Ryman Healthcare’s latest downgrade caught investors by surprise, resulting in the share price on the NZX dropping more than 11 per cent in one day.
Ryman Healthcare’s latest downgrade caught investors by surprise, resulting in the share price on the NZX dropping more than 11 per cent in one day.
Ryman Healthcare’s third downgrade for its 2024 financial year caught investors by surprise this week, resulting in the share price dropping by more than 11 per cent in one day.
The retirement village operator warned its net profit would be 13 per cent lower than previously advised at$265 million to $285m, with the company blaming lower sales and falling margins. This was well below analyst consensus estimates of $308m.
Shane Solly, senior porfolio manager at Harbour Asset Management, said Ryman was in a frustrating period. The company was continuing to dial back on its vertical building.
But this result still included four villages where the main buildings were all being completed at the same time. “That’s very unusual,” said Solly.
He said it was a legacy issue which went back to the previous management team’s decisions, made around five to six years ago.
Solly said the sell-down of units had been affected by slow sales in the residential property market. While some retirees could afford to buy units without selling their own homes, most needed to sell their property first.
“A lot of residents don’t need to sell to move in, but the vast majority need confidence that if they put their house on the market, it will sell in a reasonable period of time.”
Solly said this time of year was typically the prime period for retirement unit sales after people had had time to think about it over the Christmas holiday period.
The slow housing market and the good summer could mean some people were delaying that decision. People were also reluctant to move into villages where the main facilities were still under construction, he added.
Craigs Investment Partners analysts Stephen Ridgewell and Rob Morrison said the downgrade could not all be attributed to market-wide factors.
“Ryman has pointed to difficult trading conditions, leading to lower sales, for its downgrade. We note, however, that sales volumes in the broader housing market have improved in the year since Ryman issued FY24 earnings guidance, and we also note rival Summerset’s record-high December quarter sales result, suggesting Ryman’s downgrade cannot plausibly be attributed to market-wide factors.
“Rather, we think Ryman’s poor sales are in large part due to site-specific problems, and also that its development book is more heavily weighted than peers’ towards apartments, which are proving less in demand than townhouses, especially where there are no water views.”
Lower build rate
Ridgewell and Morrison also warned that the long-run build rate guidance could be the next to fall.
In February 2023, Ryman issued guidance for a building rate of 850-950 units in FY25, 1300 in FY27 and 10 per cent growth on this per annum thereafter. The company then reiterated the guidance in May 2023.
The analysts said they had consistently taken the view that this guidance was unachievable and inconsistent with the company’s goal to operate the business at cash flow break-even.
They estimated that a sustainable building rate for Ryman was now around 400 units per year over the medium term if debt levels were to be kept under control.
“Soft demand in FY24, a lack of recent land acquisition activity, low risk appetite and limited debt funding capacity all suggest a pick-up from the current c.400 retirement village unit per annum build rate (which equates to 4-5 per cent per annum portfolio growth) is some time away.”
“Ryman’s chunky downgrades to build rate and earnings guidance so soon after its February 2023 capital raising, despite market conditions improving, is another clear signal things are worse than previously understood. This will be a long, slow turn-around, though to be clear, we think the business will eventually turn as its brand remains strong.”
Solly said Ryman was going through a transition which was positive in the long term, but investors were having to swallow some bitter medicine in the short term.
The Craigs analysts have a target price of $6.46 on the stock. Ryman shares opened on Thursday at $4.58. They are recommending investors switch from Ryman to Summerset, which they see as the number-one pick of the sector.
Summerset plans to raise up to $125 million in new capital through a bond offer.
Summerset raising capital
Summerset revealed plans to raise up to $125m in new capital through a bond offer this week.
Solly said the move was business as usual for the company and did not point to any debt issues. He said Summerset was a good user of capital and had a history of good returns on capital.
“They are very good at managing debt.”
Solly said Summerset’s model was very different from Ryman’s.
“They have got less of the care component.”
Many retirement village businesses include hospital care as part of their offering. But Solly said the economics of offering hospital care had deteriorated over the last few years, which had resulted in a number of operators dialing back on their care offering plans.
Lack of staff and pressure to pay staff higher wages due to the Government lifting pay for public health nurses and inflation has squeezed the margins.
If there are fewer private care options, that’s likely to put even more pressure on public hospitals.
Synlait has a $130m debt repayment due in just over a month.
A2 Milk mum on Synlait
A2 Milk chief executive David Bortolussi was giving very little away this week as to the company’s stance on its closely linked and cash-strapped supplier, Synlait Milk.
Synlait has a $130m debt repayment due in just over a month, and has its Dairyworks business up for sale to try to repair its balance sheet.
A2 Milk has just under 20 per cent of Synlait and China’s Bright Dairy has 39 per cent.
Neither a2 Milk nor Bright have given any clues as to whether they would support a capital raise for Synlait, if it came to that.
As the deadline approaches, Synlait’s NZX-listed bonds trade at an eye-watering 32 per cent. ”From an operational point of view, we have no major concerns at the moment,” Bortolussi told Stock Takes after the company released a better-than-expected first-half result.
”From a shareholder point of view, the capital structure of Synlait is a concern for the company and its shareholders,” he said.
”We would prefer it if they addressed that through the current plan – the exit of Dairyworks – and hopefully through the continued support of the banking syndicate,” he said.
Synlait is looking at alternative options.
”We have not been presented with a proposal. If and when we are, then it might be something for the board to consider.
”But obviously the capital structure is a concern that needs to be addressed.
”If Synlait opts resolve its balance sheet issues funds via a share issue, then a2 runs the risk of having its shareholding diluted if it chooses not to participate.”
