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

Summerset Group Holdings / Equity Bottom-Up

<h2>Summerset Group</h2>
No Sunset at&nbsp;Summerset
OUTPERFORM
We have lowered our near-term earnings and our target price for SUM based on an operating scenario that assumes very little sales activity over the next six months, followed by a slow but steady recovery in operating levels over the next 18–24 months. Although near-term uncertainties remain, including investor sentiment towards the sector given the COVID-19 outbreak and how long it will be until residential sales transact, sector share prices are back substantially and already factor in a highly negative outlook. We remain confident of the long term business model for SUM. OUTPERFORM.
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<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SUM</td>
<td style="width: 48pt;">Financials:Dec/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$5.40</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">106.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">40.2</td>
<td style="text-align: left; width: 43.2pt;">61.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">133.6&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">13.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">28.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">21.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$7.20</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">47.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.8&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">27.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">59.2&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">14.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">31.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">23.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">7.1</td>
<td style="text-align: left; width: 42.6pt;">-62.1</td>
<td style="text-align: left; width: 43.2pt;">52.1</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">11.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">30.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">19.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">225.8m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">14.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">8.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.8&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.1</td>
<td style="text-align: left; width: 42.6pt;">1.1</td>
<td style="text-align: left; width: 48pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,219m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">0</td>
<td style="text-align: left; width: 42.6pt;">0</td>
<td style="text-align: left; width: 43.2pt;">0</td>
<td style="text-align: left; width: 48pt;">0</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">2.6</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">369.6k (NZ$2,348k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">2.6</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.3&nbsp;</td>
</tr>
</tbody>
</table>
Sizable&nbsp;de-rating for the sector
As is the case with all the major retirement and aged care operators, SUM is in a strong position in terms of locking down villages, protecting and quarantining residents, while also safely providing essential services to residents and a sense of community during the crisis. This should be helpful for sentiment towards the sector once things normalise. While the aged care and retirement sector share prices are down significantly year to date following the uncertainties around the COVID-19 outbreak, SUM included, they all had very strong share price performance late in CY19 and most are now back trading where they were around nine months ago.
Retain OUTPERFORM rating
The near term is very uncertain in terms of sales activity and hence the crystallising of cash deferred management fees, and from an earnings perspective from the actual level of realised gains on new sales and&nbsp;resales.&nbsp;The market is likely to remain volatile, however, we are confident with regard to the financial strength and business model of SUM once operating conditions normalise. We consider the current share price to have significant negativity priced in.
A risk factor for operators has been a near-term oversupply of retirement&nbsp;village units. This is no longer going to be the case and we expect unlisted operators will take considerably longer to re-launch development activity on the other side of this crisis. We also expect that we will now have an even larger shortage of good quality aged care beds, which were only getting built by the large integrated operators given the low returns on new direct aged care investment. Going into this crisis, good quality facilities were already essentially full and the demographics are not changing with a sharply increasing number of people aged in their&nbsp;mid 80s starting to occur. This plays into the hands of the integrated operators with a strong care brand.
While an FY21 PE of ~20x does not look like a bargain, we expect strong&nbsp;EPS&nbsp;growth in FY21 as the earnings recover. At the moment SUM is trading close to the&nbsp;NTA&nbsp;of NZ$5.02 at P/NTA&nbsp;of 1.1x and while there is downside risk to the&nbsp;NTA&nbsp;we do not expect a large correction given SUM will still deliver some new stock in 1H20. The discount rates used by&nbsp;valuers&nbsp;are relatively large and interest rates have dropped, but we expect some increased conservatism around house price growth assumptions near term. At current pricing SUM is getting little credit for its development and operational track record since listing and its large pipeline of future projects in NZ and Australia. We retain our&nbsp;OUTPERFORM rating.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Summerset Group
No Sunset at&nbsp;Summerset
OUTPERFORM
We have lowered our near-term earnings and our target price for SUM based on an operating scenario that assumes very little sales activity over the next six months, followed by a slow but steady recovery in operating levels over the next 18–24 months. Although near-term uncertainties remain, including investor sentiment towards the sector given the COVID-19 outbreak and how long it will be until residential sales transact, sector share prices are back substantially and already factor in a highly negative outlook. We remain confident of the long term business model for SUM. OUTPERFORM.
         


