OCA - Oceania Healthcare

[winner (n)]

.... almost a promise? So - did they, or didn't they?

Honestly - I can't remember a promise - and lets face it, wasn't the majority of their CR's a sell down of Maccas shares? Why would that increase EPS?

The capital raise in 2021 (not a sell down) to acquire Hobsonville they said 'immediatately earnings accretive'. The Remeura/Brean Bay were said to be 'strong accretion to underlying earnings per share'

The latter paid for by debt ...you'd think that a bit of debt help would increase EPS

OK not exactly a promise but pretty close to one ........and in my eyes they have failed to deliver this increased EPS

[BlackPeter]

The capital raise in 2021 (not a sell down) to acquire Hobsonville they said 'immediatately earnings accretive'. The Remeura/Brean Bay were said to be 'strong accretion to underlying earnings per share'

The latter paid for by debt ...you'd think that a bit of debt help would increase EPS

OK not exactly a promise but pretty close to one ........and in my eyes they have failed to deliver this increased EPS

Fair enough if that's what they said (EPS accretive) for Remuera. Take that at face value.

However -for Hobsonville you realise that earnings accretive is not the same as EPS accretive, do you? I am sure the earnings went up ... and so did the number of shares ;

[Shareguy]

Craigs latest "You can't eat NTA"

OCA delivered a flat FY23 result, with uEBITDA up 5% to $80m (or c.2% organic growth, after backing out acquisitions). OCA's earnings have been broadly flat for five years now as it upgrades its portfolio. Most key metrics deteriorated, with new sales well below our expectations, and the level of unsold inventory almost doubled to $374m over 2H23. Net debt increased to $551m, with gearing up 780bps YoY to 37%, above management's target.
Course correction
OCA's key problems are twofold: i) the existing assets generate negative FCF and ii) its new villages have been slow to sell. Indeed, based on the run rate of sales in 2H23, it is taking OCA around 2 years to sell units. To their credit management have acknowledged the problem and are undertaking correction actions including: i) lowering the build rate to 200-250 units pa ii) lowering the capex intensity of the build rate by pivoting towards broad acre sites iii) selling assets, with over $10m sold to date and c.$50m to go iv) lowering the dividend payout ratio from 50-60% to 30-50% (payout was 38% in FY23). These actions should see net debt start to trend down from 2H24.

You can't eat NTA

Trading at 0.6x NTA, OCA has gained some popularity amongst value investors, but as one seasoned fund manager once told this analyst "you can't eat NTA!". We are cautious on the notion OCA is a "value" stock and caution further that not all NTAs are created equal. We highlight OCA's free cashflow from its existing portfolio (that is, operating cashflows less new sales revenue and growth capex but ignoring interest) was -$11.8m in 2H23 alone. While a slight improvement on pcp, OCA's cash generation is not supportive of the reported book value of its assets in our view. Indeed, as we highlight in the note, OCA's cash generation from its existing assets is significantly worse than RYM and SUM relative to its asset backing. In short, the lower cash generation of OCA's existing assets supports the shares trading at a deeper discount to reported book value than its larger peers.
Upgrade to Neutral, $0.90 TP
OCA is now taking corrective action which should see net debt start to come down from 2H24, at around the same time housing market conditions start to improve post the RBNZ's pause yesterday, while margin from The Helier development should help OCA deliver earnings growth over FY24/FY25 (CIPe +14% FY24/FY25

[Crackity]

Hardly a resounding vote of confidence in management by Craig's. 

Net debt may come down around 2H24 - yeah maybe but the trend is not your friend currently

Definitely will come down somewhat when they announce another cap raise - I was expecting an underwritten cash issue announcement with the annual results

Maybe the beanies aren't very good or the Board aren't listening.

So far Maccas are doing best out of this company - they smart peeps

[Crackity]

Hardly a resounding vote of confidence in management by Craig's. 

Net debt may come down around 2H24 - yeah maybe but the trend is not your friend currently

Definitely will come down somewhat when they announce another cap raise - I was expecting an underwritten cash issue announcement with the annual results

Maybe the beanies aren't very good or the Board aren't listening.

So far Maccas are doing best out of this company - they smart peeps

OMG - I'm so out of date with this company - here is the current CEO bio


Brent Pattison
Chief Executive Officer

Brent has over a decade of experience in Investment Banking, is a qualified chartered accountant and has held senior finance roles in NZ corporations across the Telecommunications and Financial Services industries.

Brent has a keen focus and interest in the Aged Care & Retirement sector including providing Investment Banking advice to Oceania during the 2017 IPO and to the other listed and privately owned peers in the sector.



There ya go - nothing to see here - it's all good

[Shareguy]

Not a pretty picture

Especially considering the acquisitions made over the years (and the capital raises)

You cannot view this attachment.

Craig's negative on this warranted in my opinion.  I think this great graph from winner says it all. EPS going no where. Care is costing them and will continue unless the government comes to the party.  Debt needs to come down and should with the divi and build rate cut, plus some asset sales ($60m). Unsold stock a worry but hopefully a timing issue. The Helier which I think is in a great location should save the day FY24. Trading at a large discount to NTA. Can't see that changing in a hurry.

It's a hold for me currently.  Still like the sector as part of a balanced long term portfolio and have been adding Arv, Rym and Sum this year.

[winner (n)]

OMG - I'm so out of date with this company - here is the current CEO bio


Brent Pattison
Chief Executive Officer

Brent has over a decade of experience in Investment Banking, is a qualified chartered accountant and has held senior finance roles in NZ corporations across the Telecommunications and Financial Services industries.

