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Metlifecare undervalued compared with peers, Devon's Glass says

Wednesday 28th August 2013

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Metlifecare, New Zealand's second-largest listed retirement village operator, is undervalued versus its peers Ryman Healthcare and Summerset Group Holdings and has scope to rise, according to a fund manager.

Retirement village shares are among the 20 best-performing stocks on New Zealand's benchmark NZX 50 Index the past year as investors anticipate growth supported by an ageing population. Still, while shares in Ryman have surged 87 percent and Summerset has jumped 67 percent, Metlifecare has grown just 22 percent, lagging the index's 25 percent gain.

"What tends to happen in New Zealand is you get businesses that are very good companies, and Ryman would be a great example of that, and the market just continues to rerate those businesses," said Paul Glass, who helps manage $1 billion at Devon Funds Management. "Sometimes those companies can trade well above their fundamental valuation - they become market darlings."

The fund manager has a bigger holding of Metlifecare than Ryman, Glass said.

"We would argue that there is a lot more upside in the stock than there is in something like Ryman which has run very hard and in our view looks very, very expensive," Glass said. "In my opinion it is massively undervalued relative to the peer group."

According to asset valuations by industry specialist Michael Gunn at CBRE, which are used by all three retirement village operators, Ryman shares are trading at around 4.6 times book value while Summerset is trading at about 2.6 times and Metlifecare is trading close to its book value at 0.8 times.

Ryman and Metlifecare both generated free cash flow of about $30 million in the 2013 financial year. Summerset hasn't yet reported its full-year earnings.

Of the two major operators, Metlifecare has greater exposure to the growing Auckland market while Ryman has a larger aged care operation, which includes services such as hospital-style beds and high intensity care such as dementia, according to the fund manager.

Metlifecare aims to increase its rest home and hospital care offering in new developments and existing facilities. The company wants at least 20 percent of its new built stock to include care-related beds or apartments, Metlifecare said in presentation notes accompanying its 2013 earnings on Aug. 22.

Metlifecare fell 0.6 percent to $3.28 on the NZX today, Ryman fell 1 percent to $6.72 and Summerset fell 1.3 percent to $3.03.

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