OCA - Oceania Healthcare

[Basil]

I certainly have looked into the rate at which they can turn the ship with their current development pipeline.  What Brent said is simply not plausible with their planned build rate.  Its only achievable if they can sell at least a dozen basic care villages and their silence in regard to progress on that front so far, speaks for itself.

[winner (n)]

I finally get it ...the 45% care ratio comes about from the disposal of X care suites ....rather than building heaps more ILUs than care suites

[Whacc]

I finally get it ...the 45% care ratio comes about from the disposal of X care suites ....rather than building heaps more ILUs than care suites

If they dispose of anything it will be sites with mainly/only standard government funded care beds rather than premium care suites.

[winner (n)]

Watching rugby ....amazing Oceania ad came up after the game ....BELIEVE IN BETTER in music

Reckon it is multi award marketing

[Onemootpoint]

Yep; same. In fact quite a few commercials/ ads lately in particular OCA, Ryman and Summerset with their well known jingle becoming familiar/ annoying to my ear. That marketing needs to be done I suppose.

Mute switches....

[Basil]

Watching rugby ....amazing Oceania ad came up after the game ....BELIEVE IN BETTER in music

Reckon it is multi award marketing

What marketing awards have they won mate ?
I don't really get the "Believe in Better" marketing slogan?  Sure, it might pique some people's interest to wonder Believe in better what? but I think it's common knowledge in that age demographic that Ryman are the most trusted brand and Summerset and Arvida have bigger full feature villages.
A lifetime ago when I studied marketing at Auckland Uni I don't ever recall claiming your brand is better, (with or without being able to substantiate it), as a successful marketing strategy.  Go figure?

Perhaps another example is useful to illustrate my point.  The other day a google ad came up on my screen from Mercedes-Benz North shore branch who are having a demonstrator sale.  Their marketing punchline was "Endless Value"... surely that's an oxymoron for Mercedes Benz vehicles !    I guess my point is where a company's advertising slogan obviously lacks apparent credibility it actually works against them.

[Basil]

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

With OCA reporting next month and now plumbing fresh multiyear post Covid lows, its worth reflecting on the key issues clearly enunciated by myself many times and highlighted by Craig's report in May, quoted above, (emphasis added by myself).

To me it was notable that there was no update on sales at the annual meeting this year whereas the year before they exuded confidence that sales were going well, (despite actual results subsequently making a mockery of that claim).

Really, with vast amounts of completed unsold stock across a really wide range of villages if they can't show an increase in the sales run rate its time shareholders demanded answers.

With about a dozen basic care villages on the market for over a year now it will be interesting to hear whether they have sold any ?
I hope for shareholders sake they finally get some traction northward in their underlying earnings per share but I remain of a view their business model, in terms of its ability to generate future returns to shareholders, is vastly inferior to Summerset in particular.

Maybe with hundreds of unsold care suites they should (to use their terminology), "reimagine" how these could otherwise be made more marketable to sell? Maybe take at least half that old slow selling stock and market them as cheap units under a standard ORA agreement with no obligation on residents to pay care suite fees, but give the resident the option to transfer into the care suite system as their needs change?  Maybe that's a good way to clear some of the vast mountain of unsold stock?   Surely there's quite a big untapped market for cheapish, small retirement units under a standard occupation right agreement model?   If I can come up with an idea like this is less than 5 minutes what are the board doing and why aren't they trying new ways to clear old stock and get their debt down ?  it will be interesting to see what their gearing ratio is when they report next month.

[winner (n)]

Week close 68 cents ....that's pretty bad

Wonder what next week will bring

[winner (n)]

Updated my favourite chart ...the one of OCA shareprice as a % of SUM share price since OCA listed

Sure is one entrenched trend ...will it ever end ...trend theory would say it is so entrenched it would need a "shock" to either OCA or SUM performance to change the trend.....but then it can't continue to zero can it lol

You cannot view this attachment.

[Basil]

Deeply and irrevocably entrenched.  She's going down to 5%, (1 SUM = 20 OCA) at some stage in the next few years mate, I'm certain of it.
Been a bean counter for too long now, more than 42 years and one thing that's indelibly printed on my mind is that some business models work really well and others are destined to be low performers forever and a day. 

