[QUOTE=percy;342517]Not a doubt in my mind Percy
Cheers
Sauce
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Stephen R at Macquarie upgraded target price yesterday.
He has an even higher build rate forecast out into the future to meet demand.
Lots of local excitement and ODT newspaper stuff about the opening of the Yvette Williams Village in Dunedin.
There are apparently just two serviced apartments left, and although officially opened with some residents already there, the place still looks like a building site. From the street, it looks as if the opening should be weeks away, but I guess the inside is all up and running.
Hi Scamper, Percy
People who buy off the plans or during construction are given a discount of approximately 10%. This allows RYM to sell down their project before completion, and also settle the development in "stages" so they can get revenue in before the entire development is finished.
So residents who move in before total completion are compensated in a way. This is how it is sold to residents.
Cheers
Sauce
What a great idea! hope they open another one in Dunedin in the next 20 years....
my parents are very happily ensconced in the Frances Hodgkins village here.
it's a banana-shaped high-rise tucked into the volcanic cliffs overlooking St Clair Beach, the Harbour, peninsula and city etc.
Large balconies and fabulous views...
This was featured on Campbel live to night.I did hear new earthquake proff foundations have recently been completed at Kate Sheppard.The latest liquidifacation have ruined them too ! !!!
On this issue RYM have come out on top by putting residents interest first.well done Simon Callis and team.
I would suspect the owner Lance Bunting would have all his capital in this village and would not have the resources to help out residents.He would most probably have it mortgaged,so he looks to be the biggest loser.The lawyers will do well.
I am not so sure. The legel agreement will be pretty specific on what happens. The residents will be getting back their entry payment less the exit payment.
Residential and commerical tenants dont get insurance proceeds even though they pay the insurance premiums (implicity (through rent) or explicity respectively) so why should Village residents??? The issue is Residents pay a large upfront payment in return for a 'discounted' rental while they remain a resident.
Before I get called mean, I do see both sides. I haven't done the maths to see how it would work if the Resident did get the insurance but in theory it would leave the village operator with a big loss (a distroyed village with not enough money to demolish and rebuild).
I agree with your post,but for a lot of the residents affected by the quake,I think they will find it very hard to understand that they have lost their home,with little likely hood to regain their former position.The money they receive will not go far in getting them residency in another retirement village.As for the owner,I can not see the village being rebuild where it stands now.Should he receive full insurance pay out, I can not see him being able to replace what he has lost.At lot of issues that nobody[except RYM]could have foreseen.I would hate to be 82 years old facing these issues.
Why should residents pay exit payment. They did not exit. They have been thrown out. Retirement Village Contracts Stink. I am in that age group and have yet to see a contract that someone in sane mind would sign. How good is their legal advice? In my opinion very similar to legal advice that got a lot of people into BlueChip
RYM were very lucky there was no real damage.Yes would have cost them a lot.I must have miss heard,as I thought Simon Callis said they changed it 4 years ago.
What I do see is 1/ Ryman put residents first,and 2/they have the capital/resources to weather such a disaster.
Yes I bet the calculators were worked overtime.!!!!!!
Correct me if I'm Wrong....
These agreements appear to be in essence the same as commercial lease.
Q. Who actually owns the building. Does the tenant only own "right to occupy",
thereby in fact being a "conditionial tennant" with special OPEX's in place ?
Part of the OPEX being a payment that goes toward insurance for the L/Lord.
???
BB
As far as I know the Margaret Stoddard village is "in essence the same as commercial lease".Note again not a RYM village.
I do not know what/how the RYM insurance works.What I take from the TV program,and what Simon Challis [rym, ceo]said was that RYM foresaw the insurance risk/
problem would disadvantage residents so they have altered their's.
RYM owns their buildings.
Tks percy
Seams some very bad advice has been comming from Lawers or maybe
old folks just dont understand, & thats perfectly understandable.
pissst... Dont tell the Gumment or we will another equiry. :rolleyes:
BB
BB - Most villages are set up as a license to occupy so similar to a commerical lease. The monthly outgoings are akin to OPEX payments. They do pay a entry fee but get that back at the end, less an exit fee. The exit fee is normally 20-30% (it goes up each year but is capped at that amount) and is in essense the 'rent' - payable on termination but secured against a deposit 3x - 4x the size of the rent.
Percy - It may have been 4 years ago that it changed. He said not only do they not get charged the exit payment but they get the full insurance premiums. That will leave them with a shortfall to rebuild which they aren't insured for (since they said they will pass that on). They are large enough and spread out enough though for them to be considered 'self insured for this kind of large scale event.
BB - This normally wouldn't be an issue. Say a unit burnt down. Exactly the same thing would happen - they would only get their entry fee less the exit fee repayed (ie. about 75% of the deposit). But I assume most villages would just move them into the next vacant unit and treat them as not having moved out. They can then use the insurance to rebuild the damaged unit and resell the license to occupy.
Tks CJ & Percy
Isn't it funny how all the brokerages that were dissing RYM during the housing decline have changed their tune..
I have now seen DCF valuations and target prices for RYM from three brokerages ranging from $2.90 - $3.10, which ironically are now higher than my own current valuations. When as recently as 08/09 and even 2010, those same brokerages had doubts about the viability of RYMs business model in a declining housing market, and had valuations far below my estimates.
Now we have comments like this coming from recent broker reports on RYM:
And almost identical admissions from two other brokers that RYMs pricing is not entirely set by the residential housing market.Quote:
Ryman well positioned to leverage its pricing
With a potential scarcity of high quality product and large
well capitalised operators, RYM with its 20+ year track
record remains well positioned to enjoy very strong demand
for its product and to leverage its pricing accordingly.
I find this incredibly ironic that they now profess RYM to have some pricing power even in a declining market... But now this is no insight right? its simply hindsight now that RYM have proven it. It seems the role of the broker is simply one of commentary rather than insightful thinking about the micro and macro economics when it was truly useful (i.e. when the stock was trading at a hefty discount !!)..
Of course there is some link between village pricing and the housing market (i.e. The old person buyers have to have enough equity in their homes to afford them to start with!) but the fact remains that RYM have considerable pricing power and will continue to do so for the foreseeable future, even if the residential market as a whole continues to decline.
I agree with the latest broker reports, but its the timing that makes me wary. It wasn't difficult to see this 1, 2 or even three years ago.
Don't trust broker reports and think independently is the lesson. That is a lesson that has been hammered home to me countless times now since 2007.
well all of us RYM followers on sharetrader certainly have your independant research/advice to be thankful for.thank you.
RYM still good buying at $2.59 ? Thoughts anyone. Hold 25,000 considering adding.
I think RYM has speed up their game,building more, so growth be higher.The moat has got deeper,much harder to enter the game for a new player.So RYM prospects with an ageing population looks excellent.Now to answer your question.I do not think you should let RYM make up more than a third of your total share portfolio.
Why? Anyone with enough land and money can build one.
Rymans advantage is in its systems I would have thought. It can build and run more efficently meaning it gets super returns for the same income compared to other competitors.
This isn't a moat argument, more an economies of scale argument.
Interested in your thoughts.
CJ and Robo.You are correct.I do feel you would need a mountain of money to even start.To ever get the reputation RYM have achieved would take years.
Each year their reputation grows.People trust them.The moat grows deeper and wider each year.Their model is excellent.Operations excellent.Buildings excellent.
They only need to put up a notice they are going to build a village on a piece of land to get firm commitments.What sauce is bringing to our notice is that brokers who thought the property market would affect RYM are wrong.RYM is a retirement village,home,care model.You enter a village and they look after you until you die.
