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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Summerset Group Holdings / Equity Bottom-Up

<h2>Summerset Group</h2>
Run to Paradise
Summerset Group (SUM) has made its first foray into Australia with the acquisition of a large broad acre site in Victoria, 41 km South East of Melbourne. This fits its strategy to initially undertake a less capital intensive approach with a mid-size village with largely single level villas and village centre offering a full continuum of care. SUM’s valuation multiples have de-rated significantly over the last 12 months providing an attractive entry point. OUTPERFORM.
What’s changed?
<ul>
<li>Earnings: FY19 up +4%, +1% and +1%</li>
<li>Target Price: Up slightly from NZ$7.10 to NZ$7.20</li>
<li>Rating:&nbsp;OUTPERFORM</li>
</ul>
Kicking off in Melbourne
This was not unexpected given the company has been looking for a while and indicated it was getting close to finalising an acquisition after a couple of years due diligence in the market. We suspect the first acquisition was delayed by the recent volatility in the housing market. SUM noted that there is little in the way of retirement village competition in the location and only a modest integrated care offer. We remain very positive about the competitive opportunity for NZ operators with a proven integrated full continuum of care offering. We expect SUM will run with its NZ ORA terms. No purchase price was disclosed but it is expected to be within SUM’s target range of around A$15m to A$20m.
In line with strategy
It is a large 8ha broad acre site (net ~5ha for the actual development) and hence will be villas (ie not high rise apartments) plus a three level village centre with a care facility and serviced apartments (SAs). The location is mid-market and is 41km south east of Melbourne CBD with a median house price of around A$0.55m to A$0.66m allowing a likely standard 2 BR villa price of ~A$0.5m.&nbsp;
Less capital intensive broad acre approach to start
This is a lower risk approach and again this was what SUM had been signalling strategically. The village size is likely to be slightly smaller than a typical new NZ village with 145 villas, 50 SAs and 75 beds, which, pleasingly, will include around 25 dementia beds. The site looks to be well located to amenities for residents. The opportunity remains to improve capital recycling with refundable accommodation deposits (RADs) for aged care beds of typically around A$500,000. We expect SUM to announce further sites over the next 18 months as it looks to establish a pipeline to leverage.&nbsp;
<div class="content-highlight">
Investment View
SUM continues to strengthen its development and operational track record and has a land bank of over six years. There remains significant long-term growth potential from demographic trends and SUM has the expertise to capitalise on these themes. Execution risk is increasing near-term as it tackles large and intensive Auckland developments late in the cycle but the business remains very well placed over the longer term. At current pricing SUM is getting very little credit for its operational and development track record since listing. OUTPERFORM.&nbsp;
</div>
Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Summerset Group
Run to Paradise
Summerset Group (SUM) has made its first foray into Australia with the acquisition of a large broad acre site in Victoria, 41 km South East of Melbourne. This fits its strategy to initially undertake a less capital intensive approach with a mid-size village with largely single level villas and village centre offering a full continuum of care. SUM’s valuation multiples have de-rated significantly over the last 12 months providing an attractive entry point. OUTPERFORM.
What’s changed?

Earnings: FY19 up +4%, +1% and +1%
Target Price: Up slightly from NZ$7.10 to NZ$7.20
Rating:&nbsp;OUTPERFORM

Kicking off in Melbourne
This was not unexpected given the company has been looking for a while and indicated it was getting close to finalising an acquisition after a couple of years due diligence in the market. We suspect the first acquisition was delayed by the recent volatility in the housing market. SUM noted that there is little in the way of retirement village competition in the location and only a modest integrated care offer. We remain very positive about the competitive opportunity for NZ operators with a proven integrated full continuum of care offering. We expect SUM will run with its NZ ORA terms. No purchase price was disclosed but it is expected to be within SUM’s target range of around A$15m to A$20m.
In line with strategy
It is a large 8ha broad acre site (net ~5ha for the actual development) and hence will be villas (ie not high rise apartments) plus a three level village centre with a care facility and serviced apartments (SAs). The location is mid-market and is 41km south east of Melbourne CBD with a median house price of around A$0.55m to A$0.66m allowing a likely standard 2 BR villa price of ~A$0.5m.&nbsp;
Less capital intensive broad acre approach to start
This is a lower risk approach and again this was what SUM had been signalling strategically. The village size is likely to be slightly smaller than a typical new NZ village with 145 villas, 50 SAs and 75 beds, which, pleasingly, will include around 25 dementia beds. The site looks to be well located to amenities for residents. The opportunity remains to improve capital recycling with refundable accommodation deposits (RADs) for aged care beds of typically around A$500,000. We expect SUM to announce further sites over the next 18 months as it looks to establish a pipeline to leverage.&nbsp;

Investment View
SUM continues to strengthen its development and operational track record and has a land bank of over six years. There remains significant long-term growth potential from demographic trends and SUM has the expertise to capitalise on these themes. Execution risk is increasing near-term as it tackles large and intensive Auckland developments late in the cycle but the business remains very well placed over the longer term. At current pricing SUM is getting very little credit for its operational and development track record since listing. OUTPERFORM.&nbsp;

Jeremy Simpson, CFA
jeremy.simpson@forsythbarr.co.nz
+64 9 368 0022

Summerset Group Holdings

Summerset Group: Run to Paradise