INSIGHTS

WEEKLY COMPANY INSIGHT: RYMAN HEALTHCARE

Roy Davidson, 13 June 2019

RYM130619 

Description

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.

RYM has a strong business model

RYM has a strong focus on providing a continuum of care to residents with a circa 50:50 split between living units and aged-care beds. RYM’s business model provides very strong cash flows, which is sufficient to support ongoing development. The company enjoys above average margins supported by a strong management team. This in turn leads to operational synergies, solid pricing power, increased brand recognition and stable earnings and cash flows.

Demand set to leap, RYM rising to the challenge

The number of over 75s 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 and development capability. Australia faces similar demographic challenges to New Zealand, which bodes well for the continued expansion into Australia (recent declines in house prices notwithstanding).

Australia expansion is tracking well

A key driver of growth over the coming years will be in 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 second Melbourne Village exceeded expectations and were made at a higher development margin, contributing over half of the recent periods sales. RYM has also received higher accommodation bonds for its aged care beds than its Australian peers, which will help fund future development.

Core portfolio holding

In our view, RYM 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, one in Auckland, one elsewhere in New Zealand, and one in Australia. Rising property prices have been a major tailwind for the sector, with operators benefitting from resale gains. However, a softening property market in Australia and New Zealand may dent sector sentiment and provide an earnings headwind, with RYM’s share price tracking closely to NZ house prices over previous years. In our view RYM is the best fit in the sector, with a high quality portfolio, a proven track record and more defensive continuum of care model.

Risks

  1. falling property prices
  2. reputational damage
  3. increased competition
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