Has the sharemarket hit rock-bottom? Ryman Healthcare downgraded by analysts; more bids for Vista?

There has been a block trade sell-down of Ryman shares from a European group of investors.

The reporting season has done little to boost the sharemarket.

So far this month, it is down around 2.3 per cent after weakness from major stocks including Spark, Fletcher Building, Auckland Airport, Summerset, Ryman Healthcare and Infratil.

Harbour Asset Management’s Shane Solly said expectations were pretty low going into results season.

“Results have been better than people had thought. Relatively speaking, it’s less worse. But that’s cold comfort - nobody wants to get excited about that.”

Solly said some of the outlook statements from companies were cautious and wary.

“All the things you would expect given the economy is in a slowdown phase.”

Solly said it was possible the market had now reached rock-bottom, but that would only be known after the fact.

Companies were all being influenced by the element of a slowing domestic economy.

“But it has exposed some businesses more than others. Even Spark, which is considered to be pretty bulletproof, has proven to be more sensitive to slowing economic activity. That’s been a bit of a shock.”

Fletcher sell-down

Fletcher Building is still in the process of finding new management as well as dealing with the building slowdown. It has previously signalled plans to sell its Australian business Tradelink.

The Australian Financial Review reported private equity firm Allegro Fund is considering a bid for the business. Tradelink operates in the plumbing supplies market.

Separately, Allegro has also recently hired former PwC New Zealand chief executive and mergers and acquisition specialist Mark Averill as a senior adviser. Averill finished up at PwC on March 31 after nearly 22 years with the firm and seven years as CEO and senior partner.

Former PwC New Zealand chief executive Mark Averill.

Ryman downgrade

Analysts have downgraded their target prices for Ryman Healthcare after the retirement village operator lifted the veil on its finances this week, revealing a number of areas of concern.

“What was behind the veil was worse than we had anticipated,” Forsyth Barr analysts Aaron Ibbotson and Benjamin Crozier said in a note released after the result.

The pair said Ryman’s aggressive revenue recognition and poor cash recovery of capital expenditure was largely expected.

But other factors including capitalising village start-up costs (a system now abandoned), a valuation uplift of $400 million that had now been written down and overstatement of cash recycling from villages under construction to the value of $250m was not expected.

That saw them drop their target price from $8.25 to $7.25, although they retain an outperform rating on the stock.

Ryman has long been criticised for its opaque accounting practices.

But a new management team and largely new board has changed that.

“Ryman needs a clear break with the past, and that, we believe, it has got. An entirely new management team and largely a new board, unencumbered by the past, has set out a credible path forward, focusing on all the right things. Namely, cash recovery of new developments and increasing cash generation of existing villages,” Ibbotson and Crozier said.

But they warned the transition would be more painful than was expected, although the end result had the potential to be better.

“Ryman is currently under-earning on its $13 billion of assets, with the sector’s lowest deferred management fees and fixed fees for life.”

Ryman charges a 20 per cent deferred management fee when residents terminate their licence to occupy either through moving out or death, whereas most others in the sector charge 25 to 30 per cent.

It seems likely management will look to increase this, as well as the weekly fees it charges.

Jarden analysis shows its net cash flow from villages after overheads and deferred management fees was -$31m in FY24. Payments to suppliers and employees have rocketed up, hitting $616m in FY24 from $470m in FY23.

Analyst Arie Dekker said while its FY24 result was in line with its estimates, the additional visibility had highlighted some “big issues”.

“Despite Ryman’s FY23 capital raise having dealt with USPP [its US private placement] and recouped many years of paying a dividend not backed by operating cash flows, a disastrous period on the development front still leaves Ryman with [around] $1b of core debt.”

Dekker was also concerned about Ryman’s interest coverage ratio (ICR). “We also call out a tight ICR outlook as a meaningful risk for investors in this environment, notwithstanding Ryman’s clear intentions to bring debt down and the likely support of banks so long as it demonstrates traction on this.”

Dekker downgraded his 12-month target price on the stock from $4.36 to $4.04 and retained a neutral rating on the stock, although he noted the investment case presented considerable uncertainty - some of which was reflective of sector issue and some which were Ryman-specific.

Ryman's Jane Winstone Retirement Village on St John's Hill, Whanganui. Photo / Bevan Conley

Ryman block sale

Stock Takes understands there has been a block sale of Ryman shares, although at the time of writing it had yet to be reported to the market.

A European group called Acatis is understood to have sold down 35 million shares on Wednesday night in a deal done by Forsyth Barr.

The buyers were spread across the market.

The sell-down has boosted Ryman’s share price, which was up 10c to $3.71 early on Thursday afternoon. The stock has been hard-hit over the last year, falling by around 40 per cent.

The deal is said to have weighed on the market, with a number of institutional investors selling shares in advance to buy into the Ryman offer.

Could a new investor in Vista prompt other bidders to come forward? Photo / Getty Images

Other bidders for Vista?

Vista Group shareholders will be hoping Potentia Capital Management’s share buy-up flushes out other bidders for the movie software company.

On Monday, an announcement to the NZX showed Potentia, through its vehicle Admetus, has paid $92.2m ($2.10 a share), for an 18.45 per cent stake in Vista Group after deals done over the weekend.

It’s understood a full takeover offer is not in the wings.

But Potentia has form for bringing out other investors. In a takeover of Australian firm Nitro Software last year, Potentia made the initial approach of A$1.58 per share in October 2022 after taking a pre-bid stake in the company of 19.31 per cent.

The protracted takeover then saw numerous bid price increases, two takeover offers and a scheme of arrangement proposal. The final acquisition price was A$2.20 per share.

”They have got a pedigree of doing transactions in the technology space. They are catalyst - there’s the potential for others to get involved.”

He said Vista had already done a lot of the heavy lifting in the last 10 years.

“We think they are on the cusp of starting to improve returns on the back of conversions from software to service to cloud-based.

“It’s no surprise you have seen a technology investor group swoop at a time when the share price was potentially underestimating that improvement.”