Stock Takes: Will a turnaround in the property market boost the retirement village sector?

May’s mini-reporting season kicks off next week and all eyes will be on top stock Fisher & Paykel Healthcare, as well as the many property and retirement village stocks that are due to report.

Shares
in F&P have risen 28 per cent in the past year and are currently trading on a high multiple of 50 times 12-month forward price to earnings. Forsyth Barr analysts say this indicates that investors expect a material earnings upgrade – something they view as unlikely.

“An in-line result could take the stock lower.”

Conversely, the analysts say the aged-care sector has fallen by around 25 per cent over the last year, and if there is no news, then that could be seen as good news for the sector.

Forbarr’s Aaron Ibbotson and Matthew Leach say that when it comes to real estate investment trusts and aged-care companies, they expect the focus to be on debt levels and interest expenses, as well as demand.

“We model sharply higher interest expenses largely offset by strong top-line growth. Within aged-care a big unknown is costs. Both reported and forward guidance. Wage inflation remains high but we expect some Covid-19 related costs to drop out and for increased immigration to ease some of the record wage pressure seen over the last two years.”

Ryman’s challenge

Jarden analysts Arie Dekker and Vishal Bhula say retirement village operators are continuing to navigate a challenging operating environment, with tail-end impacts from Covid and the sector’s largest stock Ryman Healthcare still consumed by its capital raise.

“Ryman also has a chair succession and board renewal process it is working through.”

They want to see Ryman build on some of the granular details which came out with the investor pack supporting its capital raise, and suggest the company should increase its deferred management fee.

“It would be a left-field surprise for Ryman to move on care and deferred management fees but we continue to call out the opportunity to monetise its asset base/product offering through an uplift in cash it permanently retains from residents, a feature across operators in care also.”

Ryman bucks the sector trend with its 20 per cent deferred management fee. Other companies keep up to 30 per cent of the buyer’s money in deferred fees.

While analysts might be keen to see this fee rise, it could be a difficult time to push through any increases given the increased scrutiny on the sector.

This week the Commerce Commission began an investigation into the multibillion-dollar industry, over whether there are any potential issues under the Fair Trading Act. That follows a move by the Ministry of Housing and Urban Development to begin investigating the sector in December after widespread calls for change from Consumer NZ, the Retirement Commissioner and residents.

Housing bounce-back

Falling house prices and rising interest rates have been a drag on retirement village operators amid concerns that those who want to buy into a village will find it harder to sell their home.

But now that the property market seems to be bottoming out, investors are asking questions about what that potential stabilisation and return to positive momentum could mean.

Dekker and Bhula say an improvement in housing sentiment is important to take away some of the more immediate risks currently weighing on the sector.

However, they see more than that being required for a sustained rise in valuations.

“Despite derating, the entry point to the sector sits at a combined market cap of $6.9b today.

“In our view, the most relevant valuation question continues to revolve around the sector’s prospects for generating the level of free cash flow required to support this in the long term, noting long time frames and what could be a rising cost of capital for the sector.

“The sector still has to prove up the sustainable cash margins it can generate in a competitive sector from a business model largely financed by interest-bearing debt through the development phase (to now) and resident debt through the operating phase.”

Earnings slump for My Food Bag

All eyes will be on meal kit company My Food Bag when it reports its annual result next Friday, May 19, after a dismal share price performance since listing in early 2021.

Current market consensus forecasts are for sales of $176.2 million (down 9.1 per cent on the 2022 March year), EBITDA of $18.2m (down 47 per cent) and a net profit of $8.8m (down 56 per cent).

”These businesses have been under huge pressure globally following the temporary sugar-high during lock-downs and My Food Bag is no exception,” said Salt Funds managing director Matt Goodson.

”While most of the IPO proceeds went to pre-existing shareholders, they did raise some new capital which means their balance sheet is okay,” he said.

”They need to find a way to use this to better monetise their distribution network.”

Salt Funds does not hold shares in My Food Bag.

In an update released in February, the company said it had continued to see slower trading than expected.

By the end of January, deliveries were down 11.8 per cent compared to the same time last year.

In the February update, chief executive Mark Winter said trading in 2023 had remained challenging, with inflationary pressure on households and low consumer confidence resulting in more subdued demand.

“These challenges have continued through the traditional ‘win back’ period following the summer holidays, with lower-than-forecast trading continuing since the two recent long weekends.”

Shares in My Food Bag slumped on their first day of trading on the NZX in March 2021. The company’s shares were sold to new investors at $1.85 each, raising $342 million and valuing it at just under $450m.

The stock now trades around 20c, giving the company a market cap of just $49.7m.

What to make of Xero’s job cuts

Xero’s full-year result due on Thursday should also be closely followed by local investors – despite clashing with Grant Robertson’s sixth Budget in Wellington.

The software accounting firm reports just over a month after announcing that it was slicing 15 per cent of its workforce, saying it was shifting focus towards profitability by cutting employee costs.

New chief executive Sukhinder Singh Cassidy said the elimination of between 700 and 800 roles would cost between $25m and $35m, with most of the redundancy outlay occurring in the 2024 financial year.

This saw analysts sharpening their pencils, with Xero targeting an operating expense (opex) to revenue ratio in full-year 2024 of around 75 per cent. For the current year ending March, Xero is expecting to report a ratio towards the lower end of 80 per cent to 85 per cent.

Jarden analysts Elise Kennedy and Tim Halliday in a result preview point to three key things to watch out for.

First, can investors expect more costs to be taken out?

Singh Cassidy started her role in February and her first move was to announce the job cuts.

“We wonder if since the arrival of its new CEO, whether Xero has been able to find further cost out to guide to below this opex/revenue forecast. We forecast FY24 opex/revenue at 76 per cent vs consensus at 77 per cent,” the two analysts wrote.

The second issue is the risk behind United Kingdom subscription numbers, amid rising insolvencies and a further delay to the UK Government’s Making Tax Digital (MTD) plan for income tax self-assessment policy.

MTD will require self-employed persons and landlords to keep electronic records and use special software to prepare revenue and expenditure reports five times a year, playing into Xero’s hands.

“We previously highlighted that we see potential downside risk for UK and US subscribers,” Kennedy and Halliday said.

“We continue to believe that long term, the UK remains an opportunity but are more cautious on the US.”

The US has long been a laggard in the adoption of accounting software, although the Internal Revenue Service recently announced it was spending US$15m looking into a free, government-backed tax filing system, which could be a landmark step.

Third, what other revenue opportunities exist for Xero?

The company has pushed back on investor concerns about aggressive spending in the US, Jarden highlights.

“However, we question if there could be other ways for Xero to grow into the US, such as improved partnerships or alliances to profitably grow into this and/or other rest of world markets.”

Xero shares are trading around A$92 on the ASX, having climbed 32 per cent this year.