Tuesday 13th March 2018
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Summerset Group shares rose to a record after the stock was upgraded by First NZ Capital, which has been impressed by the retirement village operator's development capability.
The stock rose as high as $6.90 and was recently up 6.7 percent to $6.87 after FNZC analyst Arie Dekker raised his rating to 'outperform' from 'neutral' and lifted the target price 27 percent to $7.37. Dekker said in a note to clients the upgrade was due to an uplift in the amount of value attributed to future development "given increasing confidence in Summerset's approach to risk".
Last month Summerset reported a 44 percent increase in annual earnings as it built more units and improved its margins, and the stock had already gained 17 percent so far this year, second only to a2 Milk Co on the benchmark S&P/NZX 50 Index.
"Summerset has established itself with a growing development delivery capability and a sizeable land bank on which to grow off what is still a relatively small base," said Dekker. A key concern has been the scale of the existing asset base - which does not produce significant free cash flow - and the absolute level of debt to build the land bank and grow the development delivery, however, "we are starting to see some growth in operating cash flow as the base matures and Summerset benefits from recent unit price gains," he said.
Dekker does not rule out Summerset raising equity to bring forward and de-risk development and said "we would view this positively", with FNZC of the view that equity recycling of capital should be part of a more aggressive development funding mix, especially in a sector with cyclical exposure.
Still, the positive view comes with a caveat as the sector is sensitive to long-term unit pricing growth and the housing market, he said.
New Zealand's overheated housing market - considered a risk to financial stability - has slowed as Reserve Bank restrictions on more highly-leveraged mortgage lending and tighter credit criteria being demanded by banks made it more difficult for borrowers. The slowdown has weighed on the retirement village sector which has significantly benefited from rising prices when it re-sells its units.
"Following a period of above trend unit price growth, a rebasing downwards would have a detrimental impact on valuation metrics that would need to be offset with more future development to sustain valuation," said Dekker.
As a result "we are watching the housing market and inventory levels closely," he said.
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