The stand alone private village will find increasing difficulties staying in business,while RYM will grow.We can see from latest announcements that RYM are speeding up their growth.
The moat. the strength of the moat I feel is the amount of money and time it would take to beat RYM.or to equal them.
Percy I think you are blinded by your own thought. not realistic research Where are all these (brainless) rich retirees that can afford their fees coming from. I am in this age group & would not dream of signing one of there contracts. I am not that stupid There are at least Seven Retirement Villages being spruiked on TV in Auckland Area at the moment
Possum The Cat. No surprises from your post.!!! Retirement villages everywhere.Only one really successful listed one though, and that is RYM.The others will spend heaps advertising,while RYM just need to put up a notice they are building a village here to get sales.I go past 4 fish and chip shops to get the fish and chips I like,and if they were listed I would buy shares in them.!!! RYM have also proved people will drive past other villages to get a RYM unit. Reputation. I have been waiting for your old prison argument..!!! lol
What has blinded me is the share price performance of RYM.All done without calling on shareholders to fund growth.
I don’t agree with this statement entirely.
I agree that RYM plays this game better than the others, but that doesn’t mean any new entrants won’t survive. Their margins/profits may not be the same as RYM’s, but they could still hang around earning lower margins/profits whilst taking customers from Ryman.
Ryman in no way have a monopolistic product, it just seems that way because they dominate the market.
Someone could still enter this market and do well if they are sensible about it, but won’t do as well as RYM who have the systems, process etc etc in place to achieve the economies of scale.
As CJ points out, that is RYM’s point of difference. Over all these years they have found what works, what doesn’t and been able to create the most efficient operating model possible.
Ryman in many ways will be the incumbent when it starts building in Melbourne, a lot of their advantages they have in NZ won’t help them over there. Will be interesting to see how that works.
I agree with the points you make, Sauce.
Have held RYM for some time, and recently added to my holding. They don't give the spectacular thrills that some of my Aussie mining specs have given, but nor do they give the spills! They constitute part of my longer-term core holdings in "solid" NZ stocks.
Undoubtedly RYM will have gained considerable enhancement to their reputation following the debacle with the Kate Sheppard Homes earthquake horror story in Ch-ch. I know a couple of the KS residents who were affected and, believe me, their predicament is not nice, to put it mildly. According to reports, there are only about 10% of Retirement Village operators who - like Ryman - provide full payout (the greater of cost or insurance payout) in the event of a disaster.
Thanks guys. I think RYM are in a commanding position, their reputation speaks for itself and oldies don't care if they lose some of their original investment when they die, most kids take inheritance for granted anyway so what does it matter if some goes in exit fees on death. The bottom line for people in this age group is they know Ryman will look after them and with the aging population I see great growth over the next couple of decades and beyond. Maybe my increased shareholding today will get me a free unit in 15 years time LOL.
"Commencing work in Tauranga marks a lift in our build rate from 450 to at
least 550 units or beds per annum," said Mr Challies, "to meet the strong
demand we are experiencing for our services across the country[." Emphasis added from recent stock exchange release.
Percy - I still dont think it is a moat but agree they do appear to have an advantage. I consider Microsoft to have a moat as if you want a word processor you need to be using word (small players like open office cant get market share giving it away for free)
RYM isn't a moat as there are already other big players - Metlife, somerset etc and other players can enter the market - admitably needing deep pockets but Neil Group is currently finishing off their first village.
What it does have is economies of scale and a proven system. Much like McDonalds vs the corner burger joint.
I think the McDonalds vs corner joint sums up how I feel about it.The moat.I was thinking Buffett brought Mrs B's furniture store twice.!! The moat he said was her reputation.I never believed a furniture store could have a moat.!!!! lol
Percy you still think it is an endless market at some point it must meet a saturation point when all those that want & can afford Retirement village fees, have the retirement units they want. It is not a perpetual for ever expanding market. Have A look at Govt figures on the assets and income Of upcoming retirees. Most will be trying to live on the pension with very little savings . How are these people going to afford Rymans Fees
Hi Guys
I am enjoying all the lively debate about RYM!
If I may get involved...
It might pay to take a step back and consider what the terms 'Barrier to Entry" and "Competitive advantages' actually means. The definition of a company benefiting from 'competitive advantages' is a company that produces a 'Return on Capital' that is higher than it's 'Cost of Capital'. In theory, in a truly open market (one with no 'barriers to entry') any high returns will simply be competed away by new entrants until everyone is making returns equal to their Cost of Capital. However, if you have a business that has sustainable competitive advantages the excess returns above the cost of capital will not be competed away and the owners of the business will make outsized returns for long periods of time.
Generally speaking, operational efficiency is not a sustainable competitive advantage. Nor is access to capital. It might help for awhile, but if very high returns are visable, that is precisely what will bring a lot of money (capital) and smart operators (operational efficiency) to the table.
What Barriers to Entry doesn't mean - contrary to some comments here - is that no one can start a competing business. I can start selling bottled cola tomorrow if I want. And as CJ points out, McDonalds sells burgers, but so does the local burger joint as well. The difference is that I am very unlikely to make excessive economic returns if I try and compete with coke or with McDonalds. I.e. Coke has made long term returns as high as 50-60% on invested capital - I can tell you right now that no local burger joint will ever make those sorts of economic returns, and neither would I if started selling Cola.
So the term MOAT, and Barriers to Entry, really is simply defining the 'protection' of high returns on the capital that is invested and reinvested in the business. That protection predominently comes in two forms: Economies of Scale (so you can be the lowest cost provider and not allow others to make high returns like you) and Capitive Customers (so others cannot steal your customers - making you the dominant player and the one with the high returns). McDonalds has both of these through size and branding. The local burger store does not. The returns of each are therefore disproportionate and McDonalds has a huge economic MOAT around its higher returns that is virtually unassailable.
The way to test for a competitive advantage (quantitatively) is to check the Return on Invested Capital of a company. If it is higher than the cost of capital (the opportunity cost, or required return a investor in that business would generally expect.. say 8 - 12%pa for a typical business ) then the company, by definition, has competitive advantages. I.e. the sustainable ROC is 40% and the COC is 10% - this would be a great business to own.
The way to test for 'barriers to entry' or a MOAT (qualitatively), is really to understand how and why those high returns are sustainable and will not be competed away. Obviously if a company has made a Return on Invested Capital (or even ROE) of 40-50% for a decade or more, it very likely has large economic MOAT that stops competitors chipping away at those high returns.
So 'Barriers to Entry' in the case of RYM does not mean someone CANNOT open a retirement village. It simply means that someone cannot get the scale and pricing that RYM has to be able to compete away their high returns. We know that RYM makes a ROIC (return on invested capital) of 30% per annum, and has done for the last decade.
By definition they have competitive advantages. And quite clearly they are reasonable sustainable as nothing has derailed those high returns. So does it have barriers to entry? Yes. For many of the reasons that have already been covered - their systems, processes, village designs, experience of management,. Is their MOAT widening as Percy says? Yes, as they have achieved huge scale, they can offer the best service for the lowest price ( i.e. the lowest cost provider) and their brand and reputation provides captive customers. New entrants simply cannot match the quality of the offering for the same price and still make money, so RYMAN high returns are protected. That doesn't mean new entrants can't offer an inferior product for a higher price and still make money, it simply means they might survive on lower returns and not put any dent in RYMs higher returns.
