Yovich & Co. Weekly Update - 13 April 2015
Apr 13, 2015 | Commentary
This Week’s Themes
The New Zealand Market made a modest gain last week with the short week bringing very little news flow. The market has been trading in a narrow band between the 5800 level & the record level of 5920 for the past 6 weeks in what has been a good period of consolidation after the strong run up after the New Year.
HSBC chief economist Paul Bloxham made comments reinforcing his previous comments about NZ being the “Rock Star Economy” saying that it was the fastest growing economy in the OECD. He expects that 2015 will see this strength continue.
Australian stocks were led higher after the RBA kept rates on hold. The banks and the financial sector continued to drive the market towards post GFC highs.
A rally in the Oil price helped energy companies and the US markets to push higher.
When will we hit parity with the Aussie? We were very close last week and with the interest rate differential between New Zealand and Australia remaining at 1.25% it can’t be too far away.
Retirement Sector Review
The demographics can not be denied and the opportunity is clear, over the next 10 years as the baby boomers start to turn 70, the Retirement Sector has a huge amount of development required to keep up with the demand and requirements of an aging population. Here are some statistics that help quantify what is required:
The first Baby Boomer turns 70 in 2016 and by 2021 there will be almost 50% more in the 70 plus age bracket than there are today. By 2036 it will have doubled to around 900,000 people.
Aged Care Content (Rest Home Services) is where there is a real shortage in supply. By 2026, between 12,000 and 20,000 extra residents will require aged care. This is an increase of between 78% and 110% of the current supply.
Below is a summary of each of the listed Retirement Sector Companies:
Ryman Healthcare (RYM.nz)
The largest Retirement Village operator in New Zealand, with recent development in Australia further expanding their growth potential. They have a very large land bank in Auckland compared to the other operators and this will provide significant growth potential for further development. Ryman has the highest proportion of Aged Care Content in their villages and, as this is where the shortfall of supply is, these services are expected to receive a margin premium. The FNZC 12 month target price is $8.70, current price is $8.29. Forecasted gross yield is 1.7%.
Metlifecare is the second largest retirement living operator in New Zealand. With 60% of their units geographically concentrated in Auckland, the strong property market will ensure that their villages remain in high demand and will drive a margin premium. Downside to this is that they are leveraged to the Auckland property cycle. The FNZC 12 month target price is $5.50, current price is $4.87. Forecasted gross yield is 0.9%.
Summerset Group Holdings (SUM.nz)
Summerset is the third largest operator and the second largest developer of retirement villages and aged care facilities in New Zealand. They are entering into the second phase of development with a target of 400 unit build rate in 2016. Development is where the opportunities lie so Summerset is well placed to benefit given their secured land bank will see them potentially double the number of units in around 7 years time. The FNZC 12 month target price is $4.05, current price is $3.44. Forecasted gross yield is 0.7%.
Arvida Group Limited (ARV.nz)
Arvida listed last year after several smaller retirement businesses were merged, especially around the Canterbury area. These are mature villages with very little development potential. Because of the maturity of these businesses and their focus on acquisition and not development, the main driver for growth will be the synergies created by economies of scale. Arvida also has a large proportion of Aged Care Content so this will provide solid margins as these are in short supply for “needs” based residents. From an investor’s perspective, ARV will perform more like a listed property company as gains will mostly come from dividends. Current forecasted gross yield is 5.6%.
Weekly Update Investment Shares Bonds Market Commentary Ryman Healthcare RYM.nz Metlifecare MET.nz Summerset Group Holdings SUM.nz Arvida Group Limited ARV.nz
Kathie Perry | Apr 15, 2015
Hi Jarrod Thanks for this report. I would be interested to know what the expected timeframe is for Ryman to increase their gross yield? Regards Kathie