NZX Code
SUM
Financials:Dec/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$5.40
NPAT* (NZ$m)
106.2&nbsp;
40.2
61.2&nbsp;
133.6&nbsp;
EV/EBITDA
13.4&nbsp;
28.0&nbsp;
21.2&nbsp;
11.6&nbsp;


Target price
NZ$7.20
EPS* (NZc)
47.1&nbsp;
17.8&nbsp;
27.1&nbsp;
59.2&nbsp;
EV/EBIT
14.2&nbsp;
31.9&nbsp;
23.4&nbsp;
12.3&nbsp;


Risk rating
High
EPS growth* (%)
7.1
-62.1
52.1
n/a
PE
11.5&nbsp;
30.3&nbsp;
19.9&nbsp;
9.1&nbsp;


Issued shares
225.8m
DPS (NZc)
14.1&nbsp;
5.3&nbsp;
8.1&nbsp;
17.8&nbsp;
Price/NTA
1.1
1.1
1.0&nbsp;
1.0&nbsp;


Market cap
NZ$1,219m
Imputation (%)
0
0
0
0
Cash div yld (%)
2.6
1.0&nbsp;
1.5&nbsp;
3.3&nbsp;


Avg daily turnover
369.6k (NZ$2,348k)
*Based on normalised profits


Gross div yld (%)
2.6
1.0&nbsp;
1.5&nbsp;
3.3&nbsp;



Sizable&nbsp;de-rating for the sector
As is the case with all the major retirement and aged care operators, SUM is in a strong position in terms of locking down villages, protecting and quarantining residents, while also safely providing essential services to residents and a sense of community during the crisis. This should be helpful for sentiment towards the sector once things normalise. While the aged care and retirement sector share prices are down significantly year to date following the uncertainties around the COVID-19 outbreak, SUM included, they all had very strong share price performance late in CY19 and most are now back trading where they were around nine months ago.
Retain OUTPERFORM rating
The near term is very uncertain in terms of sales activity and hence the crystallising of cash deferred management fees, and from an earnings perspective from the actual level of realised gains on new sales and&nbsp;resales.&nbsp;The market is likely to remain volatile, however, we are confident with regard to the financial strength and business model of SUM once operating conditions normalise. We consider the current share price to have significant negativity priced in.
A risk factor for operators has been a near-term oversupply of retirement&nbsp;village units. This is no longer going to be the case and we expect unlisted operators will take considerably longer to re-launch development activity on the other side of this crisis. We also expect that we will now have an even larger shortage of good quality aged care beds, which were only getting built by the large integrated operators given the low returns on new direct aged care investment. Going into this crisis, good quality facilities were already essentially full and the demographics are not changing with a sharply increasing number of people aged in their&nbsp;mid 80s starting to occur. This plays into the hands of the integrated operators with a strong care brand.
While an FY21 PE of ~20x does not look like a bargain, we expect strong&nbsp;EPS&nbsp;growth in FY21 as the earnings recover. At the moment SUM is trading close to the&nbsp;NTA&nbsp;of NZ$5.02 at P/NTA&nbsp;of 1.1x and while there is downside risk to the&nbsp;NTA&nbsp;we do not expect a large correction given SUM will still deliver some new stock in 1H20. The discount rates used by&nbsp;valuers&nbsp;are relatively large and interest rates have dropped, but we expect some increased conservatism around house price growth assumptions near term. At current pricing SUM is getting little credit for its development and operational track record since listing and its large pipeline of future projects in NZ and Australia. We retain our&nbsp;OUTPERFORM rating.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022


Summerset Group Holdings

Summerset Group: No Sunset at Summerset