OCA - Oceania Healthcare

[BlackPeter]

I could be tempted again at 65 cents on the greater fool theory that sometime, somewhere down the track someone will probably pay more.  Not convinced there's any value at all here at the current price.  eps is 8 cents and they will be doing well if they can maintain that this year.  With 10 year Govt stock at 4.50% now fair value on a no growth stock is a PE of 8.  eps 8 cents x 8 = 64 cents. If it doesn't get down that low I don't care, plenty of other cheap stocks around.

You clearly expect real estate to go down to zero (or maybe even negative values?) and you don't expect any income from people buying their units?

Well, I do expect real estate to bottom out sometimes over the next 12 months and ... and I see that their income from selling their units will increase. Quite simple - standard unit has three to four years turnover and any new units built will increase this income stream as they come online (and they do).

But does not matter ... just close your eyes and go somewhere else. Please do! Do not waste your and our time unless you have something new to contribute.

[Basil]

Real estate falling 30%-40% would not surprise me at all, ~ 45-55% in real inflation adjusted terms over a period of 2-3 years.  More problematic for many is the rapid build up of inventory and people simply not being able to sell their homes and unable to purchase RV units.

New to contribute is my revised price target of 64 cents but it could easily go lower if some leveraged punters get into a forced selling situation with margin calls like last time so 40 cents is not completely improbable again if despair sets in.  I think OCA will be doing incredibly well if they can maintain underlying earnings per share in real terms in FY23 compared to FY22.  (Another year of no growth)  This would require headline underlying earnings of approx 8.56 cps (last year's underlying eps plus inflation at 7%).  I am skeptical they can do this so another year of (in real inflation adjusted terms) declining profit seems quite plausible.

I think you know already from my previous posts OCA's care suites are not increasing in price and not keeping up with inflation so even those they can sell are not going to generate real growth in DMF earnings after rapidly rising care costs are factored in.

Likewise, as you already know their basic care operations are saddled with ever increasing costs not being matched by Govt funding increases.  Their only apparent get out of jail free card out of this mess is ILU sales and they are going to need elderly folks in their St Heliers homes to be able to sell them before buying ILU units in the Helier.  That might be easier said than done now and by and large probably won't happen until FY24.

Finally, the rise in the 10 year risk free rates globally is undermining all DCF equity valuations, hence a no growth company should now attract a PE of 8...this was as much as 11 this time last year and is a major factor undermining equity valuations generally including your beloved OCA.

Good luck BP.  I see we closed at another fresh 12 month low today.  Maybe Mr Market is a little bit smarter than you give it credit for.

The great thing for you though is with OCA measuring profit in such a vast number of ways I am sure when they report their half years results in late November, you'll find one of those ways suits your purposes to cling on to your version of growth.  If there was an advanced accounting university paper titled "accounting obfuscation 301 create your own profit answers", I am sure they would devote most of the year to looking at the primary case study in this matter, OCA.

[winner (n)]

OCA bonds at 6.7%pa yesterday

Of the listed bonds on NZDX on Synlait ones have a higher yield

Oceania heading into the being seen as pretty risky territory

[winner (n)]

It's not surprising that Oceania (and others) don't come up publicly with a number as to the true extent care losses really are ...... like to what degree do property gains and other activities) subsidise care activities (the actual Cost of looking after those in need)

Not surprising because I reckon it would shock shareholders ....recasting their accounts and looking at money flows that cost / subsidy could be as high as  $20 a year now ....a couple of years ago it was positive, prob made or at worst broke even on care.

[Basil]

OCA bonds at 6.7%pa yesterday

Of the listed bonds on NZDX on Synlait ones have a higher yield

Oceania heading into the being seen as pretty risky territory

You know when the oldest and biggest player in their field, (Ryman) radically reduces the scale of their care in new facilities being built the scope of the losses with care is very, very serious. The board would have thought long and very hard about this as it signals a major change for them. Hard off the back of ARV effectively saying care was costing them really serious money despite only being just over a quarter of their business model the signs for anyone specializing in care are very ominous indeed.

I see AIR are raising new corporate bonds at circa 6%, a significantly lower yield than OCA bonds.  Interesting that the market sees AIR as less risky than OCA...very interesting.

I really regret buying Oceania bonds.  Another loss making investment in 2022 to add to the list.
Doggie really should stay ensconced in his kennel and initiate a share and bond buyers strike as he has a lot of wounds, (more than enough already) to lick now including in his bond portfolio.

[Left Field]

Govt been underfunding aged hospital care for a long time now.

A church based charity that I know ran a large rest home with hospital care for over 50 year. However, even this charity couldn't make the Govt funding work in recent times and closed its doors about 10 yrs ago.

One of the reasons why I shun this sector.

