Monday, October 17, 2011

Summerset IPO: A Closer Look

The coming Summerset Group Holdings Ltd [SUM.NZX] IPO (read the prospectus) will be an interesting one.

The aged care sector that this newly listed company will occupy is a fast growing and profitable one for companies that run the right business model and manage their clients well.

As well as numerous independent aged care homes and larger privately owned chains a listed Summerset will compete with two NZX listed companies. Metlifecare Ltd [MET.NZX] and Ryman Healthcare Ltd [RYM.NZX]

MET has been poorly managed and is currently undergoing a capital restructure of some kind and Ryman has had stellar revenue and profit growth since its listing almost 15 years ago.

Given the promise of the sector at large, the Summerset IPO could be one of the best IPOs the NZX has seen for some years.

Management at Summerset have put an IPO value on the company of $307 million of which approximately $120 million are the proceeds of the partial sell-down of approx 30% of the company and the balance is to be majority owned by present owners Quadrant Private Equity and various members of management. Shares will be $1.40 a piece.

Lets take a closer look at this IPO to see how it stacks up.

Summerset operate 13 villages, 1,364 retirement units, 323 care beds, have over 1,700 residents and approximately 450 staff. They have an aggressive development schedule that would close to double the size of their retirement units within five years and part of the IPO funds are to fund that expansion with the bulk of the funds raised put towards paying off debt.

All good thus far with the exception of the amount of IPO funds to be used for paying off debt - why should future shareholders pay off debt from the majority 70% shareholders?

Lets looks at some numbers.

It is not until page 64 of this 144 page prospectus that we get the prospective and historical financials for the company, albeit once again tainted by the use primarily of pro-forma figures and the usage of "underlying profit" accounting terms to smooth figures that make comparisons from year to year difficult.

Total revenue over the 5 years to 2010 (pro-forma) show it has almost doubled but so have expenses and forecast figures look even less promising. Financing costs look to have taken the bulk of any profit over the years and the IPO proceeds look to ameliorate that somewhat.

Audited figures for the 2010 year saw a loss of 1.9 million dollars so the forecast for 2011 of 9.6 million and 17.2 million in 2012 (before financing costs) look to be out of the ballpark in terms of historical performance.

I like the aged care sector very much as I have invested in Ryman Healthcare and Summerset may operate their business well but it is hard to tell this because of the use of pro-forma figures.

The large debt accrued by present management will still be a worry for the new shareholders even after a small portion is paid off.

The lack of liquidity in the market, because current shareholders will still retain 70% of the shares, will affect minority shareholders because of the veto power of the majority shareholders so don't look for management to favour the minority if they don't have to.

Metlifecare shareholders have found this out to their detriment over the years.

This IPO is one of the best the NZX has seen for years (there have only been 3 [1,2,3]over the last 2 years and none of them spectacular) but I have reservations as the whether it is a starter for the average investor like me.

Best those interested wait for some results to the NZX before plunking down the shekels and then see the fair value for the company.

Disc I own RYM shares in the Share Investor Portfolio

Summerset IPO @ Share Investor

Summerset Prospectus
Discuss SUM @ Share Investor Forum

Metlifecare @ Share Investor

Metlifecare: Its Assets could be worth more under different management
Stock of the Week: Metlifecare Ltd
Stocks on My Watchlist: Metlifecare Ltd
Time for retirement?

Discuss Metlifecare @ Share Investor Forum
Download MET Company Reports

Ryman Healthcare @ Share Investor

Share Investor's Total Returns: Ryman Healthcare Ltd
Share Price Alert: Ryman Healthcare Ltd
Ryman Healthcare Ltd: 2011 Half Year Profit Review
Gordon Macleod on Ryman Healthcare's Australian Expansion
Share Investor Q & A: Ryman Healthcare's CFO Gordon MacLeod
Ryman Healthcare: Interview sneak peak
Ryman Healthcare Ltd: Australian Expansion Needs Care
Share Investor Q & A: Reader Questions to Ryman CFO Gordon Macleod
Long Term View: Ryman Healthcare Ltd
Stock of the Week: Ryman Healthcare Ltd
Why did you buy that stock? [Ryman Healthcare]
Long VS Short: Ryman Healthcare Ltd
Time for retirement?

Discuss RYM @ Share Investor Forum
Download RYM Company Reports

c Share Investor 2011