Brent has a keen focus and interest in the Aged Care & Retirement sector including providing Investment Banking advice to Oceania during the 2017 IPO and to the other listed and privately owned peers in the sector.



There ya go - nothing to see here - it's all good

Some would say having an accountant run a care business not the best. ...numbers centric v people/empathy focus rarely gel

[winner (n)]

I'm glad I'm not the only one who  breaks cash flow into Property Related Cash Flow and what I call Cash Flow from Day to Day Operations (running villages and caring for people)

From that Craig's stuff ... We highlight OCA's free cashflow from its existing portfolio (that is, operating cashflows less new sales revenue and growth capex but ignoring interest) was -$11.8m in 2H23

That -$11.8m (negative) in six months is a big number and it seems to be getting worse. I see that as akin to an operating LOSS.

[winner (n)]

"You can't eat NTA", ie not all NTAs are created equal. Must add to my investing quotes

Interesting CIP don't really see OcA as a 'value' stock.

[Shareguy]

Further from Craigs

OCA's free cashflow from its existing portfolio (that is, operating cashflows less new sales revenue and growth capex) was -$11.8m in 2H23. This is prior to deducting interest (which we largely attribute to funding development WIP). While this is a slight improvement on pcp, OCA has again delivered a poor operating performance that in our view is not supportive of the carrying value of its assets. Indeed, as we highlight in the chart on the prior page (bottom right), OCA's cash generation from its existing assets is significantly worse than RYM and SUM relative to its asset backing (see chart above right).
This all means that OCA's existing assets are neither able to fund growth (nor the interest expense of funding growth) nor are they able to fund the cash.


We will give OCA some credit: management have started to recognise the unsustainability of the current strategy and some corrective action is now being taken, including:
Lowering the build rate. Like RYM last week, OCA has by stealth essentially lowered its build rate by missing its prior guidance for FY23 while only maintaining guidance for FY24. Projects currently under construction have been slowed. Management have also acknowledged that new project starts will require a high degree of confidence in the economics (which is unlikely in the current environment).
Lowering capex intensity: part of the reason OCA has a sector leading level of unsold new stock is that it has a capex intensive, apartment and Care Suite focused build model. These large blocks require a lot of up-front capex and take 2-3 years to sell down (such as Awatea and, likely, The Helier). A pivot to greenfield broad acre sites to develop will however take quite some time (Bream Bay being a good example).
Lowering the dividend payout ratio from 50-60% previously to 30-50%, with a cut in the total dividend to 3.2cps as a result
Asset sales: at the interim result OCA indicated it would sell $60m of underperforming aged care assets, with $10m sold at a premium to book value. The sale is clearly a good result. We note OCA's sales strategy appears to be canny, targeting local operators or buyers more prepared to pay premium rates for one or two assets, as opposed to portfolio buyers where prices for care assets are depressed. Notwithstanding the success of the initial sale, it is usually the case that the easiest to sell assets go out the door first, and OCA still has work to do to execute this portfolio sale.
Management have also, to their credit, done a commendable job in controlling certain risks including build cost risk and interest rate risk, with costs for both locked in as far ahead as was possible in the more benign cost and interest rate environment of 2020/21. Indeed, we note that OCA has locked in an effective interest rate of c.4% for several years to come. This lowers - though does not eliminate - the risk of OCA breaching its bank debt

[Teitei]

I'm glad I'm not the only one who  breaks cash flow into Property Related Cash Flow and what I call Cash Flow from Day to Day Operations (running villages and caring for people)

From that Craig's stuff ... We highlight OCA's free cashflow from its existing portfolio (that is, operating cashflows less new sales revenue and growth capex but ignoring interest) was -$11.8m in 2H23

That -$11.8m (negative) in six months is a big number and it seems to be getting worse. I see that as akin to an operating LOSS.

Using borrowings and debts to pay dividends - biggest red flag of an unsustainable operating strategy.

[Ferg]

What is the logic behind deducting the new ORA receipt from cash inflows?  This derives a significantly worse picture of cash flows.  Capex is spent in anticipation of future earnings.  You don't then deduct those future earnings irrespective of the application of those funds.  IMO it is a weird way of looking at it.

In deducting the new ORA sales values, they forgot to adjust that value for development margins of 36%.  Amateur analysis IMO.  One can only ask why....and what is their agenda?

[winner (n)]

Ferg, what Craig's are (trying) to show is free cashflow from its existing portfolio....and one conclusion was that these cash flows are not supporting the valuations of the portfolio.

The -$11.4 is basically receipts from village and care fees less what's paid to suppliers and employees and GST recovered along with a few other minor things. If one included interest of $12m free cash flow is -$23m but Craig's are nice and sat interest is all development related. I see this as what it's costing them to run villages and care for people on a day to day basis.

That leaves new ORA cash in of $99m (net) and capex of $219m ... cash out $120m  or $134m if you include that interest

[Ferg]

New builds are part of the existing portfolio so that doesn't make sense.  In addition, the staff and costs required to run those new facilities do not come free.  Such new facilities do not run themselves and yet those costs were not removed.  They removed all the revenue but none of the costs....ok.

I have never come across an analysis where we look at a business by removing all income derived from this and prior years capex but we leave in those parts that are part of the same development but were sold in the previous FY.  That also does not make sense.  IMO it is a flawed method with an agenda and not worth spending any time on.

Take this method to one of the extremes.  OCA turn off capex which falls to zero.  All remaining new units are sold which generates huge cash flows and the debts are more than repaid.  So we take out the cash flows from such sales in future and conclude cash flows are terrible?  That is nonsense.

[Shareguy]

Retirement sector on fire today.

$.86c on large turnover (8.6m).