OCA - Oceania Healthcare

[kasper]

Investing off the information posted on forums is a very bad idea.

However interesting information can be gained to be placed against your own personal views.

But a broker once said always remove the emtion from your investment decisions and never play the players always the ball.

Skate to where the puk is going to be not where it is.

https://www.youtube.com/watch?v=zWtha_SVCjg

Well if thats the case you should be loading up on this and the other retirement sector stocks and getting your ice skate blades sharpened in readiness.

[Basil]

Back to OCA (but I feel it is only right that I go on record and say that I always post very very quickly after I have exited any position over the years).
Note 3.3 from the accounts is very interesting

3.3 Held for Sale
Assets are classified as held for sale when their carrying amount is to be recovered
principally through a sale transaction and a sale is considered highly probable.
They are stated at the lower of carrying amount and fair value less costs to sell, except
for investment property assets held for sale which are carried at fair value.
As at 30 September 2022 ten sites are being actively marketed for sale and as such meet
the definition of held for sale. These sites and their respective land, building, investment
property, plant and equipment and liabilities have been reclassified for
reporting purposes.
Changes in fair value from the date of classification to held for sale are recognised in
comprehensive income.
See note 3.4 for resident liabilities associated with these held for sale assets.
$NZ000's Notes
Unaudited
Sept 2022
Audited
Mar 2022
Opening balance - -
Transfer from investment property 3.1 34,833 -
Transfer from property, plant and equipment 3.2 31,996 -
Additions 500 -
Change in fair value during the period (2,545) -
Closing balance 64,784 -

With thanks to Ronaldson from the other site for pointing out note 3.3 in the accounts.
10 sites are held for sale as at 30 Sept, (as at March 2022 none)

If my memory serves me correctly, they sold about 5 uneconomic sites a couple of years ago for peanuts.
So about 15 really poor villages were included with the IPO that never had a chance of giving a decent commercial return.  Hmmm Investors sold a pup?

Its one thing to list 10 villages at book value and quite another thing to try and sell them on this market!

[Waltzing]

 
With RBNZ balance sheet over loaded and T1 capital ratios about to be the highest in the "WORLD"  NZ is a high risk market in all sectors.

This is not to mention the macro prudential board in the hands of Dervan and others one wonders what brakes they apply next to lending on capital markets.

Sector may not recover for a long time if OCR rates remain high due to the RBNZ over cooking the market by a factor its never had to endure before in it's history.

CI.

[snapiti]

Time to ask yourself how many people have bought stocks on your recommendation and found themselves in various holes only to find you have sold out in the meantime?

I hope kasper you have not fallen into the same trap as your A2 investment, failure to acknowledge the change in the wind cost you big time.
Certainly I would think once it became clear our monetary policy was changing and was going to damage the real estate market that the retirement sector was going to take a hit was blatantly obvious.
I suspect the sector is in for an extended patch of no so great numbers. Building and development costs have gone crazy but it is somewhat harder to sell a house and one could expect a lot less, completely different playing field.
Don't get me wrong I like the sector but not the time to be holding or buying.
The down turn in numbers were somewhat foreseeable and are just starting to appear now and IMO only going to get worse.

[Basil]

Well said Snapiti.  Interestingly Balance, who correctly called the top in ATM and is involved with the property development sector, in the other place posted today he reckons this is just the first year of the property down cycle and it could last up to 5 years! 

Worryingly, with the current state of the market and the clear direction downwards and with all players in the RV sector being impacted by slowing sales and real pressure on cash flows who is going to use up precious cash reserves or their diminishing lines of bank credit to buy 10 cast-off third-rate villages that OCA don't want anymore?

[snapiti]

Well said Snapiti.  Interestingly Balance, who correctly called the top in ATM and is involved with the property development sector, in the other place posted today he reckons this is just the first year of the property down cycle and it could last up to 5 years! 

