OCA - Oceania Group - retirement villages

[ValueNZ]

Today's close looks very much like the bottom price during the covid panick.

Who would have ever thought that OCA would ever touch 51 cents again in a BAU environment.

OCA transacted at 38c at one point during the covid panic.

I actually think OCA is "cheaper" today than it was at that low, seeing as the business has grown it's assets significantly in the meantime.

[Balance]

OCA transacted at 38c at one point during the covid panic.

I actually think OCA is "cheaper" today than it was at that low, seeing as the business has grown it's assets significantly in the meantime.

Grown its debts and overvalued developments/land since Covid.

[Baa_Baa]

Grown its debts and overvalued developments/land since Covid.

What is it and why, do you hate on OCA so much and have nothing to say on any of the other RV threads? Is OCA just a proxy for all listed RV's and you assume an audience here for your grandstanding and down ramping? Interested to know.

Incidentally, OCA has suffered by far the most SP damage relative to NTA than any other RV. Maybe that's the point, to gouge out a few more % points downside to NTA and then scoop up a NTA discount to SP bargain ... "when the dealings done".

[Balance]

What is it and why, do you hate on OCA so much and have nothing to say on any of the other RV threads? Is OCA just a proxy for all listed RV's and you assume an audience here for your grandstanding and down ramping? Interested to know.

Incidentally, OCA has suffered by far the most SP damage relative to NTA than any other RV. Maybe that's the point, to gouge out a few more % points downside to NTA and then scoop up a NTA discount to SP bargain ... "when the dealings done".

One by one, the other RVs being Arv & Ryman, have fronted up to their overvaluations.

OCA has not and it's obvious the market does not believe the directors and management so I am simply highlighting some of the reasons why.

You have a problem with that? Why so? Is it not better to be aware than not?

[Baa_Baa]

One by one, the other RVs being Arv & Ryman, have fronted up to their overvaluations.

OCA has not and it's obvious the market does not believe the directors and management so I am simply highlighting the reasons why.

You have a problem with that?

No, no problem with that, not at all, it's just your opinion. So what do you think the additional punishment should be to OCA's NTA valuation and SP compared to now, given it's already the greatest discount to NTA of all RV's, that in your opinion hasn't already been price in to the SP?

[Balance]

No, no problem with that, not at all, it's just your opinion. So what do you think the additional punishment should be to OCA's NTA valuation and SP compared to now, given it's already the greatest discount to NTA of all RV's, that in your opinion hasn't already been price in to the SP?

I don't have an opinion on that - it's the market's view that OCA's valuation is suspect so it's up to OCA to clear that up.

[Muse]

The market's discount to reported NTA isn't (just) about skepticism of the book value of assets or fears on where they may head. The focus on this misses (at least) two important issues in my opinion.

Issue 1) Overhead Costs. Let's assume the book value of NTA is correct and thus fair market value. But the value of those assets comes along with a large and growing overhead cost base that isn't capitalised into those reported figures. Dumb analogies are often useful ones so lets say there is a house that has an official property value of $1m. But in purchasing that house you must also be obliged to pay $60k (growing briskly each year) to some over inflated management company and locked into perpetuity. Sure - on a strict property value basis it may be worth $1m but surely its not worth that once the impact of its management contract is considered. You'd want to take the PV of those overhead costs (or simply apply a multiple to them) and add that to NTA if one was determined to look solely at NTA as a value determinant.

Issue 2) Returns on Equity. OCA's returns on equity are poor on any basis; the various statutory npats (reported/comprehensive) or the reasonably bogus underlying earnings. Again - dumb analogy - but lets say an equity investor has a cost of equity of 10% (nice round #), and an asset has a return on equity of (say) 5% (these are just strawman numbers before anyone gets worked up). There is no way the marginal investor who sets the market price would pay book value for an asset producing approximately half of his/her required return all things equal. They would just pay the appropriate discount to NTA to true up their cost of equity. Adopting that framework into the real world, they would also make an adjustment based on the realistic level of compounded growth that asset could achieve in the future. The discussion around the float being an asset ignores the truth that in its present liability form it enhances the ROE. Returns on equity would be substantially worse if they were removed from the analysis. A second devils advocate argument would be the ROEs are deminished because a lot of capex has been put in place but hasn't been given the time to earn (and will in the fullness of time). That I have some sympathy for but that's likewise been the case for a while.

One final point and its been done to death but are the cashflow from operations. Jarden have done excellent work on OCA's adjusted funds from operations which digs into OCA's free cashflow from core operations (ie excluding new ORA sales and development capex & buybacks) which according to their analysis shows an increasingly negative cashflow profile. I'd imagine some much more informed than I posters here (like Ferg) would have seen this and make the argument that the analysis is unfair because it includes all the headoffice cost in core operations and doesn't pro-rata some out to development and its an interesting point to ponder, but it doesn't explain away that under Jarden's analysis OCA used to be reasonably cashflow positive on a core cashflow basis (+$18m in 2018) compared to circa negative 26m in 2024 (with 2h FY24 its worst on record).

It would be worthwhile for investors to consider OCA's debt headroom available to fund future development as well. Total drawn debt including bonds has doubled since FY21 and new facilities saw its headroom (undrawn funds available to be drawdown) peak at $195m in FY22. The last reported figure shows available gross headroom of only $61m - a huge compression in the capital available to fund future development and operational losses. So using the framework I talked to in issue two - that an asset earning a return below the cost of equity needs to be able to grow quickly to compensate for the below target returns - OCA's development capability is being impacted by a lack of headroom and this potentially leads to the discount ascribed by the market. If a growth company stops growing, the market reacts harshly by adjusting the multiple ascribed to it. Sure OCA can try to get new and enlarged facilities and it probably will at some point but the bank lending to it has been flat for the two years after years of lending to it. They will be informed by their interest coverage ratio and debt to (net debt + equity) covenants which OCA is presently okay on. The ICR is well north but only due to the sublime hedges OCA took out when rates were at rock bottom - I believe I read OCA would possibly be in breach if the interest rates were unhedged. And at 38.3% loan to value ratio they are below the 50% covenant but likewise they were only at 30.8% in FY22 so that's a lot of growth in gearing in just two years and probably mutes the banks appetite to grow the facilities at anywhere near the level they did in the past.

I think OCA's suspension of dividends, pullback on development, and appointment of a new CEO are a tacit acknowledgement of the realities in the paragraph above and I'd reasonably expect the new CEO to undertake some meaningful (& urgent) cost cutting measures once into the role.


I'm no an expert on OCA or aged care / RMs and the opinions above are just random musings based on a quick perusal of some recent accounts and research. I totally acknowledge the deep discount to NTA but I don't have a view on if that is too harsh or not from my back of the envelope look. I just think there are some aspects that feed into the discount applied into the market that aren't discussed in this thread so thought I'd add an outsiders perspective.

[davflaws]

I'm no an expert on OCA or aged care / RMs and the opinions above are just random musings based on a quick perusal of some recent accounts and research. I totally acknowledge the deep discount to NTA but I don't have a view on if that is too harsh or not from my back of the envelope look. I just think there are some aspects that feed into the discount applied into the market that aren't discussed in this thread so thought I'd add an outsiders perspective.

I appreciate your thoughtful and informative contribution.

[winner69]

Good most Muse …very thoughtful and I hope most read it as it’s full of very good insights

I

[Balance]

Good most Muse …very thoughtful and I hope most read it as it’s full of very good insights

I

Excellent summation and very helpful.

Superior assessment & analysis than most of the navel gazing posts blaming all and sundry about how and why OCA is trading at the deep discount to NTA.