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For Bars take on it
Ryman Healthcare (RYM) downgraded its expectations for FY24 underlying earnings by -13% at the midpoint due to weak new sales volumes and weak resales margins. A silver lining is that net debt is expected to remain stable, likely due to lower capex. The relative weakness in new sales (still expected to be up ~+50% from the very weak first half, but down ~-10% versus 2H23) is not that surprising, in particular as it appears to be concentrated in a few villages where the main building is yet to be completed. It is, however, disappointing that it appears to have caught RYM off guard. The housing market has not deteriorated further since RYM communicated its 2H24 expectations in November 2023, and neither does RYM indicate any further delays to its main buildings. Over the last 18 to 24 months RYM's income statement new sales have disappointed, whilst its cash collection of new sales has improved from substantially below 100% to substantially above. This change has coincided with a shift in focus from underlying earnings to cash generation. We believe this change in focus is the right one but the transition is painful. We reiterate our OUTPERFORM rating with a reduced target price of NZ$8.25.
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NZX Code |
RYM |
Share price |
NZ$4.88 |
Target price |
NZ$8.25 (from 8.80) |
Risk rating |
Medium |
C&ESG rating |
C+ |
Market cap |
NZ$3,356m |
Avg daily turnover |
659.4k (NZ$3,808k) |
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Financials: Mar/ |
23A |
24E |
25E |
26E |
Rev (NZ$b) |
0.927 |
0.954 |
1.059 |
1.159 |
NPAT* (NZ$m) |
301.9 |
273.4 |
324.3 |
376.6 |
EPS* (NZc) |
58.5 |
39.8 |
47.2 |
54.8 |
DPS (NZc) |
8.8 |
0.0 |
0.0 |
16.4 |
Imputation (%) |
0 |
0 |
0 |
0 |
*Based on normalised profits |
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Valuation (x) |
23A |
24E |
25E |
26E |
PE |
8.3 |
12.3 |
10.3 |
8.9 |
EV/EBIT |
16.7 |
18.7 |
15.9 |
14.0 |
EV/EBITDA |
14.7 |
15.9 |
13.8 |
12.2 |
Price / NTA |
0.7 |
0.6 |
0.6 |
0.5 |
Cash div yld (%) |
1.8 |
0.0 |
0.0 |
3.4 |
Gross div yld (%) |
1.8 |
0.0 |
0.0 |
3.4 |
What's changed?
- Earnings: FY24/FY25/FY26 underlying earnings reduced by -15%/-11%/-8% driven by lower new sales and resale gains
- Target price: Reduced to NZ$8.25 from NZ$8.80 due to lower annuity EBITDA estimates.
Midpoint of underlying earnings downgraded by -13%; net debt a positive, in particular relative to consensus
The two cited drivers of RYM's downgrade were: (1) slower-than-expected new sales, and (2) lower resale margins. New sales in 2H24 are still expected to be up ~+50% versus its very weak 1H24, but down ~-10% versus 2H23. New sales below prior expectations appears to be driven primarily by slow sales in a few villages where the main building is yet to be completed. Weaker resale margins is attributed to mix, but we suspect general market weakness has also played a part. RYM also stated FY24 net debt should be flat on 1H24, this was in-line with our prior expectations despite substantially lower new sales, likely driven by lower-than-expected capex. Cash flow breakeven over 2H24 bodes well for RYM's medium-term target of being free cash flow positive in FY25.
Accounting new sales below expectations but cash generation ahead — paying for old sins of early revenue recognition
RYM has a history of (very) early revenue recognition, at times recognising sales of units up to a year before cash settlement. After resetting the strategy, switching focus from underlying earnings to actual cash generation, the tables have completely turned. During FY21 and FY22 RYM collected ~85% of new sales in cash, but the last 18 months (reported) have seen RYM collect ~115% of recognised new sales revenue. While RYM's profit downgrade was disappointing, we suspect similar dynamics are at play during the current period. With a sales force now more focused on selling units out of inventory and settling for cash, and less focused on collecting fully refundable deposits, reported new sales could suffer while cash collections fare better.
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