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The conundrum of Metlifecare's discount while peers trade at a premium

Wednesday 27th March 2019

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Why do Metlifecare shares trade at less than 70 cents in the dollar compared with its net tangible asset backing and yet shares in competitors such as Ryman Healthcare and Summerset Group trade at huge premiums to NTA?

Ryman is currently trading at $11.76, nearly three times its $4.056 NTA at Sept. 30, while Summerset shares are trading at $6.36, 46.5 percent higher than their $4.34 NTA at Dec. 30, but Metlifecare is trading at $4.79 compared to its Dec. 30 NTA of $6.97.

Stuart Williams, head of equities at Nikko Asset Management New Zealand, was asking this question at his firm’s investment conference in Wellington earlier this week.

He isn’t alone: FNZC analysts Andrew Steele and Grant Lowe say they find the discount “somewhat confounding” and that “we find it intellectually challenging to apply different rules to the different operators on valuation.”

Williams’ investment team’s bet on Metlifecare, a stock they have favoured for several years, has hurt their past performance and is doing so again this year. “It’s the worst performer in a relative sense.”

Metlifecare shares have fallen about 26 percent in the past six months.

“The thing we struggle to identify is what is the catalyst that’s going to drag this out of the mire,” Williams says, adding that the company’s communication strategy needs improving.

“It’s perhaps an easy call to make but it just hasn’t worked. Having said that, we’re holding the faith.”

Stephen Ridgewell, an analyst at Craigs Investment Partners, says Metlifecare’s management under chief executive Glen Sowry has "in our view, clearly lifted the bar in terms of operational performance, investor communication and disclosure.”

And yet Ridgewell notes the gap between share price and NTA has only widened since his appointment.

Metlifecare’s investment proposition ticks so many boxes, such as demographics being in its favour amid New Zealand’s rapidly ageing population.

One of its disadvantages compared to its competitors is that Metlifecare was developed as a lifestyle option for older people and it has only recently started working on providing the continuum of care proposition that Ryman pioneered and remains the most successful at executing.

Analysts cite the fact that Metlife's villages that lack care facilities are more exposed to a softening in the housing market and its portfolio also has a distinct skew to the Auckland region.

While house prices in New Zealand outside of Auckland rose 8.1 percent in the year ended February, prices in Auckland were down 2 percent.

Jeremy Simpson, an analyst at Forsyth Barr, says Metlifecare is making progress with its care offering. Village fees and care revenue of $32.9 million in the six months ended December, was up 13 percent from a year earlier, although rising operating expenses largely offset this.

He notes that “demand indicators remain robust with village occupancy at 97 percent and care occupancy at 95 percent. Metlifecare remains on track for a significant lift in the build rate in full-year 2020 and looks to be continuing to make solid progress across all areas of its business.”

The vacancy rate of existing units is 2-3 percent.

Ridgewell says Metlifecare has a low dividend yield relative to its peers – it paid a first-half dividend of 3.75 cents per share out of 11.5 cents of per-share earnings – but says the dividend policy is “sensible and sustainable.”

The company also has a slower organic growth profile than its peers “with Metlifecare only now getting into a position to deliver meaningful growth from development.”

Metlifecare delivered only nine new units in the six months ended December but reiterated its guidance that 215 units, including 70 care beds, will be delivered this financial year, with the majority being delivered in the fourth quarter.

The company will deliver 40 care beds, including its first specialist dementia care unit, at Papamoa Beach and 30 care beds at The Avenues, also in the Bay of Plenty, before the end of June.

“While we acknowledge these concerns, we also estimate that investors are pricing in a materially more significant house price correction into Metlifecare’s share price than its listed peers, despite having exposure to the same underlying asset class, that is, New Zealand house prices,” Ridgewell says.

Unusually, all three analysts have a $7.00 12-month target price for Metlifecare shares and believe they will outperform the market.


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