[Mos]

The Board of OCA have not shown any real interest in shareholder value creation. If they did, they would be undertaking a share buyback at $0.68 (close to half of NTA) rather than allocating capital to new builds (especially in new care centric assets). Hopefully one day we will get a shareholder value orientated Board.

[Buzz]

The Board of OCA have not shown any real interest in shareholder value creation. If they did, they would be undertaking a share buyback at $0.68 (close to half of NTA) rather than allocating capital to new builds (especially in new care centric assets). Hopefully one day we will get a shareholder value orientated Board.

Given that the Board hold quite a lot of shares, maybe we'll see that come into play shortly. Regardless, it's still all about new sales, and some might say reducing debt to equity.

[Mos]

Given that the Board hold quite a lot of shares, maybe we'll see that come into play shortly. Regardless, it's still all about new sales, and some might say reducing debt to equity.

Yes, if it's all about new sales, they need to demonstrate some capability and performance in this regard - recent historical track record underwhelming on new sales. Will see what half year result brings but lack of update on new sales at ASM not inspiring confidence at this point. Makes little sense to allocate massive capital to additional care suites when they have years of inventory on hand available for sale.

[Buzz]

Yes, if it's all about new sales, they need to demonstrate some capability and performance in this regard - recent historical track record underwhelming on new sales. Will see what half year result brings but lack of update on new sales at ASM not inspiring confidence at this point. Makes little sense to allocate massive capital to additional care suites when they have years of inventory on hand available for sale.

Very little capital has been allocated to additional care suites, more to luxury apartments which are on market now, we want to see them sold. This is not as complicated as some choose to make it.

[Basil]

Very little capital has been allocated to additional care suites, more to luxury apartments which are on market now, we want to see them sold. This is not as complicated as some choose to make it.

Sorry, I have to spend the time to rebut that because it simply isn't true.  People deserve to know the truth.  See page 6 of this presentation from May 2023
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/OCA/411935/395028.pdf

Even the most die hard supporter Maverick has acknowledged they have (from memory) a whopping stockpile of ~ 350 unsold care suites.  Last year they only sold 74 new care suites and 54 ILU units.  The sales rate last year suggests if this can't be lifted they have 350/74 = a whopping 4.7 years of stock of unsold care suites.

But wait there's more.  On page 6 of this presentation, we see for FY24 they are targeting completion of 271 new units, (more than double the whole number of new units they sold last year), and that 271 includes a whopping 193 new care suites. (32 at the Helier, 55 at the Redwood Blemium, and 106 at Elmwood Auckland.  That's another 2.6 years care suite supply at last year's new sales run rate).
It beats me how on earth this is consistent with the CEO's stated goal of trying to bring the ratio of care units down to 45% within 2 years?  To have even the slightest hope of achieving that target they would need to sell at least a dozen basic care villages, but we have complete radio silence on progress on that, front more than a year after all these went on the market.

I think it's highly likely the unsold care suites issue will get materially worse in FY24.
One of the reasons the shares are tanking because they have a major issue with stock the market doesn't find attractive.  The board have their head in the sand like an Ostrich on this issue and seem to spend most of their time trying to obfuscate the facts from shareholders and hiding their lackluster performance, (notice how eps is never ever mentioned in their annual reports or investor presentations), behind a thick veneer of sanctimonious ESG nonsense.

They think if they focus entirely on care for the residents, everything else will work out okay.  We will see, but radio silence on sales progress to date at the annual meeting doesn't inspire confidence.  Debt massively ballooned up last year....just keep building units at about double the rate new units are selling, that very few people seem to want...what could possibly go wrong...   One day in due course they will have to get the begging bowl out for another capital raise as their banks start to ask questions...mark my words.

In due course they will have to refinance their corporate bonds OCA 010 and OCA 020.  If you were to mark to market that funding at today's interest rates based on the yields those bonds are trading at now, that adds more than $12m to their annual funding costs.  How's that for a future headwind to deal with in due course.     The market is right to see an elevated level of risk with OCA because it is very elevated. 

Not down ramping, just a PSA so people know the extent of the problems here.  Disc: No position in the shares or bonds and none sought.