SUM Summerset Group

[Shareguy]

Overall another good result.

Notice divi payout range changed to 20 to 50 percent of underlying profit, which makes sense.

Portfolio revaluations rose 64 per cent....WOW. Did not realise the housing market was in such a good state. Met last week reported a unrealised devaluation of its portfolio.........

Intention to enter Queensland market. Operating cashflow nearly doubled in 2H2023 vs 1h2023

Nta at $11.10 up 18 percent.

[Basil]

Very solid result. Frankly, this is in a class of its own.
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SUM/426789/413412.pdf

[winner (n)]

Think Summerset put this graphic in the preso just to remind everybody of the pecking order in their sector ...and saying How Great Thou Art

Least had decency not to name them by name .....but alphabetical is a good guess for Peer1 etc

You cannot view this attachment.

[Basil]

Big picture...they have continued to grow underlying earnings nicely over the years even during the pandemic.  On a historic underlying PE of only 13.3 for this proven growth company.  Lifting their projected build rate yet again to another new record forecast for 2024 while many in the sector, by stark contrast, are retrenching. Why would you bother owning anything else in this sector ?

Zooming in a bit, what I found a bit interesting is the margin between house prices and 2 bedroom ILU SUM units is gone in main sectors 100% v 100% and 90% in regional sectors.  Very different to how it was years ago.

Almost unlimited potential for SUM to roll out their very successful business model throughout Australia which brings me back to the rhetorical question I asked in paragraph 1.

[BlackPeter]

Think Summerset put this graphic in the preso just to remind everybody of the pecking order in their sector ...and saying How Great Thou Art

Least had decency not to name them by name .....but alphabetical is a good guess for Peer1 etc

You cannot view this attachment.

Not quite sure I understand why a $11 share with $9.50 NTA (SUM) would be in any form or shape better than a 60 cents share with $1.40 NTA (OCA)? But hey - if you say so ...

The other thing this graph shows is that the gearing ratio is for all four "peers" very similar.

Anyway - I am sure they have been happy they found something to fill another slide, and if it even makes some people happy, than this is great, isn't it?

[Basil]

NTA up over $11 now BP but NTA is not how companies in this sector should be valued.  Earnings is what counts and SUM have a stellar track record of eps growth while all others in this sector are tripping themselves up for one reason or another and while all other are busy making excuses, SUM are busy making earnings growth.    That said I don't own any SUM at this point as I see headwinds in this sector remaining for quite some time and their yield of only 2.3% unimputed does not fit my investment objectives.

[Buzz]

Not quite sure I understand why a $11 share with $9.50 NTA (SUM) would be in any form or shape better than a 60 cents share with $1.40 NTA (OCA)? But hey - if you say so ...

The other thing this graph shows is that the gearing ratio is for all four "peers" very similar.

Anyway - I am sure they have been happy they found something to fill another slide, and if it even makes some people happy, than this is great, isn't it?

No doubt SUM has done exceptionally well and the market has rewarded that, and may continue to do so, although the rewards will top out soon enough.

But to your point in other words, 'how much upside is there in SUM?' having already smashed the leading contender and the rest of the sector.

In real terms the listed RV's are not all that dissimilar, the difference is at the margins and not the macro, and for a longer term view I'm in the camp of backing massively discounted RV's, rather than seeking out probably modest gains in SUM, ie I think it's peaking or has peaked, for the meantime. Time to move on, find another horse, as there's no doubt that this sector will prosper for decades to come.

Of course, if one hates the whole sector then there is no reason to be involved at all. SUM has proved that might not be the best course of action, but SUM does not have the enormous SP potential anymore, that the hugely discounted side of the sector does. Jmho.

[Greekwatchdog]

For Bars review of the result for those interested.



