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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Summerset Group Holdings / Equity Bottom-Up

<h2>Summerset Group<br>1H20 Result — Gearing Up For Summer</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Summerset&nbsp;Group's (SUM) 1H20&nbsp;underlying net profit was largely&nbsp;pre-announced, however, we like the mix of these results. High quality annuity earnings in the form of deferred management fees and re-sale gains were ahead of our expectations while more volatile new sale gains were below, driven primarily by a less Auckland centric, and therefore lower priced, new sales mix. We&nbsp;were also encouraged by the relatively stable gearing ratios despite&nbsp;COVID-19 headwinds. We increase our FY20 estimates by c. 10% primarily driven by higher re-sales but leave our FY21/22 estimates largely unchanged. SUM is our preferred aged-care stock; we retain our OUTPERFORM rating and increase our target price to NZ$9.15 from NZ$9.00.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/104/original/image_4970284621597709300654.png?1597709303" class="editor-image img-responsive" data-smartkarma-image-id="153104"></figure>
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<h3>Net debt increasing slightly less than expectations despite headwinds; but stable gearing ratios at least a year away</h3>
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<p>We view net debt development as a key area of focus for the sector. SUM added a further NZ$56m in 1H20, slightly below our estimate of NZ$66m, despite higher unit delivery, driven primarily by lower land purchase cash flow. Looking ahead, we believe net debt will increase by a further c. NZ$80m to c. NZ$700m by year end FY20, depending on land purchases. Company commentary suggests that FY20 will (again) be a year of increased leverage as they complete several capex hungry multi-storey buildings, but we believe FY21 is likely to see a plateauing of leverage, although is dependent on Victoria's capex profile. We have increased our FY20 capex estimates due to our increased unit delivery expectations to 325 units (previously 300 units), the mid-point of guidance.&nbsp;</p>
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<h3>New sales and re-sales tracking well ahead of last year post lock-down</h3>
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<p>SUM's commentary suggested that new sales and re-sales were tracking c. 50% and 30% above last year's level post lock-down, implying that a portion of the reported inflated re-sales stock levels has already begun to reduce. Accordingly, we have increased our FY20 new and re-sale sales forecasts. We understand that the increased resale stock is not only driven by COVID-19 related restrictions, but also partly by increased general churn, a reversal of the last few years trend of falling churn. We acknowledge that there is a large degree of noise (randomness) in these numbers, but it does suggest that the trend of falling churn/longer tenancies may not be as strong as the last few years would suggest.&nbsp;</p>
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<h3>Dividends reduced by 0.4cps vs 1H19 — we expect a reversal in 2H</h3>
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<p>Dividends of 6cps (down 0.4cps on pcp) was our one area of disappointment, below our 7cps. Reducing the dividend by 0.4cps from last year saved SUM less than NZ$1m in cash, but it put a dent in 7 years of un-interrupted DPS growth. While the aged-care sector is not part of the extensive yield universe in NZ, we believe confidence to pay dividends is an important signalling mechanism to investors, particularly in light of the low cash conversion. We believe that RYM's valuation premium to SUM is, to a significant degree, driven by its long track record of delivering EPS/DPS growth and being partly priced by international investors with a lower cost of capital for NZ stocks. We are looking for an 8.2cps DPS in 2H, taking full year DPS to 14.2, a nominal growth of 0.1cps.</p>
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<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>
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<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>
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Summerset Group 1H20 Result — Gearing Up For Summer

OUTPERFORM
Summerset&nbsp;Group's (SUM) 1H20&nbsp;underlying net profit was largely&nbsp;pre-announced, however, we like the mix of these results. High quality annuity earnings in the form of deferred management fees and re-sale gains were ahead of our expectations while more volatile new sale gains were below, driven primarily by a less Auckland centric, and therefore lower priced, new sales mix. We&nbsp;were also encouraged by the relatively stable gearing ratios despite&nbsp;COVID-19 headwinds. We increase our FY20 estimates by c. 10% primarily driven by higher re-sales but leave our FY21/22 estimates largely unchanged. SUM is our preferred aged-care stock; we retain our OUTPERFORM rating and increase our target price to NZ$9.15 from NZ$9.00.


Net debt increasing slightly less than expectations despite headwinds; but stable gearing ratios at least a year away


We view net debt development as a key area of focus for the sector. SUM added a further NZ$56m in 1H20, slightly below our estimate of NZ$66m, despite higher unit delivery, driven primarily by lower land purchase cash flow. Looking ahead, we believe net debt will increase by a further c. NZ$80m to c. NZ$700m by year end FY20, depending on land purchases. Company commentary suggests that FY20 will (again) be a year of increased leverage as they complete several capex hungry multi-storey buildings, but we believe FY21 is likely to see a plateauing of leverage, although is dependent on Victoria's capex profile. We have increased our FY20 capex estimates due to our increased unit delivery expectations to 325 units (previously 300 units), the mid-point of guidance.&nbsp;


New sales and re-sales tracking well ahead of last year post lock-down


SUM's commentary suggested that new sales and re-sales were tracking c. 50% and 30% above last year's level post lock-down, implying that a portion of the reported inflated re-sales stock levels has already begun to reduce. Accordingly, we have increased our FY20 new and re-sale sales forecasts. We understand that the increased resale stock is not only driven by COVID-19 related restrictions, but also partly by increased general churn, a reversal of the last few years trend of falling churn. We acknowledge that there is a large degree of noise (randomness) in these numbers, but it does suggest that the trend of falling churn/longer tenancies may not be as strong as the last few years would suggest.&nbsp;


Dividends reduced by 0.4cps vs 1H19 — we expect a reversal in 2H


Dividends of 6cps (down 0.4cps on pcp) was our one area of disappointment, below our 7cps. Reducing the dividend by 0.4cps from last year saved SUM less than NZ$1m in cash, but it put a dent in 7 years of un-interrupted DPS growth. While the aged-care sector is not part of the extensive yield universe in NZ, we believe confidence to pay dividends is an important signalling mechanism to investors, particularly in light of the low cash conversion. We believe that RYM's valuation premium to SUM is, to a significant degree, driven by its long track record of delivering EPS/DPS growth and being partly priced by international investors with a lower cost of capital for NZ stocks. We are looking for an 8.2cps DPS in 2H, taking full year DPS to 14.2, a nominal growth of 0.1cps.



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





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



Summerset Group: 1H20 Result — Gearing Up For Summer