Metlifecare Limited: ASX Listed Retirement Village Operator

Overview of Metlifecare Limited

1. Description of the company

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Metlife care Limited is an ASX listed company that was formed in the year 1984 and the company is based in Auckland, New Xealand. It operates and owns the retirement villages. The entity is engaged in delivering care and rewarding lifestyle to more than 5000 peoples. The company’s villages also offer wide range of care from the independent apartments and villas through to hospitals, rest homes and serviced apartments. It further provides retirement living all over the Auckland, Bay of Plenty, Hamilton, Kapiti Coast and Manawatu. The entity offers different levels of support and care based on the user and village’s requirement. The aged care assistance of the company ranges from hospital options, rest homes and serviced apartments. Further, the assistance for living are designed specifically for the residents that includes the continuous support with regard to the medical assistance and daily tasks (Metlifecare.co.nz 2018). The independent accommodation for living includes cottages, apartments and villas. Various subsidiaries included under the company are Metlifecare Bayswater Limited, Forest Lake Gardens Limited and Hibiscus Coast Village Holding Limited. The company falls under the healthcare industry of New Zealand. If the past performance of the company is taken into consideration it can be observed that the company was able to improve the net income gradually over the past 2 years of time. Further, the earning of the company has been increased by 10.01% in the recent year as compared to the previous year. The reason of growth was that the company was able to increase its revenue through efficient control on the costs. It led to the profitability and margin expansion over the time (Metlifecare.co.nz 2018). 

2. Specification of the structure of ownership governance

i. Major substantial shareholders

As per the Corporation Act the substantial shareholder is the person who holds 5% or more 5% of shares or voting rights in the company. Name of the substantial shareholders of the company shall be disclosed through notes to the accounts. If the company provides list of top 20 shareholders of the company in the annual report substantial shareholder’s names are provided in the top of the list (Baños-Caballero, García-Teruel and Martínez-Solano 2014).  In the family business 2 or more than that number of members in the management are selected from the family only. The family business can also have members or owners from outside also. From the annual report of the company for the year ended 2017 it is found that the substantial shareholder of the company is New Zealand Central Securities Depository Limited (NZCSD) that holds 155,830,303 shares that comes to 73.15%. Further, the substantial shareholders of the company holding the shares through NZCSD are as follows –

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Name

Number of shares

% of shareholding

HSBC Nominees A/C NZ Superannuation Fund Nominees Limited

42,363,688

19.89%

HSBC Nominees A/C NZ Superannuation Fund Nominees Limited

13,086,794

6.14%

JPMorgan Chase Bank NA NZ Branch-Segregated Clients Acct

11,839,603

5.56%

 From the above presented details it can be stated that the company is not a family company as no family members is holding substantial shares in the company.   

ii. Name of main people

  • Chairman – Kim Ellis
  • Board members –
  • Chris Aiken – Independent director
  • Mark Binns – Independent Director
  • Alistair Ryan – Independent director
  • Rod Snodgrass – Independent director
  • Carolyn Steele – Non-Executive Director
  • Noetine Whitehead – Independent director
  • Kevin Baker – Non-Executive Director
  • William Smales – Non-Executive Director
  • CEO – Glen Sowry

From the annual report of the company it is identified that among all the board members none of them holds more than 5% or 20% of shares. Therefore, it can be further stated that company is non-family member as per the governance of the company (Halili, Saleh and Zeitun 2015).

3. Fundamental ratios

Ratio

Formula

2017

2016

Short-term solvency

 

 

Current ratio

Current assets/current liabilities

0.23

0.51

Quick ratio

(Current assets-inventories)/Current liabilities

0.23

0.51

Long term solvency

Debt equity ratio

Total liabilities/shareholder’s equity

1.16

1.28

Debt ratio

Total liabilities / Total assets

0.54

0.56

Asset utilization ratio

Asset turnover ratio

Net sales/total assets

0.04

0.04

Return on assets

NPAT / Total asset

0.08

0.09

Profitability ratio

Gross profit ratio

Gross profit/Net sales *100

100.00

100.00

Net profit ratio

Net profit/net sales *100

67.91

66.50

Market value ratio

Earnings per share (cents)

