OCA - Oceania Healthcare

[winner (n)]

Why?

Perhaps the most over-boarded, over-rated director in NZ.
Just get management teams off the record and ask what they really think.

Got to love Liz

Her reason for being appropriate to Oceania —- "You have to have vision, someone up that mast looking out to the future. That's what's important."

[Hectorplains]

That sounds like she's whaling out there on the wide ocean(ia.)

[winner (n)]

Jeez, week close at 68 cents

Seems instos / fundies been selling recently gradually pushing price down.

Wonder what they know?

[Basil]

https://edition.pagesuite.com/html5/reader/production/default.aspx?pubname=&pubid=18dca2a1-e3ba-465f-bdee-0d067d11827d

Some valuable insights into the truly appalling underfunding of care outlined in Brian Cree Executive director of Radius healthcare advertisement, see page 4.
(Seems entirely relevant, meets strict criteria for OCA thread, seeing as last time I looked OCA's business model is dominated by care (68%).

Some key extracts for anyone who can't get access for any reason:-
"We heard the promises of pay parity but they remain unfulfilled and devoid of meaningful detail.  The recent 14% increase in pay for registered nurses in hospital has only exacerbated the issue once again leaving the elderly who need care out in the cold ".
"Chronic underfunding means certain parts of the aged care sector continue to face an uncertain and grim future"
"More than 1200 aged care beds have closed in the last year due to a shortage of registered nurses".

Some pretty damming claims made by that Gentleman as to how brutally tough the care sector is at present. 
(Don't know how many of the claims he makes are self-serving considering it is actually an advertisement by Radius Healthcare)

[BlackPeter]

https://edition.pagesuite.com/html5/reader/production/default.aspx?pubname=&pubid=18dca2a1-e3ba-465f-bdee-0d067d11827d

Some valuable insights into the truly appalling underfunding of care outlined in Brian Cree Executive director of Radius healthcare advertisement, see page 4.
(Seems entirely relevant, meets strict criteria for OCA thread, seeing as last time I looked OCA's business model is dominated by care (68%).

Some key extracts for anyone who can't get access for any reason:-
"We heard the promises of pay parity but they remain unfulfilled and devoid of meaningful detail.  The recent 14% increase in pay for registered nurses in hospital has only exacerbated the issue once again leaving the elderly who need care out in the cold ".
"Chronic underfunding means certain parts of the aged care sector continue to face an uncertain and grim future"
"More than 1200 aged care beds have closed in the last year due to a shortage of registered nurses".

Some pretty damming claims made by that Gentleman as to how brutally tough the care sector is at present. 
(Don't know how many of the claims he makes are self-serving considering it is actually an advertisement by Radius Healthcare)

But lets not forget that we use for some funny reason OCA in these discussions always as proxy for all REITS. Some of them have basically the same care problems and others (like listed property funds) have not, but are down as well.

I'd like to opine that while there is no doubt that care is expensive and the funding model broken - the real issue for all REITS currently being down are international events.

Negative correlation with interest rates is one thing effecting all REITS in the time of high interest rates - and the withdrawal of international funds from "exotic" currencies like the NZD in times of international trouble is one other. Given that many international funds pulled out of the NZX did clearly not help our stock prices.

Too much local navel gazing going on here without people looking at the big picture ... and too many people who just like to follow any trend and (depending on the trend) either ramp down or ramp up. Clearly - for REITS the flavour of the month is down ramping. Does not need any analysis, just compare this (and other threads) with the mood in the discussion forums.

Economy is more complicated than that, but sure - predicting that the weather tomorrow will be the same as it is today yields you as well a 61% success rate. No analysis required, not even necessary to bring out the old farmer wisdoms :0; Looking deeper requires effort and analysis.

Good news is - interest rates appear to be close to their peak (remember the negative correlation with REITS?) and the international tension won't stay forever either (though might need some more time to fade away).

REITS are currently at a discount. Might be a good time to buy into well managed REITS. I think OCA is one of them, even if there are still some cosmetic issues, but hey - which company has none?

[winner (n)]

If one thinks OCA is essentially a REIT/property developer one will likely overlook the cost of looking after people and running villages.

On a cash flow basis I'd opine that this is significant - fees, DFM etc do not totally cover the cost of looking after people and running villages.

In OCA's case I reckon the 'loss' / cash outflow for this is in the tens of million .....my estimate for F22 was $15m, that being the non-property cash outflow

Evaluating REITs etc one tends to use NTA as a base ......cash flows driven by rents etc are generally positive.

