Price peak for retirement firms?

Peter V O'Brien

Saturday 17th April 2004

Share prices for retirement and healthcare companies had another good run in the six months ended last week, building on the solid performance of the previous half-year. The possibility of similar price growth in future is the big question.

Abano Healthcare's 27.3% price decline since October was struck from a low base, the 16¢ ruling on April 8 being the same as at the close on April 10, 2003.

The former Eldercare earned $306,000 in the six months ended November 30, compared with $671,000 in the corresponding period of the previous year and $2 million for the full 2002-03 year, although the last included $927,000 after tax of unusual items related to sale of property and a deferred tax gain.

The latest half-year profit was struck after a $405,000 tax provision. There was no tax expense in the previous corresponding six months.

Investors should not expect a sudden rise in the company's share price from an improved profit outlook for the full year because chairman Jim Syme said consolidated "core" earnings before interest, tax, depreciation and amortisation would be flat compared with the previous year. Net tax-paid profit would be lower than in 2003 after a full period tax expense.

Mr Syme said the company was confident improved trading and margins would be achieved over the medium term, following "the consolidation of new businesses, technology investments and with improved referrals and contract certainty with district health boards and the ACC in key business areas."

A comment from managing director Alan Clarke took some gloss off that optimism.

He said reduced occupancy in aged care facilities and low health referrals "softened" yields.

The drop in occupancy rates had continued into January (the interim report was issued on January 27) and although improvements were expected in the six months ended May, the full-year performance for aged care would be down on its plan and on last year's result.

Consolidated results for the rehabilitation business were expected to be ahead of last year but also below its plan.

Abano shareholders can be consoled with the company's maintenance of net operational cash flow, which was $3.82 million in the first half, as against $3.95 million in the six months ended November, 2002.

Things were better at Metlifecare, in both share price performance and operational earnings.

The company earned $12.09 million, before inclusion of an unusual $2.08 million from proceeds of key-man life insurance, in the year ended December 31, a gain of 16.7% on the previous year's $10.35 million.

Metlifecare had no tax liability either last year or in 2002, a point worth noting, because it can be presumed those happy days could depart at some future time if the company continues its solid profits.

The stock was 2003's best price performer, gaining 125% before quietening to a 2.2% increase in the three months ended March 31.

Strong operating cashflow was a feature of the accounts. It rose $8.16 million, or 29.6%, from $27.59 million to $35.75 million.

Total revenue of $110.15 million received a boost with a 25% lift in income from resales of villas and apartments, which went from $36.9 million to $46 million.

Ryman Healthcare also benefited from sales, listed in its accounts as "resale of occupation rights."

Revenue from that source was $11.33 million in the six months ended September 30, 19.3% higher than in the first half of the previous year.

Sensitive souls might see something distasteful in such companies apparently extolling growth in resales. That income seemed to arise from people dying, or otherwise leaving retirement facilities, and higher demand from an aging population.

The two elements could feed on each other but it was unlikely that many shareholders or potential investors cared much about revenue sources and resulting profit growth, provided both increased each year.

Ryman's net profit in the latest half-year rose 10.6%, from $7.63 million to $8.44 million.

It was hardly coincidental that there was a 38.7% jump in the all-important operating cashflow, which went from $18.69 million in the first six months of the previous year to $28.41 million.

Wakefield Hospital's 81.5% increase in profit to $846,000 in the six months ended September benefited from the acquisition of Wellington's Bowen Hospital, which contributed 28% of the total, leaving the "same business" activities' business with $609,000, a gain of 30.7%.

The company operates solely as a hospital provider, without the retirement facilities of the other three in the sector.

Companies should enjoy operational profit and cashflow growth and three would need to justify their shares' strong price appreciation over the past year.

Metlifecare, Ryman and Wakefield are at least holds, unless investors wanted to take capital gains, and would be buys if people were satisfied about potential for solid growth.

Abano has yet to show such potential.

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