Worryingly, with the current state of the market and the clear direction downwards and with all players in the RV sector being impacted by slowing sales and real pressure on cash flows who is going to use up precious cash reserves or their diminishing lines of bank credit to buy 10 cast-off third-rate villages that OCA don't want anymore?

Orr's mandate right now is to push down inflation and increase the unemployment rate......every other show, including the property market, is just a casualty of that war.
I can see 30% coming off the peak in residential property, can see the NZX being banged up as well.....won't be long and you will be able to get 5% for cash in the bank.
Beagle you are well researched, do you know out of SUM,OCA,RYM who is the most leveraged

[Basil]

Orr's mandate right now is to push down inflation and increase the unemployment rate......every other show, including the property market, is just a casualty of that war.
I can see 30% coming off the peak in residential property, can see the NZX being banged up as well.....won't be long and you will be able to get 5% for cash in the bank.
Beagle you are well researched, do you know out of SUM,OCA,RYM who is the most leveraged

RYM are the most heavily leveraged mate.
Paywalled but interesting to note RYM down a whopping 22% just in the last 4 trading days!  (Called by guess who as looking quite vulnerable in the low $8 range very recently).
https://www.nzherald.co.nz/business/market-close-nz-shares-fall-on-reserve-banks-hawkish-mood/6EH5UJEJH5APZCI2F6R37MUZKY/
Noted in this article that their market cap is now basically the same as their debt, both around $3 Billion, so getting basically 50/50 debt equity or not far off it.  ARV and SUM have the strongest balance sheets with gearing in the mid - late 20% range. OCA approx mid 30's.

Funding costs for floating rate debt which a lot of these companies have is absolutely going through the roof.  We're not done yet, another 75 bps on the cards for February and more after that.  OCA's debt jumped from $380m as at 31 March to a whopping $498.5m as at 30 September. That's real growth for ya but not the sort of growth you want 

[snapiti]

a developers worst nightmare, rising build and development costs, rising leveraging costs and a downturn in the market (longer to sell and for less)
Happy to sit on the sidelines and watch Orr do his thing

[Basil]

Agreed. Happy to sit on the sidelines too. "Blind Freddy" can see the tide is going out in this sector and in the property development game generally.  From memory OCA's current fixed price construction contracts, (which is what's behind their good current development margins of ~ 32%) only run for about another year.  When they start seeking construction tenders for new villages after that they're in for a HUGE shock.

After reviewing the result, I have downgraded my target price to 60 cents.  Remaining with a SELL and if you can borrow the scrip, SHORT !

[Fiordland Moose]

Market conditions have changed dramatically since me being bullish which was a long time ago.
Much easier to swim with the tide than against it.Great story...growth is coming, just have patience.   Problem is I have heard that story with OCA so many times now I have lost count. I ran out of patience last year and dumped most of my holding at around $1.40.  Kept a few hoping those lulling others into a trance might be right but smelled the coffee and dumped them earlier this year at ~ $1.04 when I called time on this flea ridden mutt.

The ugly truth is they face enormous ongoing systemic issues with rapidly rising care costs that are vastly underfunded, and this situation gets worse every year.  What's even worse is this situation is unresolvable in the foreseeable future.   They keep trying to solve the problem with building more care suites but they're building a mountain of them and they're VERY slow selling. My prognosis in this sector is the lower the percentage of care in your business model the better.  I see this underperforming the sector and this sector underperforming the market with strong headwinds readily apparent.

Still determined and brave enough to allocate fresh capital to this sector and do some bottom picking for value ?  Good luck with that I reckon but you might like to have a look at ARV's significant discount to NTA, (very similar to OCA's discount to NTA) and consider that only a small part of their business (about 28%) is care.

9th of May 2022 not that long ago.

"where did I put the keys to the truck...got to be good buying at anything under $1.15
Rating upgrade announced. BBB Beagle busy buying."

[Basil]

Seems like a lifetime ago, its been a LONG year in the markets. I took a small number extra onboard hoping for a good result later in May 2022. The result disappointed and I posted this on 23 May 2022, (only 2 weeks later) and sold out completely, very shortly thereafter.

