EUR 850.00 For Business Accounts Only

Morningstar | Moderation in Dwelling Price to Impact Ryman’s Development Profits. FVE cut 4% to NZD 13

Narrow-moat-rated Ryman Healthcare reported first-half fiscal 2019 earnings of NZD 19.3 cents per security and guided to full-year earnings of NZD 44.6 to 47.6 cps. Our forecasts sit in the middle of the guidance range, having been trimmed to NZD 45.8 cps from NZD 46.7 cps to account for rising nurses' wages. We also trimmed the expected profit Ryman makes on newly developed independent living units, or ILU, as dwelling prices in Australia have fallen faster than anticipated, down roughly 10% over the past year. Further, Ryman’s recently acquired development sites are in Melbourne fringe locations where dwelling prices are comparatively low, impacting the expected profit on each new ILU. Following these revisions, our fair value estimate declines by 4% to NZD 13.00. Ryman continues to screen as undervalued, currently trading around NZD 11.00.

The key driver of our valuation is a gradual ratcheting up in the number of new ILUs and aged care beds the firm delivers each year. In this regard, Ryman continues to deliver, guiding to 800 new combined ILUs and care beds in fiscal 2019 and over 900 in fiscal 2020. Ryman has laid the foundations to substantially increase the volume of beds delivered over the medium term as the current landbank supports the delivery of 6,100 beds. Of this, 2,650 is in Victoria and 3,450 is in New Zealand. On the assumption each project takes around four years from site purchase to completion, the landbank supports an annual delivery rate of 1,500 units. This simple analysis coupled with solid progress on permitting the existing 22 development sites and very favourable demographic trends underpins our forecast for Ryman to deliver 1,450 beds in 2022. Demographic trends in Ryman’s key markets points to growth slowing after 2022, which underpins our forecast for the annual rate of growth in new beds to moderate to 2% for 2023 and beyond.

We continue to view Ryman’s strategy to build and operate villages that combine ILUs and aged care as a key differentiator in the Australian market. As distinct from New Zealand, elderly Australians currently have to leave their retirement villages and relocate to aged care homes when they are unable to manage their own health care requirements. Ryman’s growth strategy for Australia is focused exclusively on the state of Victoria. The initial sites purchased were 15 to 20 kilometres from central Melbourne, where prices and development profits are high. However, more recent sites are in Geelong and Ocean Grove, seaside towns 75 km and 98 km, respectively, from central Melbourne. There towns have an ageing population, so we don’t see any risk in being able to sell newly built ILUs. However, the average dwelling price in these cities is materially below that of Melbourne, which suggests less profit for each newly developed ILU.