WEEKLY STOCK COMMENT: RYMAN HEALTHCARE (RYM)
Peter Ball, 27 July 2017
Ryman Healthcare (RYM) is New Zealand’s pre-eminent listed retirement and aged care provider, providing services to over 9,000 residents. RYM’s integrated facilities, from independent apartments through to serviced units, resthome and hospital beds, cater for the changing needs of occupants as they age.
Ryman Healthcare (RYM) has a strong focus on providing a continuum of care to residents with a circa 60:40 split between living units and aged-care beds. RYM’s business model provides the advantage of very strong cash flows, which is sufficient to support ongoing development. The company enjoys above average margins supported by a strong management team, operational synergies, solid pricing power, increased brand recognition and stable earnings and cash flows from a large and mature portfolio of villages.
The number of over 75’s is set to grow sharply in the next two decades, doubling to over 500,000. RYM is well-positioned to benefit from this accelerated growth in demand for retirement and aged care facilities and services, especially given its in-house design/development capability. Australia faces similar demographic challenges to New Zealand, which bodes well for RYM’s continued expansion into Australia.
A key driver of growth over the coming years will be Australia where RYM is aiming to have five villages operating by 2020. Australia is particularly promising as we believe RYM has a significant advantage over its competitors due to its continuum of care model. Most villages in Australia are currently either standalone retirement or aged care villages, and it can be disrupting for residents to move between villages. Sales at RYM’s first Melbourne village (Weary Dunlop) were the fastest the company has ever experienced and development margins will be higher than first anticipated (18% vs 15%). RYM has also received higher accommodation bonds for its aged care beds than its Australian peers, which will help fund future development.
RYM is a quality growth story with a defensive business model and strong earnings outlook and is a key player in the sector. In our view, the company has the most attractive retirement/aged care portfolio in New Zealand in terms of locations and mix of assets within villages while the expansion into Australia is promising. Over the coming years, RYM will look to build three villages a year, one in Auckland, one elsewhere in New Zealand, and one in Australia. This will focus the portfolio more towards Auckland where it is currently underweight.
Risks to RYM include; 1) fall in property prices, 2) increased competition, and 3) development risk.