy premium.

Both the Sands & Meadowbank are top locations, & to put it crudely will be v attractive to those wanting to be with 'their sort of people' even if they can't afford the prime units with sea views, and also to those wanting to treat themselves to a brand spanking new unit.

[Jay]

Some of the St Heliers Units will have amazing views - and a premium price to go with I imagine, while other not so much.

Disc: Sold out on the latest increase and into sum other share plus HLG with about 7% divi, better than the 2 odd % from here while we wait

[Beagle]

Much as I hesitate to disagree with you Beagle, on this point I don't see this as an issue.
Whether it's St Marys Bay or Parnell or Remuera etc, not all properties have sea views, yet we know there is always strong demand & never any bargains because location is everything & not everyone can afford to buy premium.

Both the Sands & Meadowbank are top locations, & to put it crudely will be v attractive to those wanting to be with 'their sort of people' even if they can't afford the prime units with sea views, and also to those wanting to treat themselves to a brand spanking new unit.

The main factor was the sales at The Sands are much slower now than when they first started. They sold only 4 in the last 3 months , while they sold 18 in the first 3 months. Maverick

Blue Skies - What developers typically find is that there is money set aside from the wealthy waiting fore the premium units and we see evidence of that with Mavericks quoted figures wherein old money had money set aside for when the premium units became available and they got snapped up very quickly. These weren't cheap with talk that one buyer bought two of the premium units and asked for them to be reconfigured into one large one. The sales evidence above is a worry because the Auckland market has been noticeably stronger in the final quarter and yet they only sold 4.

Absolutely there's a big price difference between units with stunning sea views and those without but developers typically find the premium units a much easier sell and the numbers above very much support my contention that the remaining units will be much more difficult to shift as well as being much lower value so realised development margin on remaining units will be both slower and a lot lower.

Agree 100%, birds of a feather like to flock together Has always been this way and always will be.

I really don't like how the ongoing deterioration in care profitability is impacting this company and even as the new units steadily get rolled out under the new occupation right agreement model over the next few years the ongoing deterioration in care profitability looks likely to squander a lot of the gains. I think this company continues to materially underperform the sector.

[BlackPeter]

Blue Skies - What developers typically find is that there is money set aside from the wealthy waiting fore the premium units and we see evidence of that with Mavericks quoted figures wherein old money had money set aside for when the premium units became available. These weren't cheap with talk that one buyers bought two of the premium units and asked for them to be reconfigured into one large one. The sales evidence above is a worry because the Auckland market has been noticeably stronger in the final quarter and yet they only sold 4.

Absolutely there's a big price difference between units with stunning sea views and those without but developers typically find the premium units a much easier sell and the numbers above very much support my contention that the remaining units will be much more difficult to shift as well as being much lower value so realised development margin on remaining units will be both slower and a lot lower.

Agree 100%, birds of a feather like to flock together

I really don't like how the ongoing deterioration in care profitability is impacting this company and even as the new units steadily get rolled out under the new occupation right agreement model over the next few years the ongoing deterioration in care profitability looks likely to squander a lot of the gains.

Beagle, just wondering, how would you see the development of the age care market in NZ? It sounds like that (in your view) even companies like OCA won't be able to recover the high cost for caring for people despite them looking after the better off part of the population?

Lets face it - the only reason SUM looks better in your books is because it hardly provides any care. In a scenario where old people care becomes fast uneconomical investors will quickly pull out of this market. Does this mean that in your view there will be no market for private care, but the state will have to chip in to look after a rapidly increasing old population?

I think we all know how state care for everybody would look like. Is this what you envisage for New Zealand or will there be still a lucrative market for well off people in need of care, which OCA would be well placed to occupy?

[trader_jackson]

Beagle, just wondering, how would you see the development of the age care market in NZ if (in your view) even companies like OCA who are (at least with their new offers) caring for the better off part of the population would not be able to make a sufficient buck due to high salaries without a chance for the provider to recover their cost?

Lets face it - the only reason SUM looks better in your books is because it hardly provides any care. In a scenario where old people care becomes fast uneconomical and at the same time the number of people needing care skyrocketing due to demographic and health related reasons (obesity epidemics and similar) this could only mean that investors quickly pull out of this market, and the state having to chip, unless we expect the old people in need for care sleeping under the bridges of Auckland.

I think we all know how the alternative (state care for everybody) would look like. Is this what you envisage for New Zealand or will there be a lucrative market for well off people in need for care, which OCA would be well placed to occupy?

My very brief take on it: those that don't have a decent continuum of care will almost certainly do better in the short run, but their days are numbered in the long run
(who would want to go somewhere that has a nice apartment but little, no, or poor quality care options for when you can't be in that apartment anymore?)

[winner69]

That big tax credit gives a clue as to how much Oceania lose from non-property activities

I reckon those loses were at least $15m in H1 .....probably losses from looking after old people

In contrast it appears Arvida and Ryman make quite a lot from non-property activities while Summerset make a little.

Reading between the lines of Beagles posts losses from Oceania’s care activities might continue for some time.