"Despite the recent pull-back across the sector, we continue to reiterate this caution."
In the past six months, Summerset shares have dropped 20 per cent while the index has climbed 7 per cent.
"For us, structural drivers including an ageing population, are overridden by our cautious view of the housing market," Craigs says.
New Zealand house prices, excluding Auckland, were up 8.1 per cent in February from a year earlier but prices in Auckland were down 2 per cent and sales volumes throughout the country were down 9.5 per cent in a month that usually sees strong activity.
"Our sector exposure reduces to 8 per cent from 12 per cent. Our decision to move to just one name highlights our view that Ryman is the highest quality operator in the sector," it says. Should investors want to gain that 8 per cent weighting through Ryman and other stocks in the sector, "we are comfortable with that."
Shares in Ryman, which has a growing exposure to the Melbourne housing market, have fallen nearly 11 per cent in the past six months.
House prices in Melbourne have dropped 8 per cent from their peak in late 2017 while Sydney prices are down more than 12 per cent since their mid-2017 peak. Commentators are picking falls of 15-25 per cent before the Australian market bottoms.
Craigs says that although margins in the retirement sector are likely to contract on the resale of units, "prices need to fall for a sustained period of time, given that embedded gains over recent years provide a buffer before any operator is likely to post a loss on a unit."
Ryman is the largest company in the sector with about 10,000 units or beds. They range from hospital and dementia care beds through to assisted and independent living units and the firm has far more care beds than any of its competitors. Summerset has more than 4,000 units or beds.
Craigs estimates the five listed aged care providers account for about 40 per cent of the sector and that Ryman has a 14.6 per cent share, followed by Metlifecare with 6.9 per cent and Summerset with 6.7 per cent. Bupa, which isn't listed, is the second-largest operator with 8.3 per cent.
About 89 per cent of Gentrack's revenue now comes from offshore and 40 per cent of it from Britain and 30 per cent from Australia, Craigs says.
It notes the company has been acquisitive lately, buying Junifer, a software as a service billing systems provider, in April 2017 for $75 million. It bought Bliptrack, an airport passenger tracker and movement predictor, for $8 million that same month, CA+, which manages and audits airport retail concession revenue, for $12 million in May 2017 and Evolve, which extends its settlement and billing offering, for $44 million in June 2018.
"Following a recent equity raise of $90 million, Gentrack has considerable balance sheet capacity if it chooses to pursue further M&A."
Scales operates in the horticulture sector, and will therefore inherently always have an element of agricultural risk, and its current strategy reset is to grow and market its own premium varieties, in particular those aimed at the Asian consumer.
"We like the company's focus on building a strong brand, its focus on appropriate capital allocation and its growing tilt towards premium varietals," Craigs says.
"Scales has announced its orchard development programme, which will reduce near-term volumes through removing lower-returning traditional varieties such as braeburn and replanting higher returning varietals," it says. That will mean current volumes won't be matched until the 2023 financial year.
While more than half Scales' operating earnings come from horticulture, it is growing its food ingredients business and downsizing its storage and logistics operations.
Following the $151 million sale of its Polacold business, Scales will be in a strong net cash position and one uncertainty is how it will apply this cash.
"We take some comfort that Scales will continue to be an efficient capital allocator, based on recent deals," Craigs says, citing the US$23.2 million acquisition in December of the US-based pet food company Shelby.
That purchase recycles capital from the lower-returning storage business into an "attractive, higher-returning pet food business that it can now operate at scale."
- BusinessDesk