In summary, even companies with huge economic MOATs can and do have competitors, often many, who all struggle with each other for more mediocre returns. But when you have a very fragmented market with ONE or TWO dominent players making outsized returns, this is usually a sign that their are significant economic barriers to entry for those firms. Indeed the existence of a 'winner' and many mediocre businesses below it on the return scale, is really one of the easiest ways to spot a MOAT.
I suggest anyone who wants to learn about competitive advantages reads "Competition De-mystified" by Bruce Greenwald (the value investing guru from columbia university).
Many regards,
Sauce
A more succinct version of my above post would have been the following:
'BARRIERS TO ENTRY' does not necessarily mean MONOPOLY
& MOAT refers to the protection of excessive profits
well I certainly learnt more about Moat,competive advantage,and barriers to entry.thanks.
It was her reputation for the lowest prices. She was a fanatic who was absolutely obsessed with selling people bargains and was able to do it profitably. She grew the store to such a scale that she could be the lowest cost provider and everyone in Omaha new they would get the best price from Mrs B so they didn't go anywhere else. She got economies of scale in her local market, was the lowest cost provider, and had captive customers from that reputation, and trying to compete with Mrs B would have been madness.
However if Mrs B had tried to open a store in New York, she would have got killed.
And that's why you can have 'barriers to entry' in local markets, but not necessarily on others.
Regards,
Sauce
Possum.Fair point.A couple of years ago I was told the average income per person for Ashburton,and Richmond {Nelson}.Was about $18,000 or under.
There is a growing ageing population working for the retirement industry.There also appears to be a huge number of people who can, and will be able to pay.
I note also a great deal of people working past age 65.
No, but the larger the moat, the bigger the hurdle, which is what you want. As buffet always says, give him 100billion to profitably take market share from Coke, and he couldn't do it.
If a business is so entrenched and has very large economies of scale and customer captivity, it becomes almost impossible to take their market share from them and make good returns. You burn through so much cash trying that eventually you run out.
RYM is not quite Coke of course. But it would be VERY difficult for anyone to take $1billion and recreate RYM, while making economic returns. It would take a very long time and the risk would probably not make it worthwhile.
Regards,
Sauce
An example of a business with a huge MOAT that IS virtually a Monopoly, is Trademe. They benefit from what is known as the 'Network Effect' where once they have all the customers, no one goes anywhere else, because they have all the customers! Which is such a powerful self perpetuating thing, especially for a business with such high operational leverage (i.e. Initial fixed costs are high, low ongoing variable costs - so at a certain inflection point in customer levels, each new sale goes straight to the bottom line and returns start to skyrocket).
Trademe is also a great example of how Barriers to Entry are usually local. I.e. if they try to go into Australia they will get killed by the incumbent (Ebay) and is also why Ebay won't bother coming here.
But, you still have Zillions and others trying. And perhaps they make enough to survive, perhaps they don't, but the returns will never be what Trademe has achieved.
It also highlights why its not a good idea to get too excited about RYMs Australian expansion. Until they refine the model over there, it will be a long time before the risk of entering a new market subsides - their local advantages don't necessarily exist in Australia, and therefore they will have to try execute as effectively as possible until they do, or they could get killed. The company has done a lot of research and believes their model doesn't really exist over there yet, so they will have a first mover advantage to create the RYM model on the ground running, which will help - along with their experience of course - but its a different ballgame.
OK - so my definition of Moat is different (does that make me wrong ;) ). Economies of scale is/can be a subset of moat.
I always thought moat referred to a monopoly or duopoly situation where new players could never get traction (the trademe example above).
Thanks for the debate. In the end though we always agreed RYM is a good company.
Hi CJ,
I agree we both like RYM and its fun to bash around a few different points of view ! These kind of discussions really help me learn more about how it all works... So thanks for stoking the fire a bit more ;)
I think we are basically talking about the same thing. You are talking about the ultimate in wide Moats, and in theory the end result if the economics are good enough and the moat wide enough! What does "new players never get traction" mean? It means they flounder around with the other weak players fighting for lower returns, often failing altogether, maybe they hang on and scrape out a living.
Buffet talks about the economic Moat enjoyed by Sees candy. How many candy makers are their in the US? There are Lots. But don't all operate in the same product space and they don't all make returns as high as Sees candy.
What about Walmart ? that is one of the best examples you can have of the power of an economic Moat. They dominated all their local markets and spread out like a virus accross america. Then they tried to enter Germany and got killed. But there are still fragmented local competitors around in the discount warehousing space around America and a few big successful ones like K-mart etc.
Cheers
Sauce
Another thought...
If you were searching for stocks with a Moat defined as businesses with a Monopoly or Duopoly, then you would simply be finding them once most of the growth had already occurred !!
It makes more sense to determine the businesses that enjoy an economic Moat (defined as barriers that stop competition driving down their returns) as early as possible and then hold them until hopefully they become the victor and have a near monopoly, duopoly or even oligopoly!!
In fact, their are very few businesses anywhere in the world that are true monopolies from what I understand.
Sauce,
A big thank you for an extremely interesting and educational article, and your other posts. The Ryman thread has certainly attracted a lot of attention in the last day or two, and is a great learning tool.
Yeah I really enjoyed those Saucey posts too. Thanks.
To the best of my knowledge the pertentage of retiree's living in retirement villages in N.Z. is currently quite low compared to overseas, can anyone post some stat's on this please ? So we have what appears to be a very effective moat with low market penetration and then of course there's the huge number of people approaching retirement in N.Z....any wonder Ryman are experiencing strong demand across the country.
Thanks very much for your kind words Karen & Roger! Hopefully I am not barking up the wrong tree here, time will tell, but its all good learning ! :) I was trying to add to the discussion but it appears I killed it..! :ohmy:
I have been doing some research and with a view to adding some more thoughts to the table for anyone interested, I thought I would post the highlights from today's research here for others to peruse. Hopefully it will stimulate more discussion...
While further researching my thoughts on competitive advantage (influenced by Michael Porter’s five forces and even more so by Bruce Greenwald’s Competition Demystified) I came across these two articles which I believe are perfect for anyone eager to learn more about Moats/Sustainable Competitive Advantages:
http://www.capatcolumbia.com/Article...ingthemoat.pdf
http://www.capatcolumbia.com/reading...y_is_Local.pdf
And in reference to my original post, here are two excerpts from Bruce Greenwald’s fantastic book Competition Demystified (not the articles above) that I think are most relevant to the discussion and to RYM:
So how does this specifically relate to RYM? The most obvious, and (in my opinion) the most important, are the following:Quote:
Barriers to Entry & Competitive Advantages
“Barriers to entry lie at the heart of strategy. The skills and competencies of even the best-run companies are available to competitors, at least in theory. Systems can be replicated, talent hired away, managerial quality upgraded. All these are ultimately parts of the operational effectiveness of the company. Strategy, on the other hand, is concerned with structural barriers to entry. Although often treated as separate aspects of strategy, barriers to entry and competitive advantages are essentially alternative ways of describing the same thing”
“There are really only a few types of genuine competitive advantages. Competitive advantages may be due to superior production technology. They may be due to customer preference (demand advantages) or they may be combinations of economies of scale with some level of customer preference. Measured by potency and durability, production advantages are the weakest barrier to entry; economies of scale, when combined with some customer captivity, are the strongest.”
