True and important to understand that while public equity investments give the illusion of extreme liquidity, the fact is that to obtain liquidity at intrinsic can take many many years.
Hence the required minimum 10 year time frame.
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I think the uncomfortable question is whether underlying EPS, as defined by OCA and others in the RV industry, is even an appropriate metric to apply a PE multiple to. Lots of work has been done by various brokers and the shareholders association on its many drawbacks (primarily based on what it omits), and the severely lacking correlation to underlying cashflow from operations (ie cashflow ex development). Even old Ryman has signaled it is moving away from its traditional underlying earnings metric, and next year will even stop issuing guidance on it.
Cashflow is king, as they say. but defining it is not straight forward.
Fortunately for me, selfishly perhaps, I didn't mention 'UN'PAT, or 'U' anything, as I think it is a made-up financial measure and the 'U' is distorting reporting across the RV's (and other sectors) as they all do it differently, to suit themselves. NPAT is a simple measure, it is well understood, levels the playing field and everyone can be judged equally on it.
I say take the 'U' out of everything, is a terrible indeterminate measure and has brought all the CFO's who use it into disrepute, imho. 'Underlying' has no place in financial reporting, end of. It is just financial numbers manipulation to make the numbers look better than they actually are.
I also agree, 'underlying EPS' is a bogus measure, it depends on what metrics they use for 'underlying'. Just get rid of it, EPS is EPS, these CFO's need to stop stop farking around with the numbers! Especially to make the numbers look better than they are!. EDITDA is EDITDA, NPAT is NPAT, EPS is EPS, etc, underlying 'U' has no place in financial reporting, it is bogus and misleading. The FMA should be looking into this distorted and misleading financial reporting.
I think that's the rub of why the SP of RVs are now in a "market value" no lands man...the market is totally unsure of how to value these things. The historical 'for convention' P/NTA is clearly out the window, as is a multiple applied to uEPS, as the later has no semblance to cashflow from operations given the development margins often exclude the cost associated with common facilities, headoffice, care facility construction or core infrastructure.
If one were to breakdown the cashflows from OCA (or any other RVs) core business, excluding development cashflows, the cashflow picture is often negative or breakeven at best. A 10x multiple applied to a negative or breakeven cashflow will never get close to the prevailing shareprice of RVs which implies the marketvalue is totally driven by bluesky/future growth.
Sure there is a particular cycle to the cashflows from a RV's core operation...they will be best when the occupancy is high, resales are in full swing, maintenance capex becomes more defined and granular...but for now, the underlying cashflow from RV companies core operations are negative and the implied CASH returns on invested capital have so far been awful. Even if you strip back the denominator from the equation to remove revaluation gains and make it based on simply cost, the ROIC is still nil or negative with negative cashflow form core operations.
and of course a DCF remains the most robust method of valuing the underlying value of an RV but that is fraught with risk, even setting aside what is the right discount rate. The blowout in inventory (working capital for an RV) stemming from the increased days to sell from homeowners wanting to sell and move, the maintainability in development margins achieved in recent years and the go forward (given inflation and labour constraints), labour constraints on care and central government funding, all pose significant input risk when doing a DCF.
In practice an RV's book value of assets contains a DCF for each underlying asset, completed by an external valuer. And they are surprisingly complicated and consider a lot of variables, but the outputs are hugely sensitive to the inputs. And the value ascribed to consented bare land is even more widely variable as the valuer considers blue sky but discounted back at higher discount rates.
I think accountability and transparency for the RV valuers would be a good thing. How did the cashflow from operations (excluding developments) in the last year compare to what was forecast in each of the previous 5 years? I'd wager a pretty penny the inputs used by the valuers were for high operational cashflows and no where near the negative cashflows experienced. And the market is saying they do not believe in the subjective assessments made by the external valuation experts.
And just because a firm spends X dollars in capex I don't think that means in an underlying, intrinsic way its value of assets has gone up by the same amount, or that its market or book value of equity has. A random company, for instance, that buys a contract at an impossible margin and spends a load on assets to fulfill those assets doesn't mean its worth the same as its assets less net debt. If the assets aren't able to achievable a satisfactory return on capital, that capital spend on assets is in fact value destructive. That's a question that never gets asked in the RV industry.
Anyway I don't have the answers and I don't have nearly the same degree of knowledge on the RV industry that many here do. So take it all with a grain of salt and just random observations and musings. But I will disclose I have bought a wee bit of SUM and ARV in recent months, and I'll happily admit my purchase decision was not an informed one, just wanting a lazy exposure at this point in the cycle.
The value of an equity is based on its FUTURE cashflows - not its historical cashflows on which I've focused - and the predicting the granularity of future cashflows is too hard and too time consuming for me, but I have great respect for those that do give it a go, and it'll only be fair they are richly rewarded if things turn as they project. They've done the work, I haven't, and I've got a lot of admiration for the work thats been done and wish all holders the best.
Whilst I agree with the last part (making the numbers look better) I respectfully disagree with the first half. I have no issue with making the numbers look better if it based on reality. The Society of Accountants has itself to blame for introducing layers of complexity with the new USA-centric IFRS reporting. It is impenetrable to all but the Harvard educated experts. Take for example IFRS 16 where a property you rent becomes an asset - it flies in the face of accounting principles and companies with zero external debt (e.g. HLG) are now reporting debt which distorts things like debt/equity ratios. Lord only knows what they are doing with software. Some derivative valuations and this constant requirement to mark things to market are IMO making the accounts more complicated and harder to understand. Accordingly, CFOs have had to "dumb down" their accounts to look through or ignore what I call 'IFRS junk' to get to the underlying numbers. Some CFOs may have taken it too far by including more items but I digress. Having an "all in" number with no explanations as to the one-off foibles, IFRS anomalies or discontinued business units, for example, gives a worse picture than the true operating or, dare I say, underlying, nature of the business. Context is key and CFOs are playing to that. But it has to be based on reality - no dispute from me on that.
Rising building costs have led the annual decline in residential construction to accelerate by 7.7%
https://www.1news.co.nz/2023/12/09/c...ates-increase/
development margins getting squeezed , no wonder there canning developments
Great post here, I have been studying the IFRS lease accounting in detail over the last few days and can only conclude that is it a good thing.
I strongly disagree with it and it is a complete cluster but for those who truly understand it and can think through it, it is an advantage as it clouds the water for everyone else.
It completely stuffs up all the balance sheet ratios and returns on capital and all sorts of things.
A company I am looking at on the ASX is made to look like it requires tons of capital to operate because of this stupid lease accounting but the reality is that it requires basically none.
Also it clouds the water for anyone using screeners.