Given

118.10

107.50

4. Information from ASX website

i. Monthly stock movement for last 2 years

Stock movement of Metlifecare Limited

Metlifecare Limited

Date

Adjusted Close

Changes

4/30/2016

5.848693

5/31/2016

5.390545

-0.078

6/30/2016

5.497771

0.020

7/31/2016

5.946171

0.082

8/31/2016

6.092388

0.025

9/30/2016

5.669732

-0.069

10/31/2016

5.522593

-0.026

11/30/2016

5.44412

-0.014

12/31/2016

5.473547

0.005

1/31/2017

5.924772

0.082

2/28/2017

6.013055

0.015

3/31/2017

5.719985

-0.049

4/30/2017

5.404942

-0.055

5/31/2017

5.273019

-0.024

6/30/2017

5.503393

0.044

7/31/2017

6.005492

0.091

8/31/2017

5.71014

-0.049

9/30/2017

5.747889

0.007

10/31/2017

5.9965

0.043

11/30/2017

6.066111

0.012

12/31/2017

6.165555

0.016

1/31/2018

5.916944

-0.040

2/28/2018

5.8175

-0.017

3/31/2018

5.78

-0.006

 Stock movement of All Ordinary Index

All Ordinary Index

Date

Adjusted Close

Changes

01-05-2016

2096.949951

01-06-2016

2098.860107

0.001

01-07-2016

2173.600098

0.036

01-08-2016

2170.949951

-0.001

01-09-2016

2168.27002

-0.001

01-10-2016

2126.149902

-0.019

01-11-2016

2198.810059

0.034

01-12-2016

2238.830078

0.018

01-01-2017

2278.870117

0.018

01-02-2017

2363.639893

0.037

01-03-2017

2362.719971

0.000

01-04-2017

2384.199951

0.009

01-05-2017

2411.800049

0.012

01-06-2017

2423.409912

0.005

01-07-2017

2470.300049

0.019

01-08-2017

2471.649902

0.001

01-09-2017

2519.360107

0.019

01-10-2017

2575.26001

0.022

01-11-2017

2647.580078

0.028

01-12-2017

2673.610107

0.010

01-01-2018

2823.810059

0.056

01-02-2018

2713.830078

-0.039

01-03-2018

2640.870117

-0.027

01-04-2018

2666.939941

0.010

Stock movement graph

ii. Report on stock movement

From the above table and graph it can be identified that the stock of Metlifecare Limited is highly fluctuated and over the last 2 years period of time and from 5.85 it fell to 5.78 during that period. The stock experienced the highest return at the end of July 2017 and the return growth was 9.10%. Further, the company experienced lowest return at the end of May 2016 and the return fell by 7.80%. On the other hand, the All Ordinary Index is moderately fluctuating over the last 2 years period of time and from 2096.95 it increased to 2666.94 during that period (Asx.com.au 2013). The stock experienced the highest return at the end of January 2017 and the return growth was 3.40%. Further, the company experienced lowest return at the end of January 2018 and the return fell by 3.90%. The correlation between the 2 stocks came as 0.407 that shows positive correlation between 2 stocks. The positive correlation states that with the increase in the All Ordinary Index the stock price of Metlifecare will also go up and on the contrary, with the reduction in the All Ordinary Index the stock price of Metlifecare will also go down (Allred 2018).

5. Recent announcement

  • Metlifecare will build new coastal retirement village – the company announced that it has purchased 3 adjoining properties for development of retirement village in Beachland’s fast growing community area. It will provide the company with incredible opportunity for meeting the requirements of that area that is currently not served with the options of retirement living. From investment perspective the company is in the view that it will create value for the company
  • Waterfront land acquisition at Hobsonville – the company announced regarding the acquisition o new waterfront site in Hobsonville’s fast growing suburb area. As per the CEO of the company it will fulfil the requirements of aging population in fast growing Auckland. From investment perspective it is expected that the acquisition will create value for the company
  • New strategies – the company announces regarding its new strategies that will have positive impact on its operation and profitability. The policies include – delivery of the new beds and units, focussing on acquisition of land, improvements of operation through bigger commercial intensity, targeting for sustained programme involving more than 300 bed or units each year.

