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FNZC lifts target price for Oceania Healthcare despite 'mixed interim result'

Tuesday 30th January 2018

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First New Zealand Capital has increased its target price for Oceania Healthcare despite cutting its profit expectations after the company reported first-half earnings last week.

On Thursday, the Auckland-based aged-care operator reported first-half profit nearly doubled to $42.5 million in the six months to Nov. 30 as its investment property became more valuable and it sold more retirement village units. Total assets increased 19 percent million to $999 million. Oceania has 51 sites around the country with 3,893 care beds, care suites and units, and 1,782 more in the development pipeline, of which 59 percent are either under construction or consented.

In a research report, FNZC analyst Andrew Steele said the result had been modestly weaker than his expectations, due largely to an occupancy rate of 88.6 percent compared to the expected annual rate of 90.5 percent. However, FNZC said the company's change in fair value of investment properties, at $34.1 million, was ahead of its $16.2 million forecast and was due to revaluations of existing villages and completion and sales of new developments.

FNZC lifted its target price for Oceania to $1.06, from $1.01, and kept its 'neutral' recommendation. That puts it in the middle of the three research houses with ratings on the stock, with Macquarie Research recommending that the stock will outperform with a target price of $1.09, and an anonymous analyst recommending a hold at a target price of $1, according to data compiled by Reuters.

The stock last traded at $1.03 and has gained 30 percent since it listed at 79 cents in May 2017.

FNZC said Oceania's first half implied a reasonable performance in the second half and a 2018 result broadly in line with forecasts. However, the research house cut its forecast for the company's underlying earnings in the current financial year and following two, based on lower occupancy assumptions. In 2018, it now predicts $51.2 million in underlying earnings, from $52.4 million; in 2019, $51.6 million, from $52.2 million; and in 2020, $61.3 million, from $62.2 million.

Oceania declared an interim dividend of 2.1 cents per share, calculated as a target payout ratio of 50 percent to 60 percent of annual underlying earnings. FNZC said the dividend policy's link to development margins will likely cause lumpiness and the company should de-link the measure from the payments.


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