Summerset Group (SUM) reported strong FY23 underlying earnings and annuity EBITDA, driven by robust resale and new sale gains, partly offset by higher costs. All time high resale margins were the stand out, an extraordinary achievement given the weak housing market. SUM guided for >+10% growth in unit deliveries for FY24. Strong margins and an increased build rate suggests high demand for SUM's product. The result was not without negatives; cash conversion was even lower than we had expected, SUM delivered negative cash flow from ongoing operations before funding costs and net debt increased by +35%, or +NZ$350m over FY23. We see SUM as well placed to deliver strong growth but at >30x FY25 EV/Annuity EBITDA we see better value elsewhere. We retain NEUTRAL with an unchanged target price of NZ$10.70.

What's changed?
Earnings: Underlying earnings up +3% to +6% and annuity EBITDA down -3% to -7% across FY24 to FY26.
Strong result...
SUM reported a strong result, with annuity EBITDA up +16% year-on-year. The strength was concentrated in resale margins, which were up ~3pp in 2H23 to ~29% sequentially, matching the all-time high achieved in 2H21. This is an extraordinary result considering the weak housing market and relatively stable prices as tracked by our aged care pricing index. A combination of a higher proportion of villas and higher average tenure likely contributed. The strong resale gains was largely offset by higher opex versus our estimates.


...weak cash
SUM reported its second consecutive year of negative cash flow from ongoing operations; driven by increased opex, expensed interest and (by SUM's high standards) weak cash conversion of sales, primarily carried through from 1H23. Even excluding funding costs, SUM's business cash flow from ongoing operations turned negative for the first time. The glass half full interpretation is that SUM is investing ahead of strong growth, as it should. The glass half empty interpretation would suggest that SUM is struggling to generate enough cash from its mature villages to support a growing corporate centre. We believe there is some truth to both.


New metrics... same old
SUM introduced a new metric called 'Summerset free cash flow'. This metric reflects net operating business cash flow and deducts BAU capex and expensed funding costs — very similar to Forsyth Barr's cash flow from ongoing operations. SUM changed the definition of net operating business cash flow to include 25% of new sales cash flow, reflecting the DMF proportion. There is some logic to this but the change is quite dramatic, increasing net operating business cash flow in FY21–23 by a factor 3x to 5x. It all adds up to the same but we prefer to analyse cash flow from ongoing operations, separate from development activities, and continue to do so.



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NZX Code   SUM
Share price   NZ$11.12
Target price   NZ$10.70
Risk rating   Medium
C&ESG rating   A-
Market cap   NZ$2,571m
Avg daily turnover   250.0k (NZ$2,405k)




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Financials: Dec/   23A   24E   25E   26E
Rev (NZ$m)   481.5   529.5   580.3   641.1
NPAT* (NZ$m)   190.2   188.6   195.2   210.2
EPS* (NZc)   81.9   80.9   83.7   90.1
DPS (NZc)   24.5   18.0   19.0   20.0
Imputation (%)   0   0   0   0
*Based on normalised profits





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Valuation (x)   23A   24E   25E   26E
PE   13.6   13.8   13.3   12.3
EV/EBIT   17.4   18.3   17.6   15.5
EV/EBITDA   16.2   16.9   16.2   14.3
Price / NTA   1.0   0.9   0.9   0.8
Cash div yld (%)   2.2   1.6   1.7   1.8
Gross div yld (%)   2.2   1.6   1.7   1.8

[Ferg]

SUM introduced a new metric called 'Summerset free cash flow'. This metric reflects net operating business cash flow and deducts BAU capex and expensed funding costs — very similar to Forsyth Barr's cash flow from ongoing operations. SUM changed the definition of net operating business cash flow to include 25% of new sales cash flow, reflecting the DMF proportion. There is some logic to this but the change is quite dramatic, increasing net operating business cash flow in FY21–23 by a factor 3x to 5x. It all adds up to the same but we prefer to analyse cash flow from ongoing operations, separate from development activities, and continue to do so.

I'm pleased to see SUM has done this.  I have banged on about this for some time.....analysts can think what they like but they are still incorrect to exclude ALL cashflows from new ORAs.  They even state they want to see cashflows from operating activities - last time I checked DMF fees are part of operating activities so the analysts continue to talk out of the rear end on this subject.

