New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Arvida Group<br>FY22 Result&nbsp;— Arena Saving&nbsp;the Bacon</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Arvida Group (ARV) reported a largely pre-released FY22 result slightly ahead of our expectations on an underlying basis,&nbsp; to a large degree driven by the Arena Living acquisition. Our above consensus opex forecasts were broadly correct, adjusting for some acquisition related costs. We estimate that organic underlying earnings were up ~+13% versus FY21, and underlying organic annuity EBITDA was up low single digits. We view this as a decent result given an estimated ~NZ$5m of additional COVID-19 related costs. The outlook struck a slightly cautious tone with low unit inventory for both resales and new sales going into FY23. We have reduced our FY23 and FY24 modestly to reflect the lower inventory levels, somewhat offset by reduced costs. We leave our NZ$2.30 target price and OUTPERFORM rating unchanged.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;We reduce our FY23–FY25 underlying earnings and annuity EBITDA by 3–7% as lower costs are more than offset by lower&nbsp;resales&nbsp;and new sales&nbsp;gains as well as higher interest expense.&nbsp;</li>
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<h3>Care earnings are suffering; management expects some relief from government funding</h3>
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<p>We estimate that "fully loaded" care earnings halved in FY22 over FY21 as costs significantly outgrew largely government funded care fees. The outlook for FY23 remains uncertain but we see&nbsp;the risk&nbsp;reward as&nbsp;balanced.&nbsp;We expect cost growth to moderate and have reduced our cost estimates modestly to reflect the non-recurring nature of some COVID-19 costs. We were also encouraged by management commentary that it expects care funding to increase "somewhere between 6% and 11%", the upper bound if pay parity with DHB nurses were to be included in a settlement and the lower bound if only inflationary costs were passed along. We are below the lower bound (4.5% increase per bed), but this is still a small increase versus our previous expectations.</p>
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<h3>Low inventory&nbsp;— a luxury problem, but still a problem</h3>
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<p>ARV's&nbsp;pre-announced record strong&nbsp;resales&nbsp;and new sales&nbsp;gains came at the price of lower FY22 year-end inventory (&lt;2% of total stock for both). The low inventory&nbsp;indicates strong demand for&nbsp;ARV's&nbsp;products and is, all else equal, good news. However, looking to FY23 implies fewer units sold out of inventory&nbsp;than we previously anticipated&nbsp;and we have reduced our expectations for FY23. With regards to new sales we also note a back-end loaded unit delivery schedule, further reducing our expectations for new sales in FY23.&nbsp;</p>
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<h3>Good value below book and at 10x FY24&nbsp;PE</h3>
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<p>At ~0.8x last reported NTA, ~16x 24m forward EV/annuity EBITDA, and ~10x 24m forward PE, we view ARV as one of the more attractive risk rewards across the market. We acknowledge headwinds in the form of care funding pressures and falling house prices but view ARV's relatively defensive portfolio as well positioned to navigate against this backdrop.&nbsp;</p>
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Arvida Group FY22 Result&nbsp;— Arena Saving&nbsp;the Bacon

OUTPERFORM
Arvida Group (ARV) reported a largely pre-released FY22 result slightly ahead of our expectations on an underlying basis,&nbsp; to a large degree driven by the Arena Living acquisition. Our above consensus opex forecasts were broadly correct, adjusting for some acquisition related costs. We estimate that organic underlying earnings were up ~+13% versus FY21, and underlying organic annuity EBITDA was up low single digits. We view this as a decent result given an estimated ~NZ$5m of additional COVID-19 related costs. The outlook struck a slightly cautious tone with low unit inventory for both resales and new sales going into FY23. We have reduced our FY23 and FY24 modestly to reflect the lower inventory levels, somewhat offset by reduced costs. We leave our NZ$2.30 target price and OUTPERFORM rating unchanged.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;We reduce our FY23–FY25 underlying earnings and annuity EBITDA by 3–7% as lower costs are more than offset by lower&nbsp;resales&nbsp;and new sales&nbsp;gains as well as higher interest expense.&nbsp;



Care earnings are suffering; management expects some relief from government funding


We estimate that "fully loaded" care earnings halved in FY22 over FY21 as costs significantly outgrew largely government funded care fees. The outlook for FY23 remains uncertain but we see&nbsp;the risk&nbsp;reward as&nbsp;balanced.&nbsp;We expect cost growth to moderate and have reduced our cost estimates modestly to reflect the non-recurring nature of some COVID-19 costs. We were also encouraged by management commentary that it expects care funding to increase "somewhere between 6% and 11%", the upper bound if pay parity with DHB nurses were to be included in a settlement and the lower bound if only inflationary costs were passed along. We are below the lower bound (4.5% increase per bed), but this is still a small increase versus our previous expectations.


Low inventory&nbsp;— a luxury problem, but still a problem


ARV's&nbsp;pre-announced record strong&nbsp;resales&nbsp;and new sales&nbsp;gains came at the price of lower FY22 year-end inventory (&lt;2% of total stock for both). The low inventory&nbsp;indicates strong demand for&nbsp;ARV's&nbsp;products and is, all else equal, good news. However, looking to FY23 implies fewer units sold out of inventory&nbsp;than we previously anticipated&nbsp;and we have reduced our expectations for FY23. With regards to new sales we also note a back-end loaded unit delivery schedule, further reducing our expectations for new sales in FY23.&nbsp;


Good value below book and at 10x FY24&nbsp;PE


At ~0.8x last reported NTA, ~16x 24m forward EV/annuity EBITDA, and ~10x 24m forward PE, we view ARV as one of the more attractive risk rewards across the market. We acknowledge headwinds in the form of care funding pressures and falling house prices but view ARV's relatively defensive portfolio as well positioned to navigate against this backdrop.&nbsp;


Arvida Group: FY22 Result — Arena Saving the Bacon