Rising Interest Rates And Policy Risks Will Hamper Aged Care

Key Takeaways

• Heightened exposure to interest rate risk, housing market cycles, and regulatory changes is constraining profitability, project pipeline, and earnings predictability.
  
• Demographic and labor trends, including declining resident wealth and rising workforce challenges, threaten sustained demand and drive up long-term operating costs.
  
• Strategic shift toward optimizing existing assets, premium service focus, and robust cash management are set to drive higher margins, resilience, and sustainable long-term growth.

Catalysts

Develops, owns, and operates integrated retirement villages, rest homes, and hospitals for the older people in New Zealand and Australia.

• Ryman's capital-intensive model exposes it to heightened risk from any prolonged period of higher interest rates, significantly increasing financing costs, squeezing net margins, and potentially curtailing or delaying growth projects and new village developments.
  
• Declining home ownership and wealth among upcoming generations may steadily reduce the pool of eligible, affluent residents, structurally dampening long-term demand for Ryman's high-priced retirement units and exerting persistent pressure on occupancy and future revenue growth.
  
• The company's over-reliance on the New Zealand and Australian housing cycle leaves it exposed to regional volatility; any prolonged downturn or stagnation in housing markets will further restrain sales volumes, resale cycles, and the collection of deferred management fees, compressing cash flows and EBITDA.
  
• Ongoing regulatory scrutiny and tightening government policies both in New Zealand and Australia threaten to increase compliance and operational costs, limit flexibility in pricing and recovery models, and may diminish profitability across the portfolio over the medium and long term.
  
• Rising wage inflation and labor shortages in the aged care sector, especially for skilled nurses and caregivers, are expected to significantly increase operating expenses, eroding operating leverage and resulting in weaker earnings growth even if occupancy remains high.

Ryman Healthcare Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ryman Healthcare compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ryman Healthcare's revenue will grow by 6.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -57.5% today to 53.3% in 3 years time.
• The bearish analysts expect earnings to reach NZ$487.9 million (and earnings per share of NZ$0.48) by about August 2028, up from NZ$-436.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from -5.8x today. This future PE is lower than the current PE for the NZ Healthcare industry at 15.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Ryman Healthcare Future Earnings Per Share Growth

Risks

• The ageing population and structural undersupply in aged care are expected to drive sustained demand for Ryman Healthcare's services and support high occupancy, which improves revenue stability and resilience in both retirement village and care operations.
  
• Ryman's higher Deferred Management Fee (DMF) structure has been successfully transitioned into new contracts without limiting sales, and this 40% increase in DMF is positioned to drive a sustained step-up in revenue and cash flow as legacy contracts turn over and the new fee regime is fully embedded.
  
• The strong cash position following a $1 billion equity raise and the ongoing operational reset, with a targeted doubling of cost savings in FY '26, supports improved EBITDA margins and a clear path toward cash flow positivity, reducing financial risks and enhancing earnings power.
  
• Ryman's disciplined moderation of new builds in favour of optimizing the performance of its existing portfolio-particularly focusing on filling new capacity and selling down over $700 million of vacant stock-offers significant latent operating leverage and the potential for a material increase in free cash flow as market conditions improve.
  
• Ryman's established brand, continued industry recognition, and focus on premium, continuum-of-care offerings position it to capture premium pricing and higher-acuity residents, supporting a shift to higher-margin revenue streams and underpinning above-average net margins over the long term.

Valuation

• The assumed bearish price target for Ryman Healthcare is NZ$2.51, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Ryman Healthcare's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$3.5, and the most bearish reporting a price target of just NZ$2.51.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NZ$914.5 million, earnings will come to NZ$487.9 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of NZ$2.48, the bearish analyst price target of NZ$2.51 is 1.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.