OCA - Oceania Healthcare

[Basil]

Gosh, hit an intraday low of 56 cents today.  Almost in freefall.

[snapiti]

I see the bond yield is creeping up again

[Basil]

Lot of gnashing of teeth on the other channel and assertions its screaming cheap.
Almost got to thinking it might be but then a little reality check this morning.  10 year Govt stock rates have been making gains in recent weeks and we're almost back to 5% 10 year risk free rate with N.Z. Govt stock.

As most know, my contention is since this listed, by and large plus or minus a little bit OCA has made 8 cps in underlying earnings in the last 6 years and i expect much the same going forward so how would the legendary Ben Graham value this stock which despite many posts by some with almost religious fervor that it has stunning growth ahead of it, has never shown any ability to grow.

Well, some will recall Ben Graham said a no growth stock is worth a PE of only 8.5 (11.76% earnings yield) but that's when the risk free 10-year rate is 4.0% a 7.76% premium to the risk free rate.  At 5% the earnings yield needs to be repriced to 12.76% so the appropriate PE becomes 7.84.

7.84 PE on 8 cps no growth stock = 62.72 cps fair value.  Of course, many will scoff and say there's huge growth coming but there's no evidence they can grow their earnings so far and I remain deeply skeptical based on their extraordinarily high exposure to care and the incredibly soft and slow housing market (REINZ said January was the slowest market since records began). Talking to a couple of people at the coal face, anecdotally, February is also going to be a very slow month. I think companies in this sector with lower exposure to ultra low return care, only make serious money in boom times in the housing market.  Those boom days and the tremendous gains enjoyed by RYM and SUM shareholders appear long gone to me.

[entrep]

Would you consider buying under 60c then Basil? Seems like a very conservative metric and valuation at 62.72 cps. I don't hold but have long watched the stock.

[snapiti]

Gosh, hit an intraday low of 56 cents today.  Almost in freefall.

HA HA just a bit of jousting ahead of big turnover on the 28th between big account holders needing to off load and others that are looking to price match buy at the right price come the 28th Feb due to the index changes

[Basil]

Would you consider buying under 60c then Basil? Seems like a very conservative metric and valuation at 62.72 cps. I don't hold but have long watched the stock.

We will see in due course.  Not interested at the current slight discount to where I see fair value. As the former directors of Waste Management once said "there's money in rubbish" but you have to get it dirt cheap.  A lot of people on the other channel think they know better how to value OCA and think they are wiser than Ben Graham and his method's and have paid very dearly indeed for their hubris.

Snapper it's a leap year so those index changes occur on 29th February.

[Buzz]

HA HA just a bit of jousting ahead of big turnover on the 28th between big account holders needing to off load and others that are looking to price match buy at the right price come the 28th Feb due to the index changes

Is it the 28th, or Thursday 29th? Leap year.

[winner (n)]

Basil pointed out that  10 year Govt stock rates have been making gains in recent weeks and we're almost back to 5%

This chart is causing some commentators a bit of concern

Be funny uf history repeated itself and OCR went back to 8% plus

You cannot view this attachment.

[Basil]

Speaking of cash rate Winner kindly posted. Housing remains extremely unaffordable in N.Z.  From memory we're in the top three most expensive countries in the world to live.  The only way housing goes up from here is if we get a dramatic reduction in interest rates. 

The only way that happens is if inflation is well and truly dead and buried and the RBNZ is very, very confident the inflation Genie is well and truly back in the bottle to stay.  All the talk on CNBC in recent weeks is its going to be incredibly difficult to wring the last couple of percent out of inflation to get it down from ~ 4% to 2% per annum.  I think it might take another year or even two before we see meaningful reductions in mortgage rates.  Even then, housing based on the N.Z. medium price just goes from extremely unaffordable to really unaffordable.

The mid 1990's through to 2021 saw a massive expansion in the real cost of housing far and above inflation over that period.  From memory and I will check this when I have more time, housing went up at approx 3 times the rate of inflation over a 25 year period.  That's what drove the super normal profit gains RYM and SUM enjoyed over that period.  I don't see that sort of super normal growth in house prices happening again in my lifetime.   More likely, housing will return to some sort of normal pricing relative to N.Z. incomes over a long period of time.  That could mean a decade or even considerably more of house prices performing poorly.

As I see it, the house price boom party and all the massive capital gains that have flowed through to RYM and SUM and drove their rampant past growth in share prices is over and the long hangover has begun.  Gains for this whole sector will be very difficult to come by in the years ahead and only the very best operators will do well, (SUM), the others will struggle on forever and a day, that's how I foresee it. 

Unfortunately, OCA is stuck with an extremely high-cost care based business model and while they are trying to transition, I predict that will be extremely slow and that burden like a superheavy weight jockey on its back means the OCA horse will continue to lumber along at the tail of the field.  Much of that reality is now in the share price but what's the attraction with no obvious ability to pay even a very modest dividend anytime soon.  They can service their bonds okay and its ironic that every other stakeholder in OCA including staff, residents, management, the directors and bondholders are doing just fine, shareholders get the short straw.  I think management needs a shake-up and to be refocused on driving shareholder returns through cost control and discipline, not chasing delusional ESG goals as though that really makes a difference to climate change.  Their ESG fixation comes across as a deliberate attempt to mask poor financial performance.  They never mention underlying eps in their presentations, ever.  Doesn't anyone find that really strange given the CEO was a former investment banking director at Jarden's.   Deliberate obfuscation? you be the judge.

[winner (n)]

Metlife posted a $22m first half loss ...included $10m fair value gains so operating loss about $22m

High expenses they said

[Basil]

Apologies I was wrong, just checked on RBNZ inflation calculator. (Google Reserve bank inflation calculator and have a play around on it yourself)  Housing went up at a staggering 7.3 times the rate of inflation from 1995 to 2021.  Lets put some numbers on this to illustrate how this went.

$100,000 in Q1 1995 increased to $166,000 in Q1 2021 - 66% General inflation.
$100,000 in housing in Q1 1995 went up to $583,000 in Q1 2021 - 483% Housing inflation!

Those extraordinary gains are what fueled the gold rush RYM and SUM enjoyed in the past.  Someone buys an independent living unit for ~ $300K and 10 years later RYM or SUM resell if for $900K, that's where the super normal profits were made.  Problem is if someone buys a unit now for $900K and in ten years they resell it for less than $900K (in real terms after accounting for inflation over the next ten years), the profits are going to be much, much smaller.
The past super normal gains are never going to happen again in the foreseeable future because house prices are extremely unaffordable now.
Far more likely is over the next 25 years we'll see house prices gradually return to some sort of normalcy which means this entire sector could underperform for as long as the next 25 years.

Problem for OCA is in these far more sober times in the real estate industry, they remain saddled with a super high cost large care based model so logic suggests they cannot outperform the others.  That said, if it gets far below fair value on index exclusion it could be worth a deep value trade, note I suggested trade, not long term hold.

The next big boom is A.I. and the smart money has already moved out of this sector into that one.

[Basil]

https://www.thepost.co.nz/business/350187075/luxury-retirement-villages-are-rise-there-demand?cx_testId=3&cx_testVariant=cx_1&cx_artPos=2&utm_source=localised_module#cxrecs_s

[850man]

Brent exiting - voluntary or involuntary?
 https://www.nzx.com/announcements/426848

[Poet]

The board must have been pretty annoyed that he let information out to shareholders last week via that Press release. Not the done thing for this company is it?

[Shareguy]

The board must have been pretty annoyed that he let information out to shareholders last week via that Press release. Not the done thing for this company is it?

I would say it was a mutual parting. Given the share performance are we surprised.