6. Stock field

i. Calculated beta of the company is 0.68

ii. Risk free rate = Rf = 4%, Market risk premium = Rm = 6%

Therefore, required rate of return of the company’s share =

R = Rf  + β ( Rm – Rf )

Where R = required rate of return, Rf = Risk free rate, Rm = Market risk premium and β = Beta. Therefore,

R = 4% + 0.68* (6% – 4%) = 5.36%

Fundamental Ratios

iii. Conservative investment

Conservative investment is the investment approach that focuses on stable, predictable and lower-risk involved return. This approach generally involves purchase of low-risk involved investments. The term conservative investment also states constructing the well-balanced portfolio progressively over the period of time (Bodie, Kane and Marcus 2014). Number of stocks in the portfolio will based on the preference and timing of the portfolio. The conservative investor generally diversify his portfolio risk through investing into various stocks like government bonds, large cap, corporate bonds, money markets, CDs and cash generating funds. Further, the mutual funds are also considered as conservative investment as the mutual fund allocates the funds on various low risk involved funds like bonds and cash mix. Though the conservative portfolio provides both income and return to the investor the return and capital appreciation rate is lower as compared to the aggressive portfolio (Harris and Mazibas 2013). Normally, under the conservative portfolio the allocation of the funds are segregated as 20% to 50% to the portfolio assets and balance 50% to 80% are allocated to mix of cash and bonds. If the investor prefers to get the cash within 3 years period of time and low risk tolerance level then the conservative investment is the perfect choice for him. Generally the conservative investors construct their portfolio on their own as per their choice, preference and risk tolerance level. From the above analysis of the stock of Metlifecare Limited it can be found that its stock can be considered as conservative owing to the below mentioned reasons –

  • The company has a stable net profit over the last 2 years that is $ 228,659,000 for the year ended 30th June 2016 and $ 251,543,000 for the year ended 30th June 2017
  • The company is regular in paying dividend to its shareholders. For the year ended 30th June 2016 it paid 5.75 cents per share as dividend and for the year ended 30th June 2017 it paid 8.05 cents per share as dividend (Renneboog and Szilagyi 2015).
  • Beta of the company is 0.68 that states that the company’s stock is exposed to lower level of risk (He and Krishnamurthy 2013).

Hence, considering all these facts stock of Metlifecare Limited is can be considered as conservative investment.

7. WACC (weighted average cost of capital)

i. Computation of WACC

The WACC is computed as follows –

WACC = E/V * Re +D/V * Rd * (1-Tc), Where,

E/V = Equity percentage in the capital structure

D/V = Debt percentage in the capital structure

Re = Cost of equity = 5.36%

Rd = Rate of debt = 3.98%

Tc = corporate tax rate = 28%

Capital structure of the company is as follows –

Items

Amount

Percentage

Equity

1370188

95%

Debt

72632

5%

Total

1442820

100%

WACC = 0.95 * 0.0536 + 0.05*0.0398 * (1-0.28)

WACC = 0.05291 or 5.29%

ii. Impact of higher WACC

The term WACC represents the weighted average cost of capital. Higher WACC signifies higher leverage level of the company. If the leverage is obtained through issuance of debt it will have an impact on the WACC.  The WACC will increase if rate of debt is higher as compared to the present WACC of the company. On the contrary, the WACC will reduce if the rate at which the debt is issued is lower as compared to the present WACC rate of the company. However, the term leverage is imprecise term and can be analysed from various aspects. WACC is used to estimate the cost of finance involved in the capital structure. Generally the company raise finance through various sources like issuing equity, raising debt from bank or financial institution. WACC balances the associated costs involved with the capital structure. For example, if the WACC of the company is 10% it signifies that the company return $ 0.10 for raising every $ 1 fund. Further, the WACC is important for operational assessment and application of loan. Therefore, if the WACC of the company is high it tries to reduce it through raising the fund from cheaper source. The company is also concerned regarding if the WACC of the company is more as compared to its return rate. This signifies that the company is losing on its debt and can search for the debt that is available at lower cost. However, raising through debt has one advantage that the debt payment is deductible under tax while the equity payment or dividend payment is not so.

