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<br>Travel and Arrival&nbsp;— Downgrade to NEUTRAL</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Summerset&nbsp;Group (SUM) reported a solid FY20 result, in-line with guidance. The forward messaging was confident with strong reported pre-sales and contracted stock levels, a combination supportive of growth into FY21. Specifically, management guided towards 500–550 unit deliveries in FY21, with potential to reach 600 units should the current buoyant market conditions remain. One area&nbsp;of weakness relative to our expectations were costs which came in +20%&nbsp;against the prior year, suggesting limited operating leverage. Looking ahead into FY21 and FY22 we increase our reported EBITDA and underlying earnings but reduce our annuity EBITDA estimates. The upgrades of reported earnings are almost exclusively related to new sales (not included in annuity EBITDA), while costs more than offset modest upgrades in re-sale margins. We keep our target price unchanged at NZ$12.80 but downgrade to NEUTRAL following strong share price performance.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Annuity EBITDA decreased -7%/-4%/-2% in FY21/22/23 reflecting increased operating costs partly offset by higher re-sales margins. Reported underlying EBITDA increased by +2%/+2%/0% due to&nbsp;higher new sales gains</li>
<li><strong>Rating</strong>:&nbsp;Downgrade to NEUTRAL following recent strong share price performance and limited valuation upside</li>
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<h3>Many moving parts within costs, but lack of operating leverage a small fly in the ointment</h3>
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<p>FY20 included many moving parts&nbsp;— received and re-paid wage subsidy, COVID-19 excess costs and impairments to mention a few. On a gross reported basis&nbsp;2H20 operating expenses were up +27% against the prior,&nbsp;on&nbsp;revenues up +11%. However, 2H20 costs included an impairment charge&nbsp;and COVID-19 related costs. Adjusting&nbsp;for this we arrive at underlying "like for like" growth of ~+13%, largely in-line with revenues. We had expected slightly higher underlying operating leverage, particularly because a substantial proportion of the growth relates to re-sale gains which do not carry meaningful direct costs.&nbsp;&nbsp;</p>
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<h3>Valuation fair and strong recent performance; downgrade to NEUTRAL</h3>
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<p>We view SUM as a long term structurally attractive stock. It has the best long term growth prospects in the sector driven by sector leading cash recovery of capex, a large and diversified land bank, and a high proportion of immature villages. However, at ~35x 24 months forward EV/annuity EBITDA we consider it fairly valued. SUM is moving into a phase with new villages opening, driving costs up at a similar or greater pace than revenue, creating flat to declining EBITDA margins. We view a further re-rating as unlikely in the medium term.&nbsp;</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 Travel and Arrival&nbsp;— Downgrade to NEUTRAL

NEUTRAL
Summerset&nbsp;Group (SUM) reported a solid FY20 result, in-line with guidance. The forward messaging was confident with strong reported pre-sales and contracted stock levels, a combination supportive of growth into FY21. Specifically, management guided towards 500–550 unit deliveries in FY21, with potential to reach 600 units should the current buoyant market conditions remain. One area&nbsp;of weakness relative to our expectations were costs which came in +20%&nbsp;against the prior year, suggesting limited operating leverage. Looking ahead into FY21 and FY22 we increase our reported EBITDA and underlying earnings but reduce our annuity EBITDA estimates. The upgrades of reported earnings are almost exclusively related to new sales (not included in annuity EBITDA), while costs more than offset modest upgrades in re-sale margins. We keep our target price unchanged at NZ$12.80 but downgrade to NEUTRAL following strong share price performance.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Annuity EBITDA decreased -7%/-4%/-2% in FY21/22/23 reflecting increased operating costs partly offset by higher re-sales margins. Reported underlying EBITDA increased by +2%/+2%/0% due to&nbsp;higher new sales gains
Rating:&nbsp;Downgrade to NEUTRAL following recent strong share price performance and limited valuation upside



Many moving parts within costs, but lack of operating leverage a small fly in the ointment


FY20 included many moving parts&nbsp;— received and re-paid wage subsidy, COVID-19 excess costs and impairments to mention a few. On a gross reported basis&nbsp;2H20 operating expenses were up +27% against the prior,&nbsp;on&nbsp;revenues up +11%. However, 2H20 costs included an impairment charge&nbsp;and COVID-19 related costs. Adjusting&nbsp;for this we arrive at underlying "like for like" growth of ~+13%, largely in-line with revenues. We had expected slightly higher underlying operating leverage, particularly because a substantial proportion of the growth relates to re-sale gains which do not carry meaningful direct costs.&nbsp;&nbsp;


Valuation fair and strong recent performance; downgrade to NEUTRAL


We view SUM as a long term structurally attractive stock. It has the best long term growth prospects in the sector driven by sector leading cash recovery of capex, a large and diversified land bank, and a high proportion of immature villages. However, at ~35x 24 months forward EV/annuity EBITDA we consider it fairly valued. SUM is moving into a phase with new villages opening, driving costs up at a similar or greater pace than revenue, creating flat to declining EBITDA margins. We view a further re-rating as unlikely in the medium term.&nbsp;



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: Travel and Arrival — Downgrade to NEUTRAL