New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Oceania Healthcare</h2>
Coastal Cool
Oceania Healthcare (OCA) has a development programme that is building momentum with around five years of activity already consented and impressive recent completions highlighted by the coastally located, ‘The Sands’. OCA expects to deliver over 260 units and care suites in FY20, with deliveries across a geographically diverse range of locations. We have taken a more cautious view on near-term unit pricing, resales margins and operating margins which has reduced near-term earnings forecasts slightly. NEUTRAL.
What’s changed?
<ul>
<li>Earnings: Underlying EPS FY20E -5%, FY21E -3% and FY22E -2%</li>
<li>Target Price: Down from NZ$1.13 to NZ$1.08</li>
<li>Rating:&nbsp;NEUTRAL</li>
</ul>
Development momentum
OCA is starting to deliver on the development front with impressive new product in Auckland and Tauranga opened in FY19 and with north of 250 units and care suites delivered in FY19 and expected in FY20. There is some uncertainty with expected pricing and margins in FY20 and FY21 given the diverse geographic mix of the product being delivered. While pricing will be well below Auckland levels, margins will be helped given the bulk of the activity is on brownfield sites with low historic land cost. OCA’s care strategy to improve the quality of its portfolio is the correct one, but will continue to have a near-term dilutionary impact on earnings.
Steady FY19
The new sales gain (strong volume and margin uplift in 2H19) was the key driver of OCA holding up its underlying profit at NZ$50.2m, down -4% on the pcp and close to expectations. Care revenues were back slightly impacted by asset sales and beds taken offline for redevelopment, offset by a tick up in occupancy and premium accommodation charges. Higher operating costs also adversely impacted, and were the result of wage pressures and the cost of opening new care facilities that have yet to fill.
Forecasts and target price changes
We have taken a more conservative longer term view on pricing, margins, capex and growth generally. This has been offset by the adoption of our change in risk free rate (2.75% to 2%) and market risk premium (7.75% to 7.50%). The net result is a drop in our DCF valuation from NZ$1.07 to NZ$1.04 and our target price to NZ$1.08 from NZ$1.13. In terms of near-term underlying earnings, these have dropped by -5% in FY20, -3% in FY21 and -2% in FY22.&nbsp; The key drivers have been lower new unit and resales unit prices and lower resales margins, plus lower operating margins.&nbsp;
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Investment View
OCA has future growth prospects centred on brownfield expansion and land bank acquisitions. A strong ‘needs based’ portfolio gives OCA a defensive earnings profile, which should provide resilience when we see a downturn in the residential housing market. Compared to its peers it has an older and diverse portfolio mix which provides some challenges and opportunities. NEUTRAL.
</div>
&nbsp;Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Oceania Healthcare
Coastal Cool
Oceania Healthcare (OCA) has a development programme that is building momentum with around five years of activity already consented and impressive recent completions highlighted by the coastally located, ‘The Sands’. OCA expects to deliver over 260 units and care suites in FY20, with deliveries across a geographically diverse range of locations. We have taken a more cautious view on near-term unit pricing, resales margins and operating margins which has reduced near-term earnings forecasts slightly. NEUTRAL.
What’s changed?

Earnings: Underlying EPS FY20E -5%, FY21E -3% and FY22E -2%
Target Price: Down from NZ$1.13 to NZ$1.08
Rating:&nbsp;NEUTRAL

Development momentum
OCA is starting to deliver on the development front with impressive new product in Auckland and Tauranga opened in FY19 and with north of 250 units and care suites delivered in FY19 and expected in FY20. There is some uncertainty with expected pricing and margins in FY20 and FY21 given the diverse geographic mix of the product being delivered. While pricing will be well below Auckland levels, margins will be helped given the bulk of the activity is on brownfield sites with low historic land cost. OCA’s care strategy to improve the quality of its portfolio is the correct one, but will continue to have a near-term dilutionary impact on earnings.
Steady FY19
The new sales gain (strong volume and margin uplift in 2H19) was the key driver of OCA holding up its underlying profit at NZ$50.2m, down -4% on the pcp and close to expectations. Care revenues were back slightly impacted by asset sales and beds taken offline for redevelopment, offset by a tick up in occupancy and premium accommodation charges. Higher operating costs also adversely impacted, and were the result of wage pressures and the cost of opening new care facilities that have yet to fill.
Forecasts and target price changes
We have taken a more conservative longer term view on pricing, margins, capex and growth generally. This has been offset by the adoption of our change in risk free rate (2.75% to 2%) and market risk premium (7.75% to 7.50%). The net result is a drop in our DCF valuation from NZ$1.07 to NZ$1.04 and our target price to NZ$1.08 from NZ$1.13. In terms of near-term underlying earnings, these have dropped by -5% in FY20, -3% in FY21 and -2% in FY22.&nbsp; The key drivers have been lower new unit and resales unit prices and lower resales margins, plus lower operating margins.&nbsp;

Investment View
OCA has future growth prospects centred on brownfield expansion and land bank acquisitions. A strong ‘needs based’ portfolio gives OCA a defensive earnings profile, which should provide resilience when we see a downturn in the residential housing market. Compared to its peers it has an older and diverse portfolio mix which provides some challenges and opportunities. NEUTRAL.

&nbsp;Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

New Zealand

Oceania Healthcare is New Zealand’s largest owners and operators of retirement villages.

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Oceania Healthcare (OCA NZ)

Oceania Healthcare: Coastal Cool

Oceania Healthcare Coastal Cool Oceania Healthcare (OCA) has a development programme that is building momentum with around five years of activity...

Forsyth Barr

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