Originally Posted by
Greekwatchdog
Brief Notes - We upgrade Oceania Healthcare (OCA) to OUTPERFORM with a target price of NZ$1.65 (from NZ$1.10). We believe OCA's higheraverage charges and focus on care suites over traditional care is a key beneficiary of the current buoyant market environment forresidential homes and high demand for care. We believe OCA to be at an inflection point with its transition from traditional careoperator towards a premium operator charging through deferred management fees (DMF) and re-sale gains. We expect OCA toalmost double annuity earnings over the coming three years and deliver the highest cash recovery of new capex in the sector. ShouldOCA deliver on our expectations and the buoyant market continue, we see substantial further upside medium term.The worst is behind us, time to look aheadOCA has had, by some margin, the worst development of all the aged care operators over the last four years; annuity earnings havedeclined by almost 30% and only 50% of capex has been recovered in the form of new sales. This has been a deliberate strategy byOCA to de-commission one third of its existing care beds to replace them with (fewer) care suites and ILUs. This has, in our view, beena high risk, high reward, strategy that looks to be paying off. The care suite model substantially improves capex recovery, cashconversion of annuity earnings and DMF. The risk primarily relates to demand; will the product work? We are of the view that the "usecase" for care suites is strong, however, it is a relatively untested product in New Zealand. The early signs are positive, but OCA is, inour view, a high risk, high reward stock.