Oceania Healthcare Limited

Company Overview: Oceania Healthcare Limited (NZX: OCA) operates in the New Zealand residential aged care and retirement village sectors. It provides residents villas and apartments within its retirement villages. The company offers a full range of residential aged care services including, rest home, hospital as well as dementia level care at aged care facilities. OCA is the 3^rd largest residential aged care provider and 6^th largest retirement village operator in New Zealand.

OCA Details

Resilient FY20 Performance: Oceania Healthcare Limited (NZX: OCA) operates in residential aged care and retirement village in New Zealand. It provides Rest Home, Hospital, Dementia, Respite and Palliative/End of Life Care, as well as Independent Retirement Village, at over 40 New Zealand locations. The company has a market capitalization of ~$816.359 million as on 7^th December 2020.

Results Performance (Year Ended 31^st May 2020)

The company has for the period, reported an increase in revenue by 3.7% to $193.6 million as a result of increased care occupancy, high income from premium rooms, and increased income from retirement village operations. Its underlying EBITDA for the full-year period stood at $63.5 million in line with the pcp despite lockdowns-related restrictions in the final quarter. Underlying NPAT of $42.9 million declined by 15.4% over the previous year due to higher interest costs to fund development activities and higher depreciation charged on completed projects.

Operating cash flow for the period increased by 11.3% to $99.4 million as a result of sale proceeds from developments completed in the previous financial year.

Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 18.81% of the total shareholding. ANZ New Zealand Investments Limited and BT Funds Management (New Zealand) Ltd. have a maximum stake holding in the company at 7.27% and 3.11%, respectively, as provided in the table below:

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

A Quick Look at Key Metrics: The company’s EBITDA margin for FY20 stood at 9.2%, better than the FY19 result of 7.2%. The company’s assets/equity ratio has improved from 2.29x in 2019 to 2.60x in 2020, while the current ratio stood at 1.24x.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Outlook:

The company has successfully managed to navigate itself through the periods of extreme risk caused by the COVID-19 and related restrictions. Although uncertainty persists, the company is considering longer-term objectives to ensure sustainable business. The strategy of assigning greater weightage to aged care has better positioned the company in terms of its ability to withstand the crisis and grow. During the final quarter of FY20, the company took a number of prudent decisions such as lower overhead costs, claim additional government funding and wage subsidies, adjust its build rate, and extend its bank facilities in order to provide with sufficient flexibility to wisely manage its way through the uncertainty that may arise. 

In the first half of FY20, the company completed 90 new care suites at Awatere (Hamilton) and 10 villas at Whitianga, and in the second half, the company completed 26 new apartments at Meadowbank (Auckland) and 12 villas at Elderslea (Upper Hutt) before the lockdown restrictions were imposed.

Construction at Eden (Auckland), The BayView Stage Two (Tauranga), The Bellevue (Christchurch) and Awatere Stage Two (Hamilton) has been restarted, and the construction of 22 apartments and 71 care suites at The Bellevue (Christchurch) is expected to be completed during FY2021 along with Stage Two at The BayView (Tauranga) and Green Gables (Nelson), bringing its forecast FY21 build rate up to 217 retirement village units and care suites.

Industry Outlook:

As per the figures provided by the Stats NZ, the number of people having age of 65+ doubled between 1988 and 2016 and reached 700,000. Notably, the number has been anticipated to double again by 2046. It is expected that there is a 90% chance that there would be 1.32 million–1.42 million people with the age of 65+ in 2043, and 1.62 million–2.06 million in 2068.

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

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

EV/Sales 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 the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

While remaining in an underlying uptrend, the stock closed lower during the previous week. However, on the first trading session of the ongoing week, it managed to close higher at the peak price of $1.31 exhibiting strength in uptrend. The technical indicator RSI with a reading around 65 but a curve flattening to up at the end suggests further picking up of bullish momentum.

Going forward, the stock may have resistance around the previous high of $1.49 whereas support could be around the 23.6% retracement level of $1.22.

Recent Update:

In a recent presentation, the company has informed about the change in the balance date to 31st March from 2021. The company also stated that it would be releasing the financial results for the 6 months ended 30th November 2020 in late January 2021. The company would then report the full-year result (ended 31st March) in late May 2021.

Stock Recommendation:

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.

Considering the aforesaid facts, we have applied EV/Sales Based Relative Valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms).

Hence, we give a “Buy” recommendation on the stock at the current market price of NZ$1.310 per share, up by 1.55% on December 7, 2020.

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

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