Economies of Scale & Customer Captivity
“The competitive advantages we have described so far are uncomplicated. An incumbent firm may defeat entrants either because it has sustainable lower costs or, thanks to customer captivity, it enjoys higher demand than entrants. Together, these two appear to cover fully the revenue and cost elements that determine profitability. But there is an additional potential source of competitive advantage. In fact, the truly durable competitive advantages arise from the interaction of supply-and-demand advantages, from the linkage of economies of scale with customer captivity… …the competitive advantage of economies of scale depend not on the absolute size of the dominant firm but on the size difference between it and its rivals, that is, on market share. If average costs per unit decline as a firm produces more, then smaller competitors will not be able to match the costs of the large firm even though they have equal access to technology and resources so long as they cannot reach the same scale of operation.”
Economies of Scale / Production Advantages
- The aged care industry has compelling structural factors that are ideal for economies of scale advantages to exist i.e. very high fixed costs; the more units built, the lower the cost of each unit - it has been noted that RYMs new villages are increasing in size – further entrenching their scale advantage.
- The suppliers to RYM are commodity style businesses (i.e. carpets, plumbing supplies etc) meaning RYM benefits on production economies of scale because they get their supplies cheaper (confirmed)
- RYMs vertical integration provides the real category-killer advantage of low costs due to everything being done through in-house labour, builders etc providing significantly higher margins.
Customer Captivity:
- This is where RYMs scale and production advantages interact to provide strong customer preference: They can offer the highest need-demand driven services such as dementia care and hospital beds, very profitably, where others can not make the same returns. This means they can offer the continuity of care (total exit plan for the elderly i.e. last ever move) which is such a powerful selling proposition it secures customer preference.
- Finally, the growing reputation and brand awareness of RYMs top service and ethics cements these demand advantages
Is there any evidence that this thesis is correct?
Aside from the fact that RYM has consistently earned the returns commensurate with sustainable competitive advantages (i.e. barriers to entry) there is a lot of further evidence available that RYM enjoys, and is further entrenching, a sizable MOAT:
There is historical evidence. I.e. When RYMs smaller, and only listed competitor, MET, had earnings smashed by the GFC, yet RYMs more affordable product continued to soak up demand and they actually grew cashflows during the same period.
And this recent study, The Aged Residential Care Service Review launched 8 September 2010 is the most extensive ever undertaken, and is evidence of important structural factors. the 103 page report is available here:
http://www.grantthornton.co.nz/Asset...ice-Review.pdf
(A very worthwhile read - It’s important to recognise that there are differences to more general ‘subsidised’ Aged Care and the private ‘Villages’ like that RYM offers – but of course they are overlapped and lumped together)
Here are the most relevant excerpts to my thesis (in my opinion of course!):
In Summary:Quote:
Supply of facilities
“Overall supply and renewal of facilities has slowed and needs to increase significantly to
cope with projected demand.
Demand estimates indicate that sector bed numbers need to adjust to accommodate an extra 12,000 to 20,000 residents by 2026. This includes an anticipated change in mix toward hospital and dementia care as the average population age grows.”
Costs and investment
- The financial returns being achieved by the majority of existing operators cover operating
costs. However, returns are below those an investor would require to encourage new
investment to replace aging facilities or to stimulate new capacity in rest home, hospital and
dementia services.
- Approximately half of New Zealand’s building stock is now over 20 years old (although 58%
have been refurbished to some extent) and facilities have an expected useful life of 20 to 30
years. The oldest facilities tend to deliver the lowest financial returns. It is noted that
refurbishments have generally not been undertaken to a level consistent with the Greenfield
model described in this Review.
- Earnings vary significantly and are often inadequate to cover interest and depreciation and
provide an adequate return on investment to the provider.
- The most efficient-sized facility is 80 beds plus, while half the sector operate facilities of 50
beds or less. (Note: Lack of sufficient scale!!)
- The widely recognised demographic pressure New Zealand will face over the next two decades in the over 65 aged group will place significant pressure on all services provided to older people.
With its 10% market share, RYM is by far the dominant player in a highly fragmented industry. They are responsible for greater than 50% of all new beds under construction nationwide. This signals strong growth in market share going forward.
New capacity within the industry has actually been shrinking due to substandard returns on investment in general, yet we are entering a period with a virtual tidal wave of demand.
RYM enjoys scale and production advantages that allow it to offer a complete continuity of aged care at unusually high rates of return.
As their market share and reputation grows, they are further entrenching these incumbent advantages, providing a growing economic MOAT that allows them allocate ever growing amounts of capital at very high returns.
The key benefit of scale is that they are able to offer a better product and service to customers at a cheaper price than their competitors and still achieve high returns.
In other words, significant Barriers to Entry exist for direct competitors.
Many regards,
Sauce
P.s. I am sure POSSUM won’t be arguing that RYM doesn’t have captive customers, aka prisoners… :p
Sauce
thanks for the detail, you are obviously a pro from your discussion. What other stocks on the nzx would have similar qualities. AIA comes to mind
Hi Voltage,
I don't know to be honest. I really am just pushing my learning in this direction at the moment and reading everything I can get my hands on. I haven't really thought to much about any other NZX listed companies from this perspective. Much more to chose from on the ASX !
Certainly RBD would be worth a look.. that business has achieved very high rates of return on its reinvested cash.
That's usually the best way to determine existence of competitive advantages and value creating economics - check the ROE/ROA/ROIC figures.
Cheers
Sauce
Voltage
New Zealand Refining. 70% market share and consistent returns to equity well over 20%. Has obvious & significant barriers to entry. Just having more of a look at it now.
Regards,
Sauce
Sounds like we need a Moat/Barriers to Entry thread?
I think its safe to say this is THE definitive one.
Great stuff Sauce, I wish I had the time to spend on research like you have and wish I could add something more constructive than I totally agree with you. Its the only stock on the NZX I really like. From what I've seen with the Evelyn Page retirement village when it opened in Orewa Auckland there's evidence in the retirement industry that due to Ryman's reputation they are able to poach the really good management and staff in any area, snowball momentum effect as good staff as i'm sure you appreciate are the key element in Ryman's sucess. Shortage of really good management and staff in the retirement industry, yet another competitive advantage for Ryman ? P.S. Have I mentioned I love the stock :)
P.S. This article on Ryman just popped up in my inbox:
http://www.sharechat.co.nz/article/6...man-healthcare.
Fans of RYM have a read of this http://www.nzherald.co.nz/staff20acc...re&kw2=&st=gsa
Doesn't tell us much, Possum. I guess there will always be the isolated (no pun intended) case where a relative is not happy with how their loved one is treated, but I doubt if Ryman have a major issue to contend with, given the large numbers of clients they have. Look at the various DHB's - they are happy hunting grounds for reporters running out of ideas for filling a newspaper with sensational stuff.
Sauce: Have you had a look at IFT, as coming broadly within your criteria? They have a portfolio of major strategic holdings. How often does an opportunity come up like their recent acquisition of all the Shell stations, etc? And their controlling interest in Trustpower? And their controlling interest in Wellington Airport? And their close association (through Morrisons) with the NZ Superannuation Fund, who are now their 50% partner in Shell (now "Z").
Their purchase of the Shell business seems to have been a bargain, judging by today's report of their annual results.
Also have lots of gearing and 4th rate European airports that lose money not to mention the bus network, gosh I think it would be fair to say their track record is at best patchy, okay they've done reasonably well when the oil price is ballistic with their Australian resource interests, but recent years results during the GFC show them up to be far riskier than RYM which has very strong defensive qualities by any logical comparison and a proven history. Having a moat is useless if the castle has systemic flaws ?
