Demand for aged care facilities has led Ryman Healthcare to increase its building rate, Craigs Investment Partners broker Chris Timms says.
Ryman, which operates two facilities in Dunedin, achieved a build rate of 710 units in the 2012 financial year. Given strong demand for its villages, the company had decided to keep building at a rate of 700 units and beds a year.
That was 27% above the previous target of 550 and 11% above Craigs' estimate of 630, Mr Timms said.
"We have incorporated this build rate into our forecasts which leads to our target price increasing from $3.62 to $4.42.
Trading at a 10% discount to our target price, we reiterate our buy rating."
Ryman's increased build rate would be accompanied by an increase in capital expenditure, he said. Craigs expected negative free cashflow and slightly higher debt as a result. However, that was a timing issue and capital expenditure was always supported by strong operating cashflow and Ryman being conservatively geared.
Even with the increase in building, Ryman would remain a small part of a fragmented industry - from 8% now to about 22% in 2022.
Mr Timms said that Ryman proved in its 2012 result it had the demand to meet the new build rate. Of the 710 units and beds built in 2012, a 24% increase on the previous corresponding period, Ryman sold 96% of the units.
"We see the ramp-up of building as an optimal strategy with Ryman seeking to cement its dominance on the industry ahead of the demographic boom to come. Indeed, we see the efficient capital recycling from its self-funding business model as Ryman's most attractive feature."
There were risks, he said, for Ryman, including unit price inflation, allowing for the death of residents, development margins, building rates and expanding into Australia.
The assumptions around the deaths of residents were critical to modelling to both resale of existing units and the group's future repayment liabilities.
Projections on the likely rate of turnover in the group's portfolio would not be entirely accurate, again adding a margin of error, Mr Timms said.
