WEEKLY STOCK COMMNET: OCEANIA HEALTHCARE
Roy Davidson, 30 November 2017
Oceania Healthcare is the fourth largest aged care/retirement operator in New Zealand. OCA’s weighting towards aged care differentiates it from others in the sector. However, the company’s development pipeline is focused on increasing the share of retirements units and moving to a continuum of care model.
OCA has 48 villages nationwide with almost 3,000 aged care beds, making it the third largest aged care operator behind Bupa and Ryman. OCA has the highest proportion of aged care beds of those companies in the sector we cover at 67% of its portfolio at present, plus 6% for care suites (which are higher specification and able to attract premium charging and/or funds from occupation rights agreements). This compares to Ryman at 35%, Summerset at around 20%, and Metlifecare at under 10%, making it a key differentiator.
While aged care is a lower returning business than retirement, it is more defensive due to the high level of government funding. The majority of revenues in the aged care sector are provided by way of government funding, providing a steady and defensive earnings stream, with the ageing population set to be a key driver in the coming years. Aged care also generally has higher barriers to entry than retirement owing to its greater regulation, government funding and required relationship and reputations with 20 DHBs throughout the country. Aged care is also a scale business, with processes and systems difficult to match by new entrants and important due to the lower return nature of the business as compared to retirement.
OCA is undertaking a sizeable brownfields development programme, representing a 32% increase in overall bed/units. This involves redeveloping existing sites to increase intensification (e.g. replacing single story structures with multi-story), increasing the share of retirement units to create a continuum of care offering similar to Ryman and Summerset, and building care suites which are more profitable than traditional aged care beds. A development led growth strategy is relatively new to the company, previously having grown by acquisition. However, the company has recently completed a number of developments providing comfort.
We see OCA as a complementary holding in the New Zealand aged care/retirement sector, particularly for larger portfolios. It has a larger share of aged care than other exposures in our coverage list (Ryman, Summerset, Metlifecare) meaning it is at the more defensive end of the scale (with 55% of EBITDA currently coming from the aged care business), primarily funded by Government care fees. We see OCA presenting a value opportunity within the sector and we see the potential for upside if management can effectively execute its brownfields development strategy and increase contribution from retirement units and care suites which have a much higher return profile.
Risks to OCA include: 1) Slowing housing market, 2) development risk, 3) increased competition.