Hi Roger,
I appreciate the response and the insights into RYM obtaining the best staff in Orewa. It makes sense that their reputation would extend to staff treatment and conditions, and that people would want to work for the best in the industry.
I don't have any other investments on the NZX either Roger.
Cheers
Sauce
sauce,
Don't worry too much about other NZ shares,You are doing a fine job on RYM.We are all learning from your research.Everything from Moats to customer captivity on the one thread.!!!!!!!
sauce you are doing a fine job, great research and reading, can you give an idea what companies on the asx have qualities like rym.
Roger, its quite obvious that your appetite for risk is not great. Thats fair enough, but you must appreciate that maybe others are happier to go along with greater levels of risk to receive potentially greater rewards. Its all a matter of timing, too. I held IFT for many years and they served me very well, but I bailed out in 2007 when they were encountering some obvious headwinds. I believe that they have now turned the corner, under Mark Bosgioski (incorrect spelling), and are worthy of fresh interest. Thats all that I was trying to convey to Sauce, in his quest and using his criteria. Yes, the European airports are a disaster, but their share of the total investment portfolio is inconsequential.
For information, RYM is one of my core NZ holdings.
Colin - Fair enough I guess all I was trying to articulate, (not especially well with the benifet of hindsight) is that Infratil's moat isn't as effective as essentially its a collection of quite a variety of different investment assets. Really any investment company can go out and buy a variety of assets, whereas clearly it would be extremly hard to replicate Ryman's enviable and now heavily established position.
Sauce - You only holding Ryman and nothing else on the NZX has really made my day :) Whilst FBU, MFT, KIP and SKC are satisfactory companies in my opinion I'm very cautious going forward and none of those companies have anything like the defensive qualities or captive market that Ryman have.
Apart from a good holding in RYM and looking to add more pending results tomorrow, and a small holding in KIP I'm currently very liquid so I'd be interested to know what you like on the Aus market.
Hi Colin,
I actually owned IFT back in like 2001 or 2002 or something like that. But I had no idea what to look for in a business in those days (of course I still probably don't!)
Just took a quick look at the historical ratios from Morningstar on surface it appears that IFT haven't achieved the kind of (economic) returns I would want if I was to entrust them with my funds. I.e. returns to equity in single digits. Of course I think it depends on how the equity is accounted for, so more effort needed to really work it out. From memory they seem to like to leverage up also, which is a negative in my view.
Cheers
P.s. Good timing on your FGE sale Colin.
Roger, Voltage
The ASX businesses that I know of with the most obvious economic Moat in my (very limited) opinion is actually JBHI Fi funnily enough...
And secondly Matrix Engineering. They make riser boyancy modules for the global offshore oil & gas industry. They operate in an oligopoly (A good sign in itself that barriers to entry exist) and generate exceptionally high returns on capital. They have highly complex production processes combined with scale and reputation for the highest quality product.
I own Matrix but not JB Hi-Fi.
Cheers
Thanks for that Sauce.
I think last time I looked JB Hi Fi were trading on pretty demanding fundamental ratio's but I'll have another look and will look into Matrix too.
Due to its size, ability to attact the best staff and have the most resources to acquire the best assets, has BHP built itself something of a moat ?
Hi Roger,
The biggest and most obvious moats are often the market darlings that sell on the highest multiples of course! Being patient and buying them when the market turns itself upside down and shakes its pockets out is the key.
In fact I believe JBHi-Fi is looking quite attractive as retail getting completely smashed in Australia - and there is some suggestion that the JBHi-fi business might be maturing somewhat (i.e. running out of growth opportunities). I think a thoughtful contrarian would be looking at them quite closely right now. THey have immensge profitibility and cashflow.
Anyway.. to stay on topic. Just one more sleep till the RYM result. I am very much looking forward to digesting that, I can see work might get shoved aside tomorrow. I suspect somewhere between 70m - 72m in cash profits.
Regards,
Regards,
Sauce
To digress slightly from the moat discussion one of the key attractions, in my opinion with Ryman, is its ability to grow consistently as has been demonstrated in the past and almost without doubt into the future. Management are on record as targeting a 15% growth rate for the forseeable future which I think taking into account the higher demand for advanced care in rest home and dementia with a rapidly aging population should be realistically achievable over the long term.
Take a theoretical example, an investor approaching 50 thinks Ryman's facilities are first class and wants to retire at one of their fine establishments when he's 65.
Here's how the Ryman compounding machine appears to loo to me, $100,000 invested in Ryman now compunded at 15% growth per annum over 15 years = $813,000.
If a fine 2 bedroom independent apartment is currently $400,000 and increses at the rate of inflation, (lets assume 3%) compounded for 15 years = $635,000.
So such an investor by investing $100,000 now would, "in theory" have enough for a fine apartment and say a brand new Merceedes-Benz E class when he retires. Realistic planning ?
P.S. Looking forward to tomorrow.
Well I think its very much part of the discussion Roger! Indeed it is your conviction of the existence of a MOAT, and your assessment of whether it is getting wider or narrower, that allows you to come to the conclusion that their returns are sustainable for a long time into the future.
Of course the first decade of their listed life was an absolute doozy with compounding returns in the mid 20's not even including divis. Of course they were coming off a low base, and had more favorable tail winds - but you simply don't need to hit those returns to do ridiculously well over time.
Yes, some years they will do more and some years they will do less. Eventually growth rate will slow down (the bigger they get the harder it will be to maintain), but that is far enough away that it is not relevant to investors at this point in time.Quote:
Management are on record as targeting a 15% growth rate for the forseeable future which I think taking into account the higher demand for advanced care in rest home and dementia with a rapidly aging population should be realistically achievable over the long term.
I realise its theoretical, but I believe RYM target 80+ which is better for investors, as the turnover is higher. It sounds cold to put it like this, but in my experience people are often not ready for this step until about this age anyway - so its a win win. If people came into the villages at 65 they could have a 20 - 25 year tenure rather than a 5-7 year one, which would be no good for RYMs stockholders.Quote:
Take a theoretical example, an investor approaching 50 thinks Ryman's facilities are first class and wants to retire at one of their fine establishments when he's 65.
Yes! But you are forgetting one important factor, and that's dividends. During that time they will also have paid you $130,370 less tax in dividends. And at that time you will be getting about 22,000 - tax a year (and still growing) from your corporate coupon :)Quote:
Here's how the Ryman compounding machine appears to loo to me, $100,000 invested in Ryman now compunded at 15% growth per annum over 15 years = $813,000.
Me too. Not that the short term result makes much difference, but its one of the few times a year you get to really chew over the progress and comments.Quote:
P.S. Looking forward to tomorrow.
....gee you guys are good.....RYM is a great Co.....its accepted....do you guys have real jobs......
That's a strange comment to make while lurking on a forum which has been specifically created for people to talk sh it about shares... !
Sauce good stuff. Growth in dividends is really what you want at the end of the day. RYM has grown at 19.8% over the last 11 years, Trust power 15%, cochlear 21.3%, ramsay health 19.2%. (taken from research Craigs)
those were dividend growth rates per annum
Some of us like to make constructive comments to help each other along and in the process actually add something to the thread and most of us I assume like to plan for our retirement, of course if you wish to rely on the Government, then I wish you all the luck in the world. In case it wasn't obvious the purpose of yesterday's "theoretical" excercise regarding prospective compounding returns was to illustrate how someone like me approaching 50 could be well on their way to having a secure retirement by investing approx $100,000 now.
