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A Broker's PreView - Summerset Sure to Rise

Overview: Earlier this week Summerset announced a profit upgrade, continuing a trend of impressive results across the aged care sector. Underlying profit is forecast to be in the range of $32m to $34m this financial year, a reasonable increase on the market expectations of $30m.

Pros: Summerset is New Zealand’s second largest developer of retirement villages, with 4 villages opened in the second half of 2014 and a village set to open n Wigram later this year. The company also has sites in Casebrook, Ellerslie and Lower Hutt.

This strong sales growth is indicative of the demand for units in New Zealand. This demand is only expected to increase as our population ages, particularly with the demographic bottleneck known as the Baby Boomers on the retirement horizon.

Along with developing stand alone units, Summerset has been careful to include care beds in their development plans. This allows them to offer residents the continuum of care, meaning that most of their needs can be met on site as their needs change, a key demand of many residents.

Cons: Any company developing houses is subject to the whims of the housing market. Any material drop in house prices will have grave consequences for all aged care providers as the value of their stock would drop concurrently. This is particularly relevant for those retirement village operators involved in heavy development.

Any drop could also see a change in retirees’ decision making, with some delaying their move into a home until prices recover. Those that do still sell will have less to spend on the units, driving down the price Summerset could expect to receive from their development, obviously crimping margins.

The other major risk that retirement operators face is the prospect of retiree’s living longer. Without wanting to be crass, the lower the turnover, the less resales the company can achieve, leading to fewer deferred management fees and gains on resales (if we assume property prices continue to rise). Summerset achieved record resales of 110 units in the first six months of the year.

Price performance: Summerset hit new highs this week, rising 5 percent on the day of their profit upgrade.

Investment outlook: A good update has seen some analysts increase their valuation already. Prospects for the company and industry remain positive.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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