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NZ Core: Ryman Healthcare

$11.13 Last Price
Sector: Healthcare
Market Cap 5,565 M
Fair Value $13.00

Investment Perspective
Ryman Healthcare is a well-managed company operating retirement villages in New Zealand and Melbourne and is positioned to benefit from a fast-growing elderly demographic in both locations. We expect Ryman Healthcare's business to expand strongly during the five years to 2023, driven by new construction in New Zealand and Australia and from the resale of existing units as a result of portfolio growth. Rising dwelling prices have boosted the funds retirees have to purchase retirement living units and is contributing to higher selling prices and margins on the new units developed by Ryman. The company's strong reputation for high standards of service and care, differentiated offer that combines retirement living and aged care plus a low fee structure, combine to underpin its narrow economic moat.

Company update
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 land-bank supports the delivery of 6,100 beds. Of this, 2,650 are in Victoria and 3,450 are in New Zealand. On the assumption each project takes around four years from site purchase to completion, the land-bank 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.

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