Annual Review.

Positives
1. The new acquisitions at Remuera and Bream bay are the stand out positive feature of 2022 as the Remuera acquisition in particular is highly likely to be underlying eps accretive and there's plenty of room for future development at Bream Bay.
2. That together with negotiating more funding headroom for future acquisitions is a material and notable achievement for 2022.
3. The review of the development portfolio and planning to achieve an increased build rate going forward is also a good positive.
4. Enduring another year of Covid without any material slippage in underlying eps of just a fraction under 8.0 cps is a satisfactory result considering the extremely challenging environment both on an operating level as well as in a political environment that's clearly unhelpful to the sector.

Negatives
1. The longstanding issue with staff costs rising much faster than operating revenue continues and in fact has got worse this year than ever before.
Total employee costs compared to last years annualized figure are up a staggering 12.65% substantially worse increase that the systemic long run average of 7-8% increase per annum.
2. The repayment of the wage subsidy of $1.8m is completely illogical considering the Govt's systemic underfunding of basic care services and is a very poor decision in my opinion.
3. Even backing out the wage subsidy repayment staff costs increased 11.3% against Rest Home and hospital care fees only up 5.3%.
4. Importantly Government funding is unchanged on the year !
5. Staff costs in total amounted to ~ 67% of all revenue received and importantly the increase this year in human resource ate up 91% of all the increase in gains made from the increases in premium rooms and DMF fees so the long run trend of staff eating ostensibly all the gains from the business transformation process over the years continues unabated.
6.Underlying eps of just on 8.0 cps for 2022 by my calculations in real inflation adjusted terms, (inflation is a serious matter now), is now 17.5% lower than in 2018, the first full year.
7. From my review of the financial statements other costs in the business are also rising at a pace that's concerning.
8. Delivery of new units in 2022 was disappointing, the second year in a row.

Notes from the analysts call on Friday afternoon
1. Direct Covid costs of $2.5m in FY22 are unlikely to repeat in FY23. Comments were made that there was also indirect Covid costs but no explantion was offered as to whether they might repeat.
2. Remuera Rise average age of residents 83.6 years, sounds like 1 resident has vacated already and the apartment will be marketed at about $500K more so management are confident this will be eps accretive and that their assumptions around that are conservative
3. Good cover on fixed price construction contracts right through to December 2024 (which was a very pleasant surprise !)
4. Actively looking for greenfields development sites and some softening in land prices has been observed.
5. An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.
6. There may be many more care suites for sale than are officially on the books as vacant. Its would appear there are a large number presently being used as PAC rooms. I confess I was getting a bit sleepy towards the back end of the hour long analysts call after spending all morning deciphering the dog's breakfast accounts so please take the total number of units for sale expressed as 450 in the conference call as an indicative number at this stage. I am 99% sure that's the number I heard which is really concerning because that's a whole year's worth of stock. Mav is looking into this with the CFO, and will provide more detail in due course.

