Following my research into the future potential of the retirement sector, I thought I’d revisit Summerset as a potential investment. My interest was peaked after I found out that they had been dropped from the MCSI small cap index1.
What interests me about this is that this could result in a sell off from index tracking funds. This supply side increase could cause a downwards pressure on the share price that isn’t related to performance; i.e. bargain buying.
So let’s see if there’s an investment case based on the current price of Summerset’s shares.
At the time of writing, shares are $9.51 giving a market cap of $2,228m2. Half year Underlying Profit (which I believe is after tax - this should be confirmed) was last reported as $87.155m in August3. Doubling this half year result would give a clue about the full year result. The Q1 metrics released since that update show a lift in sales of 19% year on year, so there are no concerns from current or historical sales since the half year report, though the coming year is anyone’s guess at this stage.
Given the above numbers, we see SUM on a PE of 12.8 with an after tax dividend yield on today’s share price of 1.6%. For a company with a solid growth history of over 14% pa, underpinned by tangible assets, I think SUM is a ‘buy’ for my long term dividend portfolio.
To justify this more thoroughly with the numbers, the annual growth is above inflation (and above the rate of a mortgage which I use as the Free Cash Rate); the yield from profit in the share price is 7.8% (100 / 12.8) which is above inflation; dividends grow annually and should double every 5 years. This results in an investment that yields a dividend that grows above the rate of inflation, making you relatively richer each year. If you have enough money to invest to give you a sufficient income from this low dividend yield, this looks like a good investment as part of a long term dividend income portfolio to me.
Risks that I see are future share price collapse due to possible recession next year, more punishment to house prices from increasing OCR next year (though this feels unlikely) and wage inflation. With the exception of the wage inflation, these risks seem to mitigate themselves in the long term.
Opportunities include increased demand for housing as immigration increases with new government and increasing demand from aging population.