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OUTPERFORM
Summerset (SUM) has delivered the strongest organic earnings, asset, and cash flow growth within the aged care sector over the last five years. We consider it the "best in class" aged care operator. SUM has, in our view, the strongest and lowest risk pathway to growth over the next three to five years driven by a combination of its; (1) sector leading landbank, (2) youngest independent living portfolio in the sector, implying "automatic" earnings growth as villages mature, and (3) highest level of embedded value in relation to current earnings. Over the past twelve months, SUM's share price is down -12% despite delivering ~+25% earnings growth. In light of its meaningful multiple de-rating we now believe SUM offers an attractive risk/reward proposition. Upgrade to OUTPERFORM.
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NZX Code SUM
Share price NZ$11.45
Target price NZ$13.50 (from 13.70)
Risk rating Medium
Issued shares 225.5m
Market cap NZ$2,582m
Avg daily turnover 198.0k (NZ$2,622k)
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Financials: Dec/ 20A 21E 22E 23E
NPAT* (NZ$m) 98.3 134.4 139.7 178.9
EPS* (NZc) 43.8 59.6 62.0 79.3
EPS growth* (%) -8.4 35.9 4.0 28.1
DPS (NZc) 13.0 19.0 23.0 27.0
Imputation (%) 100 100 100 100
*Based on normalised profits
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Valuation (x) 20A 21E 22E 23E
PE 26.1 19.2 18.5 14.4
EV/EBIT 28.8 22.1 21.4 16.8
EV/EBITDA 26.8 20.7 19.8 15.7
Price / NTA 1.9 1.6 1.4 1.3
Cash div yld (%) 1.1 1.7 2.0 2.4
Gross div yld (%) 1.6 2.3 2.8 3.3
What's changed?
Target price: Decreased to NZ$13.50 (from NZ$13.70)
Rating: Upgrade to OUTPERFORM
Best in class growth, past and future
SUM has delivered a ~25% organic annuity EBITDA CAGR over the last five years, which includes two years significantly impacted by COVID-19. This is >2x the average for the other three listed aged care operators. We expect CY22 to be yet another year of disruption but think the fundamentals for strong underlying growth remains better for SUM relative to any of the other aged care operators. This is based on three key drivers, (1) SUM has a young portfolio, with only ~40% of villages mature which should drive high visibility annuity earnings growth, (2) SUM has, by some margin, the largest land bank in the sector in relation to current portfolios,, and (3) SUM's broadacre development strategy improves the cash recovery profile, provides more flexibility and allows it to bring product to market quicker.
Attractive entry point into long term winner
SUM is still trading at a discount to its largest listed peer, Ryman Healthcare (RYM). A discount that we view as unwarranted in light of the number of factors listed above. On an absolute basis, SUM is also trading at or near its lowest PE and EV/Annuity EBITDA multiple since the onset of the COVID-19 pandemic in early 2020, this is despite delivering strong earnings growth, stable gearing and stable cash recovery in what has been a challenging backdrop for the aged care operators. Last month, we downgraded our earnings estimates across the sector (in part due to the onset of the Omicron variant) reflecting a combination of (1) expected higher labour costs, (2) lower unit sales and (3) higher level of concern in relation to house price appreciation. Our estimates remain unchanged but we believe that the market is now overcompensating for these headwinds across both SUM and the smaller cap operators in the aged care sector. We upgrade SUM to OUTPERFORM reflecting what we view as an attractive risk/reward proposition for a best in class operator with a meaningful growth runway ahead of it.