But for likes of OCA I still contend that a valuation using NTA as a baseline should be along the lines of NTA less the present value of future cash outflows for looking after people and running villages (over and above fees /DFM etc)

If indeed this outflow for OCA is about $15m one needs to discount the NTA by about $150m  (about 20 cents per share)

That's how I see it anyway

[Basil]

Well said Winner.  I would add that if thinking of OCA as a REIT the return on assets employed in basic care, (not care suites) is basically nothing and in this market, with all the serious cost and manpower issues pertaining to providing care, I think those assets have very little or no value. We will see if OCA have made any progress with their attempt to sell 10 basic care villages next month. You also need to consider the returns on care suites and whether they are lower than independent living units, my views on that are well known. 

With ~ 69% of OCA's assets tied up in one form of care or another and only ~ 31% independent living, there's a lot to discount in my opinion.
A stark contrast to some REIT's that have 99%+ of their assets earning a proper commercial return.

[BlackPeter]

If one thinks OCA is essentially a REIT/property developer one will likely overlook the cost of looking after people and running villages.

On a cash flow basis I'd opine that this is significant - fees, DFM etc do not totally cover the cost of looking after people and running villages.

In OCA's case I reckon the 'loss' / cash outflow for this is in the tens of million .....my estimate for F22 was $15m, that being the non-property cash outflow

Evaluating REITs etc one tends to use NTA as a base ......cash flows driven by rents etc are generally positive.

But for likes of OCA I still contend that a valuation using NTA as a baseline should be along the lines of NTA less the present value of future cash outflows for looking after people and running villages (over and above fees /DFM etc)

If indeed this outflow for OCA is about $15m one needs to discount the NTA by about $150m  (about 20 cents per share)

That's how I see it anyway

Sure - they provide an additional "service"(care) and charge for it. I agree that at current it appears they subsidize part of this service with their property income.

Question is - is this part of their long term plan, or do they just need that for the start up phase (while they are still juggling with turning old old peoples homes into flash new care units and often need to run two operations in parallel (more staff)?

I think it is the latter.

[Red Baron]

Sure - they provide an additional "service"(care) and charge for it. I agree that at current it appears they subsidize part of this service with their property income.

Me zinks you have not fully thought through ze application process for zees 'retirement villages'.  If you vish to move to a retirement village, you do not vish to 'move again'.   You are shopping for 'continuity of care'.  This is not a zervice to be broken into parts.   It is all one zervice.   

There is no 'cross zubzidy' here.    If a village does not provide care units on site, then no one will buy those highly profitable Independent Living Units also on site.  Village income will eventually drop to zero.

RB

[Mos]

Well said Winner.  I would add that if thinking of OCA as a REIT the return on assets employed in basic care, (not care suites) is basically nothing and in this market, with all the serious cost and manpower issues pertaining to providing care, I think those assets have very little or no value. We will see if OCA have made any progress with their attempt to sell 10 basic care villages next month. You also need to consider the returns on care suites and whether they are lower than independent living units, my views on that are well known. 

With ~ 69% of OCA's assets tied up in one form of care or another and only ~ 31% independent living, there's a lot to discount in my opinion.
A stark contrast to some REIT's that have 99%+ of their assets earning a proper commercial return.

Hi Basil, how do you calculate 69% of OCA assets in care? Page 49 of Sep accounts shows $696 m of care assets out of total assets of $2,451 m. Even if you add care suite ORA of $198 m the care total will still only be $894 m or 36.5% of total assets. Agree they returns from care are low and unlikely to improve.

[Basil]

Fair point that independent living units are higher value than care.  IIRC from the May 2022 call they had 69% of units as either basic care or care suites.  Have a look at my lengthy analysis on the other site (Beagle) posted in April and May 2022.  Posts #12336, #12339 and #12842

How I value OCA is nothing to do with NTA.  With a bit of under and overs, over the years (overs when they sell down a major new village like the Sands or the forthcoming Helier and unders when there's extra headwinds from the pandemic or they haven't got an A Grade village to sell down), they seem to make around about 8 cps each year and I expect much the same in FY23 about to be reported next month, somewhere in the mid $50m underlying earnings. 

They have demonstrated no ability to grow eps, indeed my observations are ostensibly all DMF gains from the business model transition over many years now are eaten up by staff, management and the residents with extra care costs.  Until they can prove otherwise, (and I don't think a one off modest potential increase in eps for FY24 for the sell down of the Helier is going to be nearly sufficient proof for me), as far as I am concerned, they are a no growth company making eps of about 8 cps, give or take a bit each year.  As I see it this is always going to be a very high care needs company and there's very little money in care so unless you're getting the shares dirt cheap...why bother.

Using Ben Graham's no growth PE of 8.5 which has served me incredibly well over the years as a brilliant yardstick that sifts the wheat from the chaff and sorts out a lot of the hot air B.S. that's in a lot of share prices from time to time, to me the value of OCA is 8 cps x 8.5 = what do you know, 68 cents, what it closed at on Friday.  By my reckoning the shares are now down to somewhere around fair value.  Good value (subject to no untoward surprises in the FY23 report would be 60 cps in my opinion).

