Ryman Healthcare officers gloat for now

Friday 20th July 2001

Self-confidence is an asset in business; overconfidence is not. Ryman Healthcare is on the border of the two if its second annual report as a listed company is any indication.

It has grounds to be pleased with itself after turning in a 12% increase in net profit to $14.1 million for the year to March 31, on revenue up 28% to $59 million, especially as it operates in the highly competitive aged care sector.

However, the board and management seem to believe this trend will continue indefinitely, when history would indicate adverse conditions come around sooner or later.

Chairman David Kerr sets the tone in his report when he states "Ryman's large and sophisticated villages ... are becomingly increasingly difficult to compete against."

In commenting on the group's financial position, he notes increased property revaluations have boosted shareholders' funds.

"These annual revaluation exercises, due largely to development efficiencies, are indirect earners that boost shareholders' reserves on a regular basis."

That may the case right now, but internal efficiency gains inevitably taper off and companies with property assets have been known to see valuations go down as well as up.

Joint managing directors John Ryder and Kevin Hickman can't resist a gloat in their report either.

"The company has noted a number of larger operators in the industry have retrenched their development operations due to the difficulties involved in identifying, developing and marketing appropriate sites. This is one of Ryman's strengths and we intend to be active in this field."

There is no denying Ryman has outperformed its listed competitors and it patently expects further developments to continue this trend.

Its return on average shareholders' funds is an attractive 16.1%, roughly the same on the previous year's end of year figure. (No average could be determined because the company does not show its 1999 figure. While it does not have enough history to show the traditional five-year review, a three-year one would have been useful.)

The company muddies the waters by quoting at the front of the report a 22.5% return on shareholders' funds "on an historical cost basis." This is a number rarely quoted in other reports and may be confusing to less financially savvy readers.

Its balance sheet is conservative, thanks in part to a $28.7 million revaluation reserve, with shareholders' funds of $95.7 million representing 59% of total assets. Net operating cash flows are strongly positive at $16.7 million, although this figure is down on 2000 despite that year's lower receipts.

Payments to suppliers and employees have been kept at bay, with a 19% increase against a 24% increase in receipts. The main increase has been in payments to residents of its facilities, which jumped from $3.8 million to $12.4 million. This appears to relate to a near doubling in the resale of occupation rights, which the company first has to buy back from departing residents or their estates.

The report mentions that resales have a much lower margin than initial occupation rights, which is why Ryman's profits did not rise as much as its earnings last year. This suggests the company's earnings growth will decline over time.

Further on this subject, an item in the notes to the accounts shows the company claimed tax credits on the sale of occupancy rights in each of the past two years. In 2001, these totalled $2.8 million, suggesting the company made losses on its $22.9 million in new sales and $11.5 million in resales.

Elsewhere in the notes, a cash flow reconciliation shows "cost of sales of occupancy rights" at $14.6 million, which would indicate a decent profit was made.

This may be a reflection of non-cash items or possibly a timing issue. Unfortunately, the reason for the credit, which helped the company eliminate its tax liability, is not made clear in the report.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

Comments from our readers

No comments yet