Sauce, as always you've articulated your viewpoint extremly well and you're quite right its exactly because of the ever increasing moat along with a range of other factors not the least of which is the old age population expansion, that we can be assured of excellent growth over the forseeable future. I plan to re-invest my dividends so that will no doubt add a little extra probability to expected long term returns. Maybe I'll be able to buy an S Class Mercedes-Benz :)
Would appreciate any insights you have as soon as you've digested the annual result today. Regards
RYM
19/05/2011 08:30
FLLYR
REL: 0830 HRS Ryman Healthcare Limited
FLLYR: RYM: Ryman announces 17% profit increase
Ryman announces 17% profit increase
Christchurch based aged care and retirement village operator Ryman Healthcare
today announced a 17% increase in underlying profit, posting a new record of
$72 million for the year. Unrealised valuation gains lifted the reported
profit after tax to $100 million.
The underlying profit growth has prompted the directors to lift the annual
dividend by 18% to 7.2 cents per share, with the remaining 50% of the
company's profits being retained for investment in new villages both in New
Zealand and Australia. The final dividend of 3.8 cents per share will have a
record date for entitlements of June 10, and will be paid on June 24.
Operating cashflows were again strong at $133 million for the year, and the
increasing value of the village assets helped boost shareholders equity by
24% to $566 million.
"This is a very strong performance from the company, ahead of our own
expectations, and in the face of a weak economy" said chairman Dr David Kerr,
"It's a result that reinforces the defensive nature of the company's trading
activities and reflects the company's growing reputation for looking after
its residents."
The company recently announced a lift in its build rate to 550 units or beds
per annum in New Zealand.
"We have escalated our expansion plans to meet the growing demand we are
experiencing," said Dr Kerr. "We achieved our new build rate this year,
which boosted our new sales by 50%, and allowed us to beat our medium term
target of 15% underlying profit growth."
"This year's expansion will also spark profit growth in the year ahead, as it
also establishes new income streams from care fees, management fees and
resales gains."
A new village was successfully opened in Dunedin during the year, and work
commenced on new villages in both Gisborne and Tauranga. The company is
currently building across nine sites, has increased its landbank to over 2100
units or beds, and is well placed to continue building at the new rate of 550
units or beds per annum for the foreseeable future.
The company recently acquired a site in Waikanae and is actively seeking a
site for its first village in Australia.
Statistics NZ estimates the number of New Zealanders aged 75 plus will more
than double from 250,000 to 516,000 over the next twenty years. Ryman is
well positioned to cater for the accommodation and care needs of this rapidly
growing group.
Ryman currently owns 22 villages nationwide, which each offer a combination
of retirement living and resthome care.
The company is a six times winner of Best Retirement Village in New Zealand,
serves over 5400 elderly New Zealanders, and employs over 2600 staff.
Ends
Media advisory: For further information, photos, interviews or comment please
contact Ryman chairman Dr David Kerr on 021 362 403, or Ryman managing
director Simon Challies on 03 3664069 or 0274 968 762
CONSOLIDATED OPERATING STATEMENT FOR THE YEAR ENDED 31 MARCH 2011
Audited.
Current Year NZ$; Up/(Down) %; Previous Corresponding Year NZ$
UNDERLYING PROFIT:
72,143,000; + 17.5%; 61,389,000
OPERATING REVENUE:
Trading Revenue:
129,149,000; + 18%; 109,148,000
Other Revenue
501,000; (9 %); 549,000
Total Operating Revenue
129,650,000; + 18%; 109,697,000
Fair value movement of investment properties:
80,796,000; + 22%; 66,327,000
TOTAL INCOME:
210,446,000; + 20%; 176,024,000
NET PROFIT BEFORE TAXATION:
102,772,000; + 23 %; 83,816,000
Less tax on operating profit:
2,595,000; (52%); 5,399,000
NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF LISTED ISSUER:
100,177,000; + 28%; 78,417,000
Earnings per share (basic and diluted):
20.1 cps; + 27%; 15.8 cps
Final Dividend
3.80 cps; + 12%; 3.40 cps
Record Date: 10 June 2011
Date Payable: 24 June 2011
Imputation Tax Credit: No Imputation Credit
End CA:00209241 For:RYM Type:FLLYR Time:2011-05-19 08:30:43
My initial thoughts:- Very impressive performance in light of the very difficult economic conditions. Very happy, will be buying more. Will definitly be investing much more than the initial $100,000. How well will this company perform when the country starts enjoying real growth again ?
Predictable result in-line with 15% underlying growth targets.
Flat 2H. Probably was expecting little stronger.
New sales: 1H/2H: 196 / 152.
Existing sales: 1H/2H: 154 / 197.
Good to see healthy increase in average $ value of new units from $308k to $359k and slight increase in existing units from $306k to $314k. However new sales average price was mainly a result of 1H where the average sales prices in 1H was $370k. 1H the average sale price was $312k for re-sales.
Churn of the existing units y/o/y lower which was mainly from a much lower 1H.
Disc some #'s obtained from research reports so cant verify accuracy.
Truly great stock to hold.
I’m back in for good at $2.50
And Sauce - great insight, I wish I could add something useful to the discussion but am out of my league!
RYM steadily approaching all time high territory! All time high was $2.75, and highest closing price was $2.67 I believe (May 2007). Still, with RYMs growth prospects it has to be good buying at a PE of 13 odd, and surely there's a lot more value in the company than there was in 2007!
Hi Roger
I enjoyed your theoretical exercise. It might just be me (or us!) but there is something emotionally satisfying about the idea of setting your self up for retirement by investing in retirement villages! Rationally it makes little difference what your vehicle is of course. But the premise to your exercise is absolutely right; The time to start compounding your wealth is always yesterday. The earlier you start the easier life will be later on. That is literally the definition of 'investment' in my view. Giving up consumption now for the expectation of the ability to consume more in the future. And odds are good that RYM will be the best 'compounding vehicle' on the NZX during my lifetime.
Cheers
Sauce
Agreed, but great result in that this one should finally put the naysayers crowing about RYMs demise due to falling property prices to rest.
All due to timing of village settlements. Result was always going to be loaded towards 1H. That's why management re-iterated FY 15% estimate at the half year even though H1 was way up on that. Represents a 29.63pc Return on contributed equity (shareholders funds excluding re-valuations).Quote:
Flat 2H. Probably was expecting little stronger.
This is much appreciated.. As always, enjoy your balanced and rational assessment Mamos.Quote:
Good to see healthy increase in average $ value of new units from $308k to $359k and slight increase in existing units from $306k to $314k. However new sales average price was mainly a result of 1H where the average sales prices in 1H was $370k. 1H the average sale price was $312k for re-sales.
Hi Mandrake
Be careful with the PE. It's actually about 18 - you have to use the cash profits that are announced i.e. 72.1m not the 100m that includes gains in valuation (i.e. non-cash profits). But PE is really is a terrible proxy for valuation of RYM anyway. I will post my (possibly misguided, misleading and easily misinterpreted) thoughts and rationalisation of RYMANs intrinsic value when I gather some energy.. . !
Cheers
Sauce
You hit the nail on the head Percy. a 15% growth rate and a 50% dividend payout implies a 30% return on the retained earnings and vice versa. Only exceptional businesses make those kind of returns consistently. And for anyone who wishes they would reinvest the other half at 30% rather than pay out the dividend: it's an ideal view, however the reality is that it would be very hard for RYM to grow any faster than it is and still execute well. The policy of the 50% dividend and 15% growth target is no accident. This is a carefully selected sustainable reinvestment rate that the company feels they can execute over the medium term without tripping themselves up in the process - in my opinion.