Outlook
1. Its one thing to state a new goal of 300 units and another to achieve it. Achieving it in FY23 should be a foregone conclusion with 113 care suites in Milford deferred from last year, (so its really only 187 units in FY23) but I will believe it when I see it in FY24 and beyond.
2. From my 5 year review its clear there is very very little money in care, nothing in basic care and very modest returns from premium care and care suites and notwithstanding the vitally needed pivot towards more building and acquiring more independent living units OCA will be saddled with an extremely high level of their business model being in care which accords a very low return on capital employed for the foreseeable future.
3. The Global shortage of care and nursing staff and fierce competition for them and demands for ever increasing pay rates for the risky work involved are not a situation I foresee changing any year soon. Expect a continuation of multi year trend of staff eating the vast majority of all gains from DMF and premium care revenue increases.
4. The political environment is extremely unhelpful, actually hostile to OCA both from a funding perspective and residency for care and nursing staff with this Govt in its "infinite wisdom" making it less attractive to come here than for staff to go to Australia. With care and nursing staff (nurses up to a whopping $30 an hour more) able to earn substantially more in Australia I expect the recent opening of the borders to exacerbate the staff shortages not help the situation.
5. Fixed price construction costs locked in on projects through to Dec 2024 confers a material advantage compared to others in the sector.
6. 300 units this year sounds impressive but a heck of a lot of them are care suites which appear to have very limited pricing power in a high inflation environment.
7. The Helier should provide a boost in earnings as its sold down in much the same way as the Sands did in 2018 and they might get back to underlying earnings in real inflation adjusted terms in FY24 of about 10.7 cps which while being a 27% increase from this year is still a no growth scenario in real terms since the underlying eps of 2018...so 6 years without any real growth in underlying earnings and that assumes they actually make 10.7 cps in FY24 which is not a certainty.
8. Its very important to note that this woke Govt's review of the retirement village sector remains as something pending and who knows what they might do ?
Its clear I am nowhere near as positive as Maverick and Ferg.
Will they be able to grow earnings from FY24 onwards...only time will tell.
In the meantime for those who want to make a much quicker pivot towards independent living units there are SUM clear alternatives with a long proven track record of strong earnings growth and much better cost control discipline.
9. OCA are cheap and they are cheap for many good reasons and not the least of them is a proven inability to grow earnings despite a booming real estate market for the last 5 years.
10. Its very clear the tide is going out very fast in the real estate sector and the approximate halving of sales volumes recently reported is going to make it much harder for all companies in this sector to execute sales as the vast majority of incoming residents need to sell their home first.
11. I expect extremely challenging real estate and political conditions for the balance of 2022 and for as long as this woke Government is in power the headwinds are most fierce in this sector for OCA.
12. The outlook globally with almost all central banks rapidly winding back stimulatory settings also provides a very challenging backdrop for the market and I remain of the view we are in "Bear" market conditions.

If a Labour Greens Maori coalition get a third term, which they might, run for the hills.

My rating Underweight / Underperform Disc: Will retain a modest stake for now and see if the shares somehow get a lift and go from there.

Others will have a different view and that's fine. DYOR.

Agility has been a very necessary attribute in the market this year.  Its helps mitigate very painful losses.  Be quick or be hurt !

[Basil]

Like I said Kasper, you have to be quick in this market or you end up getting hurt.
The repayment of the wage subsidy of $1.8m was completely illogical last year.  If you normalize last year's underlying profit for this repayment, then underlying earnings have gone backwards in the result announced today compared to normalized underlying earnings last year.  I don't see anyone else on this or the other forum has picked this up yet.  You get these insights when you do your own thorough analysis rather than relying on your "gut feel"

[Fiordland Moose]

Like I said Kasper, you have to be quick in this market or you end up getting hurt.
How's your Ryman trade going ?

but bazzer - during that (last) 2-3 week period where you were a shareholder and were lavishing praise on OCA - there were many posts about being a long term shareholder...

"Provided one takes a long term view I think with this new acquisition the shares are a pretty good opportunity at below $1."

"This is Brent stamping his mark of leadership on the company and I like what I see so far.
They have another $290m for future acquisitions and this one only cost them $57m. Are you getting the picture now ?
Brent was formerly a director of investment banking at Jarden. Leadership matters and under Brent's leadership we are seeing acquisitions of new villages that are predominantly independent living, (Hobsonville last year was the first example and these two are examples two and three). You see a new pattern emerging here ? I do.  I'm buying more...can't help myself... under $1 is sound long term buying."


You are obviously a momentum trader and there is nothing wrong with that but when you make all these statements about long term this and that and then nek minute you are out, its weird. 

