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First NZ downgrades Summerset to 'neutral' as Auckland's housing market cools

Friday 22nd January 2016

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Summerset Group's Auckland-centred growth plan has seen the retirement village developer and operator's stock downgraded by First NZ Capital analysts, who say moderation in house price growth could limit the company's ability to outperform expectations.

The stock has been cut to a 'neutral' rating from 'outperform' by First NZ Capital. Earlier this month, Summerset said it had lifted occupation rights sales 26 percent in 2015, and affirmed earnings guidance for underlying profit of between $36 million and $39 million in calendar 2015. That forecast was up from a previous range of between $32 million and $34 million and more than the $24.4 million reported in 2014.

"After two guidance updates during 2015, and largely in line with fourth quarter 2015 data, we see less ability to surprise to the upside when Summerset reports full year 2015 on Feb. 24," the First NZ report said. 

Moderation in Auckland's house price growth, indicated by recent Real Estate Institute of New Zealand data, increases risk for the business, First NZ said, while adding it's still too early to determine whether the cooling will last. 

Like other retirement village operators, Summerset has been acquiring land and preparing for a record building spree in anticipation of increased demand as people born in New Zealand's post-war era reach the target age for operators. It will open its Ellerslie village in Auckland this year, which will add another 250 units and an 80-bed care centre to the company's books.

The company opened its Wigram, Christchurch village through the second half of last year and was granted consent to build a a $100 million, 237-home site in that city's Casebrook suburb.

Last July, Summerset bought a 2.3 hectare site in Auckland's Parnell which it plans to develop as a premium site. It also bought an extra 2.4 hectares in Warkworth, allowing it to build 77 retirement units adjacent to its existing Summerset Falls village, and signed a 127-year lease for a 2.5 hectare site on Parsons' Paddock in the eastern suburb of St John's to build its sixth Auckland village.

"Summerset has ambitious development plans and remains the fastest growing developer amongst peers (in percent terms) and hence has higher exposure to the housing cycle," First NZ said. "While Summerset has lower existing exposure to Auckland, most of its large greenfield sites are in Auckland and therefore its earnings track is highly dependent on Auckland house prices over coming years."

First NZ said about 58 percent of the company's landbank is now in Auckland compared to just 18 percent of its completed portfolio. Mitigating factors were the purchase of the Parnell site, which the analyst report described as opportunistic, and Summerset's historic lack of Auckland land ownership.

"Notwithstanding our downgrade, Summerset's business is tracking extremely well," First NZ said. "Sales data shows continued momentum, reflecting both Summerset's improving operational calibre and buoyant industry conditions." 

First NZ lowered its forecast for Summerset's 2015 earnings to $38.7 million from its October projection of $40.3 million. It increased its target price by 2 cents to $4.35 a share. Summerset slipped 1.5 percent to $4.02, and its share price is unchanged for the year.

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