[winner (n)]

SUM bond offer over subscribed ....got the 75m plus 50m more

Plenty of punters happy with 6.43% pa

Sign of confidence in the company

[KW]

...weak cash
SUM reported its second consecutive year of negative cash flow from ongoing operations; driven by increased opex, expensed interest and (by SUM's high standards) weak cash conversion of sales, primarily carried through from 1H23. Even excluding funding costs, SUM's business cash flow from ongoing operations turned negative for the first time. The glass half full interpretation is that SUM is investing ahead of strong growth, as it should. The glass half empty interpretation would suggest that SUM is struggling to generate enough cash from its mature villages to support a growing corporate centre. We believe there is some truth to both.

This is the issue I have with this industry.  Currently its running like a giant ponzi scheme.  So long as they keep building new units, they can disguise the fact that they dont make any money from the old ones.  So if in the future they stop building (either voluntarily or by force majeure) then what happens to the company, the villages, and the people living in the villages?  The whole ponzi falls apart as the company becomes insolvent.

Personally I would like to see the two parts of the business separated, split in the same way a traditional stapled REIT splits its operations - a development arm (building new villages) and an operational arm (managing existing villages) with the structure being a company share for the development arm stapled to a trust unit for the existing real estate.  Then you can clearly see how both arms of the business are performing. 

Because eventually all ponzi's come undone.

[Basil]

Had an interesting chat with Julian Cook years ago about new villages and how much they make when they're established.  In a nutshell there's nothing really in a new village as lots of capex is spent on community facilities and buildings.  The real money is in resales he said when the village matures and is about 10 years old.  That said, we've had this extraordinary period over the last 25 years that I've posted extensively about already where house price growth has vastly outstripped inflation so I'm not sure the huge gains on resale are going to be there in the future, like they have been in the past.

There is ongoing strong growth in the aging population and will continue to be and arguably SUM have massive room for expansion in Australia and what they're building is the style of village people seem to want.

That said, Forbar are only picking ~ 3% growth in eps in the next 3 years for SUM and that might be indicative of what shareholders can expect to see for the foreseeable future, i.e. a mature low growth company.  Growth of 3% + no growth PE of 7.8 suggests to me that a fair multiple for SUM might be only ~ 11 at this point and with it trading right around the NTA and only paying a ~ 2% yield the numbers are not "talking to me" at all.

Dare I say it there could be better value in the short run in a couple of the other names in this sector which have been very heavily beaten down to below half their NTA, ARV and OCA.  Absolutely scandalous that ARV directors showed their takeover suitor the door at an indicative price of $1.70.   Accordingly, there would appear to be no chance of a takeover putting ARV shareholders out of their misery as nobody in their right mind would pay more than that.

On the other hand, OCA is trading well below half their NTA.  Maybe OCA directors will allow shareholders to have a say in their own future if someone comes knocking on the door at around ~ $1?    You never know, there's a possible chance of a takeover there.  I am sure many long-suffering shareholders would welcome the opportunity to sell into a takeover at around, or slightly above $1.

[Untamed]

Last thing I want to see is a takeover, and no way in hell I'd sell mine for $1.00.

You never know, there's a possible chance of a takeover there.  I am sure many long-suffering shareholders would welcome the opportunity to sell into a takeover at around, or slightly above $1.

[Basil]

I haven't been following lately.  What's their latest stated NTA guys ?

Quickly looked it up.  My goodness, NAV which includes everything is $1.48 as at 30/09/23, page 22, up from $1.36 as at 31 March 2023.
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/OCA/422074/407732.pdf

I reckon those people buying in the late 50's cent range recently might do okay then ?  Maybe $1.20 for a possible takeover then ?

[Buzz]

Last thing I want to see is a takeover, and no way in hell I'd sell mine for $1.00.

Agree, what a steal that would be. Keep in mind that the Directors/Chair own a lot of shares and I'd be appalled if they chickened out for $1!!!