Oceania Healthcare Limited

Company Overview: Oceania Healthcare Limited (NZX: OCA) operates in the New Zealand residential aged care and retirement village sectors, providing residents villas and apartments within the retirement villages, and also offering a full range of residential aged care services (including rest home, hospital as well as dementia level care) at aged care facilities. OCA is presently NZ's 3^rd largest provider of residential aged care, as well as New Zealand's 6^th largest retirement village business. The company happens to be an experienced brownfields developer of aged care as well as retirement village facilities across New Zealand.

OCA Details

Investment Summary:

• Topline and bottom line CAGR between FY15-19 stood at ~2.64% and ~23.68%, respectively
• The company's aged care business has proven resilient, despite the restrictions since the Alert Level 4 lockdown, with new admissions taken and stable occupancy levels recorded during the period.
• The first half period of FY20 reflects the strong sales momentum at OCA’s two new Auckland villages
• OCA is scheduled to complete retirement village apartments at Meadowbank Stage 5 in H2FY20
• Industry outlook looks promising as the population around the world is rapidly ageing, whereby the average age increases as a result of an increase in life expectancy or falling fertility. 
• Price to Earnings (P/E) Multiple based relative valuation approach is indicating a decent upside for the stock.
• OCA’s business activities expose it to a variety of financial risks such as market risks (including cash flow interest rate risk), credit risk and liquidity risk.

Increase in Aged Care Occupancy Rate Underlines OCA’s Strength: Oceania Healthcare Limited (NZX: OCA) is one of New Zealand’s leading owners and operators of retirement villages and has a market capitalization of ~$584.15 million as on July 6, 2020.

Looking at the past performance over FY15 to FY19, top line and the bottom line of the company witnessed a compounded annual growth rate (CAGR) of ~2.64% and ~23.68%, respectively. The company’s total revenue improved from $168.5 million in FY15 to $187 million in FY19, and its net income improved from $19.4 million in FY15 to $45.4 million in FY19.

The company's aged care business has proven resilient, despite the restrictions of Alert Level 4 lockdown, with new admissions taken and stable occupancy levels recorded during the period. It has continued to sign applications and completed sales of Care Suites throughout the lockdown period. The company will also benefit from the recently announced increase in Government funding for aged residential care. The company has experienced strong demand for The Sands, Meadowbank Stage 4, as well as the premium care suits across the country. At The Sands, on the beachfront of Browns Bay on Auckland’s North Shore, 48% of the retirement village apartments and, at Meadowbank Stage 4, 49% of the retirement village apartments sold within the first six months of operation. Notably, the company would be announcing its full-year result for the period to May 31, 2020 on July 23, 2020.

The first half period of FY20 reflects the strong sales momentum at OCA’s two new Auckland Villages, The Sands and Meadowbank Stage 4, as well as continued strong demand for the company’s new premium care suites across the country. The company reported net profit after tax of $24.1 million, up 17.6% on the pcp. Operating cash flow for the same period stood at $57.0 million, up 21% on the pcp as a result of strong sales proceeds from the new developments completed.

For six months ended November 30, 2019, aged care occupancy increased from 92.3% to 94.2% at centres not impacted by redevelopment, up 1.9% on the pcp. As per the release, completion of 265 new retirement village units as well as aged care beds for the year ending May 31, 2020 happens to be on track with 90 care suites at Awatere, Hamilton already completed in July and 10 villas at Whitianga, Coromandel.

Cashflow Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 24.21% of the total shareholding. ANZ New Zealand Investments Limited and Accident Compensation Corporation are holding maximum interests in the company at 8.41% and 5.00%, respectively, as provided in the table below:

Top 10 Shareholders (Source: Refinitiv (Thomson Reuters))

A Quick Look at Key Metrics: The company recorded an improvement in EBITDA margin to 8.0% in H1FY20 as against 7.6% in the previous corresponding period. The company’s net margin stood at 15.4% which is higher as compared to the industry median figure of 3.0% and, therefore, it can be said that OCA is possessing decent capabilities to convert its top line into the bottom line. 

Key Metrics (Source: Refinitiv (Thomson Reuters))

Robust Operating Cash Flow for First Half FY20: Its operating cash flow for the first half period of FY20 (ended on November 30, 2019) was reported at $57.0 million, an increase of 21.0% on previous corresponding period (pcp). Total assets also increased by $287.7 million to $1.497 billion, primarily reflecting the significant development capital expenditure invested in the portfolio over the period. Net debt of $288.1 million as on 30 November 2019 represents a prudent gearing level of 31.8%. Unaudited underlying net profit after tax for the period was reported at $24.1 million, up 17.6% on pcp. The Board of Directors increased the interim dividend from 2.1 cents per share (unimputed) to 2.3 cents per share (unimputed).

H1FY20 Income Statement (Source: Company Reports)

Outlook: As per the release dated January 24, 2020, in the second half of the year, Oceania Healthcare is scheduled to complete retirement village apartments at Meadowbank Stage 5, Green Gables in Nelson, as well as the extension of Gracelands Village in Hastings, Elderslea in Upper Hutt and Woodlands Village in Motueka.

Industry Outlook: Population around the world is rapidly ageing, whereby the average age increases as a result of an increase in life expectancy or falling fertility. As per one projection, growth in the population aged 65 and older, and aged 80 or older are common across most developed countries including the EU, the USA, Canada, Japan, Australia, New Zealand, etc. Ageing presents both challenges and opportunities. As per UN report on World Population Ageing: 1950-2050, the worldwide number of persons aged 60 and older will be larger than the number of persons aged 15 years and under by 2050. Ageing increases the demand for primary health care and long-term care. Increased life expectancy has given the rise of chronic illnesses and disabilities and the demand for long-term health services.

Key Risks: The group's activities expose it to a variety of financial risks such as market risks (including cash flow interest rate risk), credit risk and liquidity risk. The group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the group. The group uses derivative financial instruments such as interest rate swap contracts to hedge certain interest rate risk exposures.

Key Valuation Metrics (Source: Refinitiv (Thomson Reuters))

Valuation Methodology: Price to Earnings (P/E) Multiple Based Relative Valuation (Illustrative)

Price to Earnings (PE) Multiple Based Relative Valuation (Source:  Refinitiv (Thomson Reuters))

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands with upper band suggesting overbought status while lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack.

On the first trading day of the on-going week, the stock opened with a gap and gave close at the peak price of $0.95 thereby demonstrating strength in a bullish trend. Technical indicator RSI with 57 reading suggests strong bullish momentum for the stock.

Going forward, the stock may have resistance around $1.13 as provided by upper the Bollinger band while support could be around 50% retracement level of $0.88.

Note: Technical analysis as at 3:05 pm, July 6, 2020, Auckland, New Zealand.

Stock Recommendation: The company’s first half of the financial year reflects the strong sales momentum at its two new Auckland Villages, The Sands and Meadowbank Stage 4, as well as continued strong demand for its new premium care suites across the country. This is evidenced by the fact that aged care occupancy increased from 92.3% to 94.2% at centres in the first half of FY20, up 1.9% on the pcp. Moreover, OCA is committed to complete 265 new retirement village units and aged care beds as soon as possible.

Considering the aforesaid facts, we have valued the stock using a relative valuation method i.e., Price to Earnings (P/E) multiple based relative valuation (on an illustrative basis), and we have arrived at a target price of lower double-digit growth (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$0.950 per share, up by 4.40% (New Zealand Standard time: 3:16 pm) on July 6, 2020.

OCA Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

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