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 Limited</h2>
Central Otago Gold
Arvida Group (ARV) has settled the acquisition of&nbsp;its three new villages which has increased its portfolio to 30 villages and significantly lifted its development pipeline, giving ARV the confidence and capability to lift its build rate to 250+ units from FY21.&nbsp;OUTPERFORM.
What’s changed?
<ul>
<li>Earnings: FY20E +2%, FY21E +6% and FY22E +5%</li>
<li>Target Price: Lifted from NZ$1.65 to NZ$1.75</li>
<li>Rating:&nbsp;Remains OUTPERFORM</li>
</ul>
Further villages added to a large and geographically diverse portfolio
ARV settled the NZ$180m purchase of Bethlehem Country Club and Bethlehem Shores (both in Tauranga and adjacent to each other) and Queenstown Country club on 31 July 2019. The acquisition was funded by an NZ$50m placement, an NZ$92m rights issue, the issue of NZ$10m of shares to the vendor, and bank debt. ARV noted the acquisition is expected to be EPS accretive with a circa single mid digit lift in both FY20E (pro-forma) and FY21E EPS. Gearing (net debt to net debt + equity) post acquisition and capital raise is ~25%.
30 villages and a pipeline of 1,357 units, plus a lift in its build rate
The acquisition brings ARV’s total portfolio to 30 villages and two greenfield sites versus just 18 villages at its IPO in 2014. The portfolio comprises 3,677 units&nbsp;and beds with the 326 independent living units (ILUs) acquired. The development pipeline has lifted +37% to 1,357 ILUs, care suites and beds. ARV plans to lift its build rate to 200 ILUs, from 170 ILUs and care suites in FY20, and to 250+ ILUs and care suites from FY21 onwards, compared to 200 previously.
Upgraded earnings forecasts
The new villages have expected resales and new sales pricing well above the existing averages for the ARV portfolio. New sales are also expected to have a higher development margin than the existing portfolio.&nbsp; We have assumed that ARV sells the additional new units and resales units in line with its guidance for FY20 (proforma) and FY21. We have lifted ARV’s build rate to 200 units in FY20 and to 250+ in FY21 and FY22. These changes have lifted our underlying profit forecasts significantly, but in terms of the EPS lift, given the new shares on issue, the growth rate is in line with ARV’s guidance for FY20 and FY21.
Target price lifted to NZ$1.74
Our 12 month target price has lifted from NZ$1.64 to NZ$1.74 on the back of a similar lift in our DCF valuation. The valuation has been boosted by the adoption of our new risk free rate of 2% and market risk premium of 7.5%, which has been partially offset by more conservative, longer term growth rates.&nbsp;&nbsp;
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Investment View
ARV has future growth prospects centred on brownfield and greenfield expansion. It has a defensive earnings profile given its heavily needs-based portfolio, and has only a modest Auckland exposure. Relative to its listed peers, ARV has an attractive dividend and compares favourably on P/NAV and earnings multiples. Our rating is OUTPERFORM.
</div>
&nbsp;Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Arvida Group Limited
Central Otago Gold
Arvida Group (ARV) has settled the acquisition of&nbsp;its three new villages which has increased its portfolio to 30 villages and significantly lifted its development pipeline, giving ARV the confidence and capability to lift its build rate to 250+ units from FY21.&nbsp;OUTPERFORM.
What’s changed?

Earnings: FY20E +2%, FY21E +6% and FY22E +5%
Target Price: Lifted from NZ$1.65 to NZ$1.75
Rating:&nbsp;Remains OUTPERFORM

Further villages added to a large and geographically diverse portfolio
ARV settled the NZ$180m purchase of Bethlehem Country Club and Bethlehem Shores (both in Tauranga and adjacent to each other) and Queenstown Country club on 31 July 2019. The acquisition was funded by an NZ$50m placement, an NZ$92m rights issue, the issue of NZ$10m of shares to the vendor, and bank debt. ARV noted the acquisition is expected to be EPS accretive with a circa single mid digit lift in both FY20E (pro-forma) and FY21E EPS. Gearing (net debt to net debt + equity) post acquisition and capital raise is ~25%.
30 villages and a pipeline of 1,357 units, plus a lift in its build rate
The acquisition brings ARV’s total portfolio to 30 villages and two greenfield sites versus just 18 villages at its IPO in 2014. The portfolio comprises 3,677 units&nbsp;and beds with the 326 independent living units (ILUs) acquired. The development pipeline has lifted +37% to 1,357 ILUs, care suites and beds. ARV plans to lift its build rate to 200 ILUs, from 170 ILUs and care suites in FY20, and to 250+ ILUs and care suites from FY21 onwards, compared to 200 previously.
Upgraded earnings forecasts
The new villages have expected resales and new sales pricing well above the existing averages for the ARV portfolio. New sales are also expected to have a higher development margin than the existing portfolio.&nbsp; We have assumed that ARV sells the additional new units and resales units in line with its guidance for FY20 (proforma) and FY21. We have lifted ARV’s build rate to 200 units in FY20 and to 250+ in FY21 and FY22. These changes have lifted our underlying profit forecasts significantly, but in terms of the EPS lift, given the new shares on issue, the growth rate is in line with ARV’s guidance for FY20 and FY21.
Target price lifted to NZ$1.74
Our 12 month target price has lifted from NZ$1.64 to NZ$1.74 on the back of a similar lift in our DCF valuation. The valuation has been boosted by the adoption of our new risk free rate of 2% and market risk premium of 7.5%, which has been partially offset by more conservative, longer term growth rates.&nbsp;&nbsp;

Investment View
ARV has future growth prospects centred on brownfield and greenfield expansion. It has a defensive earnings profile given its heavily needs-based portfolio, and has only a modest Auckland exposure. Relative to its listed peers, ARV has an attractive dividend and compares favourably on P/NAV and earnings multiples. Our rating is OUTPERFORM.

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

Arvida

Arvida Group Limited: Central Otago Gold