Forbar have them on a FY24 PE of 6.9 and a gross yield of 6.9%, (when the share price was 72 cents).
This suggests eps of 10.4 cps for FY24.  That's too optimistic in my opinion and highly likely to be just a temporary aberration to the upside as they sell down the Helier.  At 68 cents we're probably somewhere near the bottom, but who knows...these things can overshoot by 20-30% at times so I remain happy to let the chart and TA tell me when the bottom really is in.  Others think the projected uptick in eps in FY24 is just the beginning of the new growth path OCA will be commencing and many subscribe to that theory espoused by a prominent poster on the other site.  From my jaundiced perspective after years of watching the very rapid escalation in the costs running this business, I'll believe growth in eps when I see it.  This company has a well proven ability to disappoint and an inability to control costs within anything remotely like the rate at which the Govt increase care funding each year.
Basically, in a nutshell the ever-increasing extent of Govt underfunding of care keeps eating all the other gains.  If they can shed those 10 care villages, they want to sell at even half their book value that might mitigate the problem to some meaningful extent going forward.

[Mos]

Yes OCA certainly tests the patience with the transformation that is taking years without much to show for it in terms of eps growth. I am also estimating modest underlying earnings growth in FY23 before the much prophesized Helier significant uplift in FY24. 

The Oceania brand and offer lacks consistency ranging from luxury to budget. There does not seem to be any meaningful action to address this other than a slow shift in mix through new developments and the ongoing effort to sell the 10 small facilities that account for less than 3% of assets.

Despite the frustration with delivery, the care handbrake and the inconsistent brand/offer, I see good value at $0.68. It would be good to see the Board adopt a clearer focus on growing shareholder value by undertaking a buyback at these levels rather than additional acquisitions/greenfield developments and paying taxable dividends. If the Board don't see compelling value at half of NTA then it is hard to figure out why they think it is a good idea to allocate capital to building more care suites.





 

[Basil]

The Elephant in the room as I see it.
$696m of care assets (not including care suites).  On 720m shares that's 96.7 cps of assets per share with a massive question mark about their real worth.
What are those assets really worth on today's market given we have numerous facilities owned by other operators offering basic care going broke or closing around the country ?  (Some are claiming as many as 1200 basic care beds have been shut down just in the last year)
If the returns are very close to break even can they even sell the ten small care villages at any price ?
What are their other older villages that predominantly have care as their core business really worth ?

I think the apparent discount to NTA is an illusion and is simply the market recognising that these assets may have very little value on today's market either as NTA or in terms of earnings power.

[Mos]

The Elephant in the room as I see it.
$696m of care assets (not including care suites).  On 720m shares that's 96.7 cps of assets per share with a massive question mark about their real worth.
What are those assets really worth on today's market given we have numerous facilities owned by other operators offering basic care going broke or closing around the country ?  (Some are claiming as many as 1200 basic care beds have been shut down just in the last year)
If the returns are very close to break even can they even sell the ten small care villages at any price ?
What are their other older villages that predominantly have care as their core business really worth ?

I think the apparent discount to NTA is an illusion and is simply the market recognising that these assets may have very little value on today's market either as NTA or in terms of earnings power.

Your point is well made and I agree goes to value of OCA shares. If Care assets were only worth half of carrying asset value it would result it would lower NTA by $0.48 to $0.86 per share. I think care assets while challenged are likely to be worth at least half of carrying value for the following reasons...
- a small amount of care (10-20% of assets) underpins the continuity of care proposition that underpins achieving good ILU sales prices and occupancy. Noting that OCA has up to 36% of assets in care including care suite ORA so is overweight and 100% care facilities don't contribute to the continuity of care proposition
- supply of care is falling and demand is increasing which will mean that premium care facilities will increasingly be able to earn cost of capital through premium charging via weekly fees and care suite ORA's. This clearly does not apply to non premium facilities where potential customers can not afford to pay despite need. This is a real problem for the healthcare system and is resulting in people having no where to go and staying in very expensive public hospital beds. Unfortunately, it is going to get really tough for people needing care but lacking funds to pay for a premium option in many places
- some of the non premium care facility properties will be able to be repurposed for new housing/commercial developments albeit the timing is not great now

Summerset seems the only operator that has optimised the care component of its portfolio justifying a better share price/NTA ratio.  However the OCA share price in my view more than reflects the care handbrake and is good value at these levels.

 




   
-

[Basil]

What you say makes good common sense to me Mos.  You're right, there is genuine potential for the conversion of older facilities into affordable housing, perhaps as rentals for older folks.  You're probably right, there is value around these level's but is it a value trap? How long does it take to meaningfully mitigate the effects of the high care albatross around their neck ?

Forbar have SUM on a forward PE of only 11 and with their well proven track record of growing earnings over time and well refined business model, to me that seems a very small premium for the best of breed.