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First NZ Capital makes case for merger

NZ Newswire logoNZ Newswire 5/10/2017 Rebecca Howard

Merging retirement village operators Summerset Group and Metlifecare would put them on firmer ground in mounting a trans-Tasman expansion as the domestic property market starts to fade, says First NZ Capital.

"We raise the question of what a more benign property market might mean for capital appreciation in the medium term and highlight why the upside for investors in both Summerset and Metlifecare from a re-rate in Mergeco could be substantial," said FNZC research analyst Arie Dekker in a note.

Retirement village operators have been strongly supported by an upbeat property market, getting stronger prices for the sale of occupation rights to their units.

However, recent data points to a slowdown in the sector after moves by the central bank to clamp down on the level of high loan-to-value ratio mortgages are starting to have an impact.

Earlier this week state-owned valuer Quotable Value said growth in New Zealand property values continued to slow in September, staying below 5 per cent.

On Thursday, Summerset Group said its sales of occupation rights fell about 21 per cent in the third quarter, with a decline in both resales and new sales.

Mr Dekker said reasons to consider a merger include the benefit of combining Metlifecare's balance sheet strength, operating cash flows and significant embedded value with Summerset's more advanced development capability and landbank.

He also noted a combined entity would create a "more credible platform" to follow market leader Ryman Healthcare into Australia.

"While SUM (Summerset) is considering a move into Australia, we think a combined SUM and MET (Metlifecare) entity would be able to more confidently approach this opportunity at greater scale than SUM could do on a standalone basis today, at least in the absence of capital raising to do so," he said.

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