Stock Movement of Metlifecare Limited

8. Optimal debt structure

i. Optimal structure for capital

Debt ratio

Total liabilities / Total assets

Year 2017 = 0.54

Year 2016 = 0.56

The debt structure refers to the combination of debt and equity under the capital structure of the company. The capital structure of the company depends on the preference and availability of funds. However, the optimal structure states the structure of debt and equity under which the cost of the capital is minimum for the company. The capital structure of the company has direct impact on the WACC of the company. Further, the capital structure has direct impact on the shareholder’s wealth (Albul, Jaffee and Tchistyi 2015). Debt payment is deductible under tax while the equity payment or dividend payment is not so and therefore, debt is considered as cheaper source of finance as compared to equity. Hence, the company requires fewer amounts to provide return to the debt holders as compared to funds needed for providing return to the equity holders. Generally, the debt equity ratio of 40% or lower is considered as optimum. It is observed from the above table of debt equity ratio that the ratio for the year 2016 was 56% whereas it reduced to 54% in the year 2017. Therefore, it can be stated that the major portion of company’s assets is financed through debt as compared to equity. Therefore, to maintain the optimum capital structure the company shall pay off its borrowing and for further requirement of fund it shall borrow through equity instead of equity (Peirson et al. 2014).

ii. Gearing ratio

Gearing ratio is the general segregation that states the financial ratio that compares the shareholder’s equity of the company as compared to the borrowed funds. It is the measurement of the financial leverage of the entity and this one of the most well known method for measuring the financial health of the company. The debt equity ratio can be used to measure the leverage of the company (Akeem et al. 2014). Thus, companies that have higher level of gearing ratio are required higher amount for fulfilling the debt obligation. As it can be seen from the annual report of the company that the company has 95% of equity and only 5% of debt in the capital structure it is lower leveraged (McLean and Zhao 2014). However, it is further found that to maintain the gearing ratio the company paid off the interest bearing liabilities as the amount of debt for the company has been reduced from $ 80,798,000 to $ 72,632,000 over the year from 2016 to 2017. However, the company did not issue any new equity shares as the amount of equity share for the year remained same at $ 306,895,000. Moreover, the company did not mention anything regarding its capital structure or gearing ratio in its director’s report (Bendell and Doyle 2017).

9. Dividend policy

The board of the company declared the final dividend for 6 months till 30th June 2017 at the rate of 5.8 cents per share and the dividend for full year was 8.05 cents per share. The company maintain the 30% to 50% ratio for dividend pay-out from the operating cash flow to balance the returns to the shareholders to maintain the growth of the company (Ajanthan 2013). Further, the company does not have any plan for reinvesting the dividend. Therefore, the company follows the Stable Dividend Policy. It provides predictable and steady payouts for dividend in each year (Heikal, Khaddafi and Ummah 2014).

10.  Recommendation

Dear Mr. ABC,

After the detail financial and operation performance analysis of Metlifecare Limited, I would like to advise you not to include the stock of the company in your portfolio. One of the major reasons is company’s liquidity position. It was 0.51 for the year 2016 that is much lower than 1. Further, the same has been reduced to 0.21 in 2017. Hence the liquidity position of the company stating that is not efficient to meet its short-term obligation. Further, the debt equity ratio of the company is stating that the company is highly leveraged and the asset utilization ratio of the company is significantly low. However, if the profitability position is considered you can include the stock in your portfolio as the net profit of the company is quite high that is 66.50% for 2016 and 67.91% for 2017. Further, the company is regular in paying dividend to the shareholders. Therefore, the stock can be included if profitability position is considered otherwise not.

Sincerely,

Mr. PQR

Investment analyst