OPINION: You may have seen a headline last week proclaiming "House sales take off in new year".
The story reported a significant increase in the volume and value of house sales in January compared with a year earlier.
Residential property enthusiasts may feel their juices flowing at the thought, but there are potentially more profitable implications for sharemarket investors.
The profits come from the retirement village sector, the fortunes of which are closely related to the housing market. And with three retirement village companies now readily available on the listed market - Ryman Healthcare, Summerset and Metlifecare - analysts are having fun figuring out which is the best opportunity for investors at any given time.
One of the latest reports on the matter comes from UBS, whose analyst Wade Gardiner looked at the relative valuations of the three companies.
One of the ways he crunched the numbers was to estimate how long the market was expecting each company to continue developing new villages based on its current growth rate.
Ryman's share price - $4.65 at the time - reflected 10 years of development at the current build rate, he said.
The company could increase its build rate, but maintaining its historical average growth of about 15 per cent would not be easy.
So "we have retained our ‘sell' rating as we are uncomfortable pricing in even further growth".
Summerset, which floated in October 2011 at $1.40 a share, has performed well on the market and when Gardiner published his note on February 5 it was priced at $2.48.
At that level, the market was pricing in six or seven years of development, he said.
The company had ramped up its development rate to target 200 new units in 2013, and 300 by 2015, so it could yet grow faster.
"We retain our ‘neutral' rating but lift our price target to $2.60," wrote Gardiner.
The shares have since risen to around $2.64.
With Metlifecare, however, "on our valuation the market is paying for the existing units but no future development. Accordingly MET appears to be the cheapest of the three stocks".
After years of underperformance and a major restructuring in 2012, the company had yet to prove its worth, said Gardiner, but he rated Metlifecare a "buy" with a 12-month price target of $3.70.
Metlifecare shares were trading last week at about $3.13, having gained about 40 per cent since its rejig last July.
Regular readers of sharemarket news may recall here that just before Christmas Ryman was picked out by two brokers, Macquarie and Forsyth Barr, as a preferred stock for 2013.
One important consideration is that Ryman is widely regarded as one of the most consistently excellent performers in NZX history. When it listed in 1999 it had a market capitalisation of $135m and it has since grown to a value of $2.3 billion.
You can get a flavour of its attraction from the comments of analysts Chris Byrne and Stephen Ridgewell at Craigs Investment Partners.
In a note last November reiterating their "buy" rating, they said "RYM . . . remains the market leader in a sector with both favourable economics and attractive long-term growth driven by demographics."
That sort of reputation makes it hard to look past Ryman as a sound portfolio investment.
However, it doesn't mean it is necessarily the best buy in the sector if you are looking for growth.
On advice, I sold a portion of my long-held Ryman stock in December as it had produced good gains and looked fully valued. As it turned out the shares still had some way to run, but that's okay because I've kept a reasonable holding.
At current valuations, it's possible other Ryman shareholders are making similar adjustments.
Anyway, returning to the issue of house prices, retirement village companies tend to benefit from a strong housing market because their customers typically sell a property to buy occupation rights in the village development.
Rising house prices allow retirement villages to charge more for occupation rights and thus indirectly capture the capital gains from real estate.
Last October the house price trend was already attracting attention. In a research note issued that month, Goldman Sachs analyst Matthew Henry commented on the return to growth.
"The aged-care sector effectively offers a leveraged exposure to house price growth," he wrote. "When coupled with the continued expansion and maturing of their retirement village portfolios, we forecast strong earnings growth over the next three years."
Henry didn't cover Summerset, but of Ryman and Metlifecare he said the latter "offers the greater leverage to house prices", partly because of its greater proportional exposure to Auckland.
Despite the positive views, uncertainty remains over the future of Metlifecare's 43 per cent shareholder Retirement Villages Group, an Australian investment fund. Reports in Australia say RVG is in breach of debt covenants and must sell assets soon, putting its Metlifecare stake in play.
However, last year's restructuring required RVG to hold its stake until November 23, so the potential overhang could last some time yet.
Overall, it should be apparent that the three companies in the retirement sector are well worth a look and have the potential to make a residential property investor weep with jealousy, even in a strong housing market.
Disclosure: Tim Hunter owns shares in Ryman Healthcare.
- © Fairfax NZ News
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