[winner (n)]

Capitalise expected future care losses and it's no wonder some in sector trade at discount to NTA

Share price valuation = NTA (maybe should be discounted a bit these days) LESS future value of care losses

[Whacc]

It's not surprising that Oceania (and others) don't come up publicly with a number as to the true extent care losses really are ...... like to what degree do property gains and other activities) subsidise care activities (the actual Cost of looking after those in need)

OCA are the only ones to disclose care as a separate segment, specifically excluding all of those gains?(??)

[winner (n)]

OCA are the only ones to disclose care as a separate segment, specifically excluding all of those gains?(??)

They do indeed ..... but how meaningful is it really

Like if they really made $9,537 ebitda per care bed (excluding property related gains) why are moaning about not getting enough cash from the government

Maybe the government looks at this $9,537 profit per bed and says you must be joking if you want more.

[Whacc]

Like if they really made $9,537 ebitda per care bed (excluding property related gains) why are moaning about not getting enough cash from the government

Because profit (specifically EBITDA) isn't the same thing as covering your cost of capital (or even just your maintenance spend), but dummy retail investors (and even listed company directors) love it as a metric.

There is obviously the D, the I and the all important (to retail investors at least) Divs to consider.  Frankly, none of these businesses should be paying Divs at this point in their lifecycle and especially given the macro environment.
They're mistakenly conducting capital management as if their target customer demographic (past mature, into decline) is also their stage in the business lifecycle (growth).

Not sure what you want the answer to be here to be honest, above you want to know the "true extent of losses" and then when they show a positive segmented EBITDA margin it's also incorrect?

Government does (and should) realise that in a functioning market all viable businesses will make a margin and seek to cover their WACC, otherwise why would anyone get out of bed.

[Basil]

The nub of the issue is that this Government expect companies to care for residents for free.
Its actually totally repulsive to their core beliefs that anyone is entitled to make money from care.
Andrew Little in not quite so many words said as much the other day.

If you went into a Labour caucus meeting and said retirement villages are entitled to a fair rate of return on their cost of capital you'd probably get one of four responses
a) Blank stares wondering what the heck is cost of capital ?
b) A quick and smarmy retort along the lines of That's a cost we can do without !
c) Didn't you know this was our way of exacting revenge on these greedy capitalist companies because we can't tax their tax free gains on independent retirement units ?
d) Jovial laughter and be laughed out of the room

I suspect it would be A or D.

[winner (n)]

The nub of the issue is that this Government expect companies to care for residents for free.
Its actually totally repulsive to their core beliefs that anyone is entitled to make money from care.
Andrew Little in not quite so many words said as much the other day.

If you went into a Labour caucus meeting and said retirement villages are entitled to a fair rate of return on their cost of capital you'd probably get one of four responses
a) Blank stares wondering what the heck is cost of capital ?
b) A quick and smarmy retort along the lines of That's a cost we can do without !
c) Didn't you know this was our way of exacting revenge on these greedy capitalist companies because we can't tax their tax free gains on independent retirement units ?
d) Jovial laughter and be laughed out of the room

I suspect it would be A or D.

Let the Commerce Commission loose and they'd work out these retirement companies are making 'excessive profits of $X a day'

[Minimoke]

The nub of the issue is that this Government expect companies to care for residents for free.
Its actually totally repulsive to their core beliefs that anyone is entitled to make money from care.
Andrew Little in not quite so many words said as much the other day.

If you went into a Labour caucus meeting and said retirement villages are entitled to a fair rate of return on their cost of capital you'd probably get one of four responses
a) Blank stares wondering what the heck is cost of capital ?
b) A quick and smarmy retort along the lines of That's a cost we can do without !
c) Didn't you know this was our way of exacting revenge on these greedy capitalist companies because we can't tax their tax free gains on independent retirement units ?
d) Jovial laughter and be laughed out of the room

I suspect it would be A or D.

Definitely A

[Plata]

Did I miss something? Why is OCA down so much today? 3.5% on no news while ARV is UP doesn't add up to me?

[BlackPeter]

It is important to distinguish between signal and noise ...

If you look at the chart - it looks like these two are nicely correlated. However ARV (orange line) went a bit too far down compared to OCA (the blue line) and therefore market probably just correcting a bit.

You cannot view this attachment.

Hint - following share prices and getting excited about every jitter on a day by day basis can be a huge time waster and might both increase your medical bills (heart pills and similar) and reduce your life time and quality. Just relax and enjoy the ride unless you are a day trader ...

One interesting phenomena they noticed in European and US capital markets (but I am pretty sure it is globally applicable) ... dead peoples portfolios (i.e. estates) are typically outperforming the portfolios of living people. Dead people don't monitor the share prices on a day to day basis and they obviously don't sell or buy on any jitter. They just hold and are clearly free of any worries.

Maybe something to learn from.