Regards,
Sauce
Do you value these companies who have a moat/competitive advantage different to a company without it?
Because on the face of it, companies like RYM are usually overvalued on conventional metrics used by many personal investors and brokers. Most prospective investors never expect to come across a company who holds such advantages, so in many ways ignore the historicals (the historical YoY Roic increase which proves the moat) when doing valuations.
In RYM’s case, once knowing it holds these advantages, do you then add different criteria to the valuation test, or soften some of the requirements? Standard PE’s and EV ratios are forms of in direct valuation, or comparable valuation. As only one company in the industry can hold a moat/advantage is it right to compare?
I'm kind of answering my own question here, but I'm guessing that is why smart money i.e. The Buffets, have done so well out of these investments, as they can go un noticed to many prospective investors using techniques they don’t really understand or know the meaning of.
Anyhow, keen to understand if there is anything different you do with a RYM when investigating the investment decision/calculating their fair value.
Because, you can not fall in love with a stock, everything has a value! The NZX is a small market, RYM could really shine as a darling in years to come and become overvalued. In coming overvalued you are only going to love those excess returns and the company more, hence struggle to sell it.
i wish to top up my holding is this stock under valued or fully priced at its present PE 18.
voltage - I will wait for Sauce's reply before I cast to much judgement on valuation, but a single PE won't value RYM or any stock.
It totally ignores RYM's strong BS, and abilty to grow from retained earnings. RYM could in a hole of debt and capt raisings and the PE would totally ignore that.
I'm not saying its a poor valuation method, I'm saying stand alone it's a poor valuation method.
Fantastic post Buns, I thoroughly enjoyed it, so much for not adding anything of value!
I think the issue is not that investors don't expect to find durable competitive advantages (although I question if the average investor knows what that really is, since I consider myself an average retail investor and I am only just starting to get a minor minor inkling of what this means) but more a fundamental issue with the PE as a valuation tool to begin with - the price to earnings ratio tells you nothing about the underlying economics of the business so is not a proxy for valuation. It's more of a (as you rightly say) comparison tool or rule of thumb that has little practical use, and even worse is incredibly dangerous because of its simplicity and ease of use and prolific following among investors.
And when I think about it, even using it for comparison is actually rather absurd. Like the following example:
Take two business in the same industry. Company A has $1,000,000 of equity earning $200,000 of net profit, and Company B has $1,000,000 of equity and earns $100,000 of profit.
I.e. One of them makes a 20% return on equity and the other makes a 10% return on equity.
Both businesses are able to reinvest 100% of their profits at their respective ROE's.
Company A trades on a PE of 15 and company B trades on a PE of 10.
Which one is more expensive? Since they are in the same industry does the use of the PE ratio make sense as a comparison tool?
Of course the answer is that the one trading at the PE of 15 is a bargain (assuming the outsized ROE is sustainable).
The reason is due to the difference in compounding and value creation. If you require a 10% return the PE of 10 is actually fair value for company B. And the compounding growth ads no value at all. Company A compounding at 20% means growth ads a lot of value and is probably worth as much as 4x the price of company B.
And I have to say, I completely agree that everything has a value and you should not fall in love with a stock. Those two statements alone, if understood and followed with dispassionate focus, are in my opinion enough to make you a great investor over time (combined with a lot of hard work). And yes, RYM has done EXACTLY what you just described back in 2007 it was overvalued. But it has grown considerably since then. And hey, if you bought it then with a 15 year focus and didn't capitulate at the bottom of the GFC and sell, you probably won't be too disappointed in the long run !! but your right, RYM will have to sustain its returns for an extraordinary amount of time for that to be the case. I think they have a good shot.
Will post more on my thoughts on Rymans value tomorrow (The idea being to reverse engineer the share price to see what assumptions the market is placing on future performance at the current price)
Regards,
Sauce
Hi Sauce
Been liking your posts in this thread. Thought I might contribute.
Basic finance calc which Sauce eluded to in his previous post is the calculation of growth... I.e. g = ROE * Retention Ratio.
Now care needs to be taken with this formula. The return on equity needs to be what the new funds (those which have been retained) can be invested at. This does not necessarily equal what the companies current investments are at. That said it's a good start if you believe the company will be able to use future funds to the same extent as past funds (which may be reasonable in a growing industry in the short to medium term).
Now to Ryman, from their latest report ROE = 72 / 511 = 14% (using average equity over year). Now firstly, let me say 14% growth is never available into perpetuity, however it is impressive and as long as there are opportunities there will be strong earnings growth.
Now for the growth the market seems to be factoring in... this is easy if you assume a WACC, I'm going to assume 9.6% but use whatever you feel the MARKET is using at the moment (i.e. this may NOT be what you personally feel it should be). Note the 9.6% is from the PWC document gregrday was kind enough to link me to in another thread, I don't agree with all the WACC in this document, and the truth is I don't think the market does either... however it's a good place to start for an example.
Now a formula (there are a number which can be applied, but I like this one partly because we are using WACC):
Equity = Free Cash Flow to Firm / (WACC - growth rate) - Debt + Cash
Note that FCFF = Operating CF + Interest * (1-tax rate) - Capital Investment.
What we already know:
Equity = $2.68 per share * 500m shares = $1,340m
FCFF = $133m + c.$8.5 * (1 - 0.30) - c.$120m = $20m
WACC = 9.6% (assumed)
Net Debt = c.$152m
Therefore:
1340 = 20 / (9.6% - growth rate) - 152
growth rate = 9.6% - 20 / (1340 + 152)
growth rate = 8.26%
Now this represents the rate of growth in FCFF after being weighted for time-value-of-money (i.e. growth this year is more valuable than growth in 5 years). Also note that RYM could have growth in FCFF tomorrow by cutting capital expenditure down to just that associated with replacement, this will reduce to roughly depreciation by the time they finish growing.
Now assuming RYM has growth of c.14% and then this drops all at once to a long term growth rate of 2% (i.e. inflation) at some point in the future then we can also calculate the number of years the market expects FCFF will grow for. In reality the shift will be progressive, which I can calculate but is more complex without a spreadsheet. This also assumes growth in FCFF = growth calculated earlier for earnings... this will not exactly hold but lets keep it for the example.
enterprise value = annuity at high rate + perpetuity at low rate discounted back to present
enterprise value = FCFF*(1+g)/(WACC-g)*[1-{(1+g)/(1+WACC)}^n] + FCFF*(1+inflation)*(1+g)^n / (WACC - inflation) / (1+WACC)^n
1492 = 20*(1+15%)/(9.6%-15%)*[1-{(1+15%)/(1+9.6%)}^n] + 20*(1+2%)*(1+15%)^n / (9.6% - 2%) / (1+9.6%)^n
now i can't be bothered doing the algebra, so I'm going to use excel to solve for "n"
n = 21.1 years
i.e. FCFF would need to grow by an average of 15% p.a. for more than 20 years to justify the current price... now is this reasonable? Maybe, the truth is FCFF should grow quicker than the return on equity due to leverage... so lets re-run with 20% growth, it's 13.7 years. This means it's highly sensitive to the growth rate, but that's no surprise.
Now I'm going to get REALLY rough and see what will happen with the following two assumptions: 1) 20% growth in FCFF over "n" years, and then 2) FCFF ads another 30% in the first year of the perpetuity (to account for reduced capital expenditure from this point forward). With these assumptions it takes 12 years of supernormal growth to justify the price.
