Originally Posted by
Beagle
Negatives
1. The longstanding issue with staff costs rising much faster than operating revenue continues and in fact has got worse this year than ever before.
Total employee costs compared to last years annualized figure are up a staggering 12.65% substantially worse increase that the systemic long run average of 7-8% increase per annum.
2. The repayment of the wage subsidy of $1.8m is completely illogical considering the Govt's systemic underfunding of basic care services and is a very poor decision in my opinion.
3. Even backing out the wage subsidy repayment staff costs increased 11.3% against Rest Home and hospital care fees only up 5.3%.
4. Importantly Government funding is unchanged on the year !
5. Staff costs in total amounted to ~ 67% of all revenue received and importantly the increase this year in human resource ate up 91% of all the increase in gains made from the increases in premium rooms and DMF fees so the long run trend of staff eating ostensibly all the gains from the business transformation process over the years continues unabated.
6.Underlying eps of just on 8.0 cps for 2022 by my calculations in real inflation adjusted terms, (inflation is a serious matter now), is now 17.5% lower than in 2018, the first full year.
7. From my review of the financial statements other costs in the business are also rising at a pace that's concerning.
8. Delivery of new units in 2022 was disappointing, the second year in a row.
Notes from the analysts call on Friday afternoon
1. Direct Covid costs of 2.5m in FY22 are unlikely to repeat in FY23. Comments were made that there was also indirect Covid costs but no explantion was offered ass to whether they might repeat.
2. Remuera Rise average age of residents 83.6 years, sounds like 1 resident has vacated already and the apartment will be marketed at about $500K more so management are confident this will be eps accretive and that their assumptions around that are conservative
3. Good cover on fixed price construction contracts right through to December 2024 (which was a pleasant surprise)\
4. Actively looking for greenfields development sites and some softening in land prices has been observed.
5. An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.
Outlook
1. Its one thing to state a new goal of 300 units and another to achieve it. Achieving it in FY23 should be a foregone conclusion with 113 care suites in Milford deferred from last year, (so its really only 187 units in FY23) but I will believe it when I see it in FY24 and beyond.
2. From my 5 year review its clear there is very very little money in care, nothing in basic care and very modest returns from premium care and care suites and notwithstanding the vitally needed pivot towards more building and acquiring more independent living units OCA will be saddled with an extremely high level of their business model being in care which accords a very low return on capital employed for the foreseeable future.
3. The Global shortage of care and nursing staff and fierce competition for them and demands for ever increasing pay rates for the risky work involved are not a situation I foresee changing any years soon. Expect a continuation of multi year trend of staff eating the vast majority of all gains from DMF and premium care revenue increases.
4. The political environment is extremely unhelpful, actually hostile to OCA both from a funding perspective and residency for care and nursing staff with this Govt in its "infinite wisdom" making it less attractive to come here than for staff to go to Australia. With care and nursing staff (nurses up to a whopping $30 and hour more) able to earn substantially more in Australia I expect the recent opening of the borders to exacerbate the staff shortages not help the situation.
5. Fixed price construction costs locked in on projects through to Dec 2024 confers a material advantage compared to others in the sector.
6. 300 units this year sounds impressive but a heck of a lot of them are care suites which appear to have very limited pricing power in a high inflation environment.
7. The Helier should provide a boost in earnings as its sold down in much the same way as the Sands did in 2018 and they might get back to underlying earnings in real inflation adjusted terms in FY24 of about 10.7 cps which while being a 27% increase from this year is still a no growth scenario in real terms since the underlying eps of 2018...so 6 years without any real growth in underlying earnings and that assumes they actually make 10.7 cps in FY24 which is not a certainty.
8. Its very important to note that this woke Govt's review of the retirement village sector remains as something pending and who knows what they might do ?
Its clear I am nowhere near as positive as Maverick and Ferg.
Will they be able to grow earnings from FY24 onwards...only time will tell.
In the meantime for those who want to make a much quicker pivot towards independent living units there are SUM clear alternatives with a long proven track record of strong earnings growth and much better cost control discipline.
9. OCA are cheap and they are cheap for many good reasons and not the least of them is a proven inability to grow earnings despite a booming real estate market for the last 5 years.
10. Its very clear the tide is going out very fast in the real estate sector and the approximate halving of sales volumes recently reported is going to make it much harder for all companies in this sector to execute sales as the vast majority of incoming residents need to sell their home first.
11. I expect extremely challenging real estate and political conditions for the balance of 2022 and while Labour is in power.
12. The outlook globally with almost all central banks rapidly winding back stimulatory settings also provides a very challenging backdrop for the market and I remain of the view we are in "Bear" market conditions.
If a Labour Greens Maori coalition get a third term, which they might, run for the hills.
My rating Underweight / Underperform Disc: Will retain a very modest free carry stake.