There's also absolutely nothing wrong with being a momentum trader either. Things change. It's a dynamic environment. Hey, a divy is coming, this is what the macro runway is like, boom I'll take it. I think you have a very good read of it all. I think you are an excellent trader. but you will no doubt be aware you have a lot of older long term investor types who follow you and I reckon you should be more conscious of that

But when making your posts, play the ball not the man. You are far too clever, you have far too much to contribute, to get into the gutter and attack individuals who don't post here, or attack others whose unrealised investments are below cost, or troll, or whatever.  You are so far above that, and this comment is beneath you.

I used to get excited to login and see some beagle comments and the insight they always had, and now when I see something its like oh who is he trolling next. 

I miss the old beagle and I hope he comes back.

[Shareguy]

And FB say today

We remain of the view that OCA is one of the most attractive medium and long term investments under our coverage

Oceania Healthcare (OCA) delivered underlying earnings below our expectations due to higher costs and lower new sale gains. Annuity EBITDA fared better, up +21% versus 1H22 and +4% ahead of our forecasts. The strong annuity EBITDA performance was driven by resale gains, up +55%. None of that mattered. The aged care stocks continue to sell off across the board driven by concerns around increasing debt levels, led by Ryman Healthcare (RYM), down ~-20% in the four trading sessions since it reported earnings. OCA's debt also increased by ~NZ$60m more than we had anticipated but we are meaningfully less concerned with regards to OCA's debt levels than we are for RYM's. We remain of the view that OCA is one of the most attractive medium and long term investments under our coverage. We reiterate our OUTPERFORM rating and see ~70% upside to our reduced 12 month target price of NZ$1.30 (from NZ$1.45).

Three reasons to be comfortable with OCA's level of debt
OCA's increase in net debt was higher than we had anticipated, following a familiar pattern over the last few reporting seasons across the aged care sector. That said, we remain comfortable with OCA's ~NZ$500m of debt for three reasons; (1) the value of finished, unsold stock is over half of OCA's total net debt. In addition, OCA's flagship development, 'The Helier' should deliver a net >NZ$100m in cash; (2) OCA has termed out its debt sufficiently. It has ~NZ$220m of debt headroom and zero debt maturing until FY28, and (3) we estimate that OCA could be free cash flow neutral already next year, depending on how ambitious its greenfield program is.

[Basil]

I have tried to make a conscious effort to rise above some of the personal attacks on here but its challenging at times when some get annoyed with their losses and look to blame shift on to me.

By way of further clarification.  Firstly, it's been an extraordinary year in the markets with extreme volatility unlike anything I have seen bar the initial onset of Covid in 2020 and the GFC. The OCA report in late May 2022 bitterly disappointed me, just like the current print really disappointed others.  I never get emotional about stocks any more, it's a numbers game for me pure and simple and if I sense risk to my capital, I am very quick and proactive about taking action to mitigate or eliminate that risk.  I've been refining my ability to sense reward, risk and corporate B.S. for over 40 years but I still get caught out now and again as does anyone else.  Staring like a possum at the approaching headlights of a runaway train is not something I am into doing, it almost always ends very badly. 

I always post very promptly after exiting a position and always make a very fulsome effort to explain why in very fulsome detail and am cognisant that some follow my lead so I go to great lengths, (often to the extreme dislike of remaining holders), of effort to very clearly articulate why I have entered or exited positions. 

If people want to follow me in or not that's their decision. I don't ask for followers, so they are free to choose whoever they follow, me or anyone else or their own nose for a feed.  All I expect is that for those that follow me, if you keep holding after I have clearly articulated why I have exited, you own that decision for yourself and don't blame me if the custard hits the fan.  Once in a blue moon I very occasionally allow myself the luxury of wondering how many people I have helped over the years.

Back to OCA - Its good to see the ferocity of the care cost headwinds are not increasing further but they remain very strong for the foreseeable future and OCA is obviously far more exposed than other sector participants.  I believe the brokers are not understanding that care suites are not finding good market acceptance.  A clue to how much better the market appears to be receiving the fully refundable deposit scheme that RYM runs for care facilities can be seen in RYM's recent accounts for those that want to do the legwork and go looking for it.