New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Oceania Healthcare<br>1H21 Result&nbsp;— Inflection&nbsp;&nbsp;</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>We walk away from&nbsp;OCA's&nbsp;1H21 result with increased confidence in our view that OCA has reached an earnings inflection point&nbsp; and are on track to double annuity EBITDA from FY20 to FY23. Specifically, we note three positive developments; (1) OCA reported positive free cash flow and reduced net debt from its FY20 result (May year end), the first aged care&nbsp;operator to do so for several years; (2) annuity EBITDA grew by ~+30% versus 2H20 and +20% versus 1H20 – we firmly believe that&nbsp;OCA's&nbsp;earnings have&nbsp;troughed&nbsp;and will continue to grow over the coming years; and (3) we were encouraged by the large proportion (we estimate 80-90%) of delivered care suites that were sold under an ORA versus care beds with an associated premium accommodation&nbsp;charge (PAC).&nbsp; We reiterate our OUTPERFORM rating with an increased target price of NZ$1.70.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/184/347/original/image_95964337121611532956194.png?1611532960" class="editor-image img-responsive" data-smartkarma-image-id="184347"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_4416861474588412454iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;Small increase in annuity EBITDA driven predominately by higher&nbsp;resales&nbsp;gains, underlying earnings are largely unchanged (higher resale gains are offset by slightly higher depreciation &amp; amortisation and lower newsale gains)</li>
<li><strong>Target price</strong>:&nbsp;Increased to NZ$1.70 from NZ$1.65</li>
</ul>
</div>
<div>
<h3>Proving up the care suite model; an important milestone</h3>
</div>
<div id="m_4416861474588412454i634j">
<p>The biggest risk to our positive view on OCA centres around the so far relatively unproven care suite model whereby care beds are sold under an ORA. The care ORA model improve the economics of aged care meaningfully for two reasons. Firstly, and most importantly, it reduces the cash drag on growth. The ability to sell care suites, not just independent living units, implies a cash neutral or even cash positive development (growth). Secondly, it improves the profitability of care even with low positive house price inflation. OCA's 1H21 result was encouraging on both fronts as OCA was free cash flow positive for the first time in several years and our estimate of care annuity earnings grew ~+30% versus 1H20, a change in tack following a period of decline across the sector but particularly in the case of OCA.</p>
</div>
<div>
<h3>1H21 reaffirms our positive view</h3>
</div>
<div id="m_4416861474588412454iukmi">
<p>OCA's 1H21 result delivered on our expectations and reaffirmed our positive view given; (1) valuation metrics remain undemanding despite its recent strong share price performance. Trading on 15x P/E and ~22x EV/Annuity EBITDA on our FY22 forecasts, OCA continues to be valued at a significant discount to its larger peers despite, (2) us forecasting it has the fastest annuity EBITDA growth in the sector over the next three years, predominately driven by the frequent recycling of (deferred management fees) DMF and resales gains from the care suite product and, (3) it has the lowest cash drag in the sector, over the past few years the sector has been characterised by rising debt levels as capital recycling has become harder. OCA reported a net debt decline in 1H21 and was free cash flow positive for the first time in several years, a rare occurrence in the aged care sector.</p>
</div>
<div>
<div>
<div><strong>Aaron Ibbotson CFA</strong></div>
<div><a href="mailto:aaron.ibbotson@forsythbarr.co.nz" target="_blank" rel="noopener">aaron.ibbotson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0024</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
</div>
</div>

Oceania Healthcare 1H21 Result&nbsp;— Inflection&nbsp;&nbsp;

OUTPERFORM
We walk away from&nbsp;OCA's&nbsp;1H21 result with increased confidence in our view that OCA has reached an earnings inflection point&nbsp; and are on track to double annuity EBITDA from FY20 to FY23. Specifically, we note three positive developments; (1) OCA reported positive free cash flow and reduced net debt from its FY20 result (May year end), the first aged care&nbsp;operator to do so for several years; (2) annuity EBITDA grew by ~+30% versus 2H20 and +20% versus 1H20 – we firmly believe that&nbsp;OCA's&nbsp;earnings have&nbsp;troughed&nbsp;and will continue to grow over the coming years; and (3) we were encouraged by the large proportion (we estimate 80-90%) of delivered care suites that were sold under an ORA versus care beds with an associated premium accommodation&nbsp;charge (PAC).&nbsp; We reiterate our OUTPERFORM rating with an increased target price of NZ$1.70.


What's changed?&nbsp;



Earnings:&nbsp;Small increase in annuity EBITDA driven predominately by higher&nbsp;resales&nbsp;gains, underlying earnings are largely unchanged (higher resale gains are offset by slightly higher depreciation &amp; amortisation and lower newsale gains)
Target price:&nbsp;Increased to NZ$1.70 from NZ$1.65



Proving up the care suite model; an important milestone


The biggest risk to our positive view on OCA centres around the so far relatively unproven care suite model whereby care beds are sold under an ORA. The care ORA model improve the economics of aged care meaningfully for two reasons. Firstly, and most importantly, it reduces the cash drag on growth. The ability to sell care suites, not just independent living units, implies a cash neutral or even cash positive development (growth). Secondly, it improves the profitability of care even with low positive house price inflation. OCA's 1H21 result was encouraging on both fronts as OCA was free cash flow positive for the first time in several years and our estimate of care annuity earnings grew ~+30% versus 1H20, a change in tack following a period of decline across the sector but particularly in the case of OCA.


1H21 reaffirms our positive view


OCA's 1H21 result delivered on our expectations and reaffirmed our positive view given; (1) valuation metrics remain undemanding despite its recent strong share price performance. Trading on 15x P/E and ~22x EV/Annuity EBITDA on our FY22 forecasts, OCA continues to be valued at a significant discount to its larger peers despite, (2) us forecasting it has the fastest annuity EBITDA growth in the sector over the next three years, predominately driven by the frequent recycling of (deferred management fees) DMF and resales gains from the care suite product and, (3) it has the lowest cash drag in the sector, over the past few years the sector has been characterised by rising debt levels as capital recycling has become harder. OCA reported a net debt decline in 1H21 and was free cash flow positive for the first time in several years, a rare occurrence in the aged care sector.



Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Oceania Healthcare: 1H21 Result — Inflection