This is largely why I'm personally not buying RYM... It's not that it's a bad company (it's seems fantastic). Also it's not that it won't grow (it should grow fast). It's not that it may not be worth it's price, or even more (it very well may be)... The reason I don't buy RYM is that I can't easily forecast what growth it will have and for how long into the future. Now with a full model taking population demographics into account etc I could have a very good stab, but I'll generally not build a full model for a business unless I can already tell there is a good chance a business is undervalued, and here I can honestly say, I have no idea what RYM is worth without a full model.
NOTE: A full model would be useful as it would take into account when the reduction in capital expenditure which would occur near the end of the growth period.
The reason for this post: Since this particular thread seems to be mostly fundamentalists, and many seem to be holding shares... a quick question, does everyone who has shares also have an idea of what they think the value is? I don't mind if you share the value or not, just curious if anyone has forecast what they expect growth to be before purchasing. (Not relevant question for any TA in here)
Note: I won't be buying either way, stick to stuff you can understand... well I struggle to forecast retirement villages. I know the industry will grow, but know little more than that. However I do worry that others are buying knowing less than me, some will certainly know more... but I doubt all will.
Also I agree wholeheartedly with previous posters re PE multiple based valuation. Just don't do it. Having ranges of PE as one of your selection criteria for what stocks to invest in is ok... but using it to value a firm is fundamentally flawed.
*Analysis done late at night, if there are mistakes then please be polite in correcting them.
EDIT: Oh and one sense check. 12 years of 20% growth is a total growth factor of almost eight times. Is eight times the number of villages, revenue etc. reasonable? Not sure if it is but could look to how many people are forecast to be over the age of 80 at any one point in time into the future (vs. currently). For this comparison it would be better to have growth changing over time as opposed to just stopping (easy enough in excel).
Cheers
Te Whetu
Te Whetu.
I think sauce's post No. 459 on this thread covers your concerns.
I see RYM as being in the right place at the right time.Ageing population,wanting total care,in a safe environment.
Old people can't stop the ageing process,they can only make it more comfortable.
...,a little, of the NZO thread, which it appears to have taken over from.
A deluge of daily posts by the faithful, the odd negative comment with the slap-down reply.
best wishes
Paper Tiger
DISC:
Have held NZO, but currently do not.
Hold RYM big-time.
Hi Te Whetu
Thanks for your great post, very much enjoyed it and the time taken is appreciated. Your knowledge of DCF will leave me for dead and I might get lost here but I have some points to add before I head off to work:
You have to be very careful with RYMs equity figure because it is loaded up with asset revaluations. When they changed their accounting from GAAP to IFRS they were forced to book village revaluation gains as profit that ends up as equity on the balance sheet. So ROE is not the right figure to use to understand the economic benefits to shareholders. And it's easy to see right? If their ROE was 14% and their retention rate was 50%, their implied growth rate would be 7% - yet they growth is over 17%. What you have to do is strip out all the revaluation gains from the equity figure, and you are left with all true contributed equity and retained earnings. The return on this figure is 30% if you beginning numbers or 27.5% if you use average of end/start. Which then makes sense as 30% - (1 * 50%) = 15% or approximately RYMs growth rate.
You also have to be careful with their operating cashflow, as the operating cashflow includes cash from residents which are effectively an interest free loan. The 'cash' left over that could actually be considered 'take home cash for owners' is the 72m reported (and as an aside RYMs depreciation of about 5m is spot with their annual maintenance schedule costs).
Finally, their true cost of capital would be very low because their villages are self funding through resident's right-to-occupy fees, which as mentioned are basically an interest free loan to RYM. That said, in my estimates of value for RYM I build in a 10% discount rate, as I feel that is a conservative estimate, and because I feel a rational investor would likely expect a 10% after tax return for the risk of owning RYM.
Unfotunately I am away until monday night.. If I get time from work today I will post some numbers. I disagree that you need to opt for such precision in your modelling, and I will put forward a simpler (but no less like to be wrong) way to think about their economics, future prospects and value, that I believe is more than sufficient to make an investment case, and will avoid the false precision inherent in detailed DCF valuations (i.e. garbage in = garbage out as Bruce Greenwald would so aptly say). For interests sake I get a current valuation of $2.48 - $2.86. And since my tendency now is to use the more conservative figure I would say RYM is certainly no bargain anymore, but I believe it was an obvious value buy last year when it was trading around $2 (no need to mention the lows of the GFC when most were of course).
Regards,
Sauce
Haha, I hope you don't consider me 'faithful' to RYM!! I certainly wouldn't consider myself a person of any kind of 'faith', particularly when it comes to stocks! (Perhaps I have some faith in my dog, but with her never ending desire to do nothing but be at my side, how could you not!)
Regards,
Sauce
percy
Post No. 459 is excellent, and it shows Ryman should coast along with strong growth. However I'm not sure it addresses the concern "does RYM have a share value greater than its share price". Now I don't have time to read the entire Grant Thornton report right now, but I think I can grab a couple numbers and hopefully not get it too wrong.
As at 30 Sept RYM had 4,524 beds/units so I'll assume 4,750 as of full year end. I note 12,000 to 20,000 new beds needed by 2026. Now I note Sauce said the following: "[RYM] are responsible for greater than 50% of all new beds under construction nationwide". Lets assume present industry players continue to refurb/renovate/rebuild as their existing building reach end of life (with returns less than RYM but high enough to justify), this means the potential for growth is 12,000 to 20,000 beds. Also lets assume RYM build 60% of all new beds, this implies RYM will build another 7,200 to 12,000 beds over 15 years. This corresponds to a real compounded annual growth rate of 3.0% to 6.8%, if we add inflation it becomes 5.0% to 8.8%
Now this misses a couple of points. Firstly RYM may be able to increase prices by beyond inflation, either through lack of supply, higher margin units/beds sold, or general market dominance. However these could be accounted for if you wanted to put in the work (I don't). I'm curious, has anyone built an integrated model for RYM? I could, but without the ability to short a share it's generally not worth it unless there is already a strong suspicion of undervaluation. Currently I have little idea of value.
Cheers
Te Whetu
To save anyone the time working it out, the 'shareholders equity' figure for 2011 is $279,290,000 and for 2010 it was $243,218,000
Regards,
Sauce
Nice work Te Whetu
I think RYM will get pretty close to achieving the 15% FCFF growth needed to justify its current value
On valuation specifically:
- Yes I have valued RYM, not there exact market value (direct valuation) but have done so on a combination of metrics (mostly comparable types) which give me an indication of RYM’s Earnings value, stability and risk. I usually do this on a 1year forward basis, so for FY12 for RYM. If the numbers look alright, and I know they aren’t going to get worse from here I see this point to do more research on where they could go past FY12. I will continually do this until I feel RYM is overvalued.
- I think RYM will always be a touch overvalued (because it’s on the NZX, nature of its shareholders, and its position in the market), and am prepared to take that into account when buying. I asked sauce about it earlier but I think these companies trade on higher multiples than others, so I was asking if there is another way to value such companies. Your post points our direct valuation (the only other way).
- Obviously you have a very low risk tolerance, which is 100% fine! Do you not feel safe assuming RYM can grow by say 10% YOY, with anything above 10% being upside or a bonus? Unless you are some kind of genius, I don’t know how one can understand a variety of markets/industries the detail you require, hence must get stuck with a conservative (companies which grow understandably/slowly) and narrow portfolio (as you shy away from so many industries)