As co-living properties owner and operator LHN expands its presence in Singapore to ride on the co-living boom, analysts are taking notice and are initiating their coverage on the stock.
See: LHN confident about outlook as it rides co-living boom
Lim & Tan Securities, as well as UOB Kay Hian (UOBKH) have both initiated “buy” calls on LHN with target prices of 50 cents and 55 cents, respectively.
For Lim & Tan, analysts Nicholas Yon and Chan En Jie are upbeat on the face that LHN’s co-living business – Coliwoo – is poised to be the key growth driver over the next few years with positive uplifts in demand, significant increases in capacities and higher room rates.
Higher residential rents and the return of foreigners have propped up demand for co-living spaces. As the market leader with 32% share, Coliwoo sees strong occupancy rates of 96.7% despite elevated monthly pricing of about $2,900 to $5,800.
FY2022 ended September 2022’s capacity of 1,015 keys will be boosted by about 663 keys by end of FY2023 and management targets to add at least 800 rooms per year for the next three years.
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Meanwhile, LHN has a track record in buying underutilised properties or undervalued investments and selling them for a premium, such as the sale of Coliwoo Hotel Amber for $46.6 million in November 2022 (purchased for $27 million in March 2021) and GetGo Technologies for $7.9 million in September 2022 (invested $40,000).
“Their solid track record of asset recycling initiatives to enhance return on equity (ROE) for shareholders has allowed the market to re-rate its shares closer to its intrinsic value as well as allow management to implement a new dividend policy to distribute at least 30% of recurring earnings as dividends,” say the analysts.
“A potential divestment of the 540-lots Golden Mile Tower carpark and the strata unit sale of food processing industrial building at 55 Tuas South can provide attractive gains and boost FY2023/FY2024 earnings,” they add.
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Management has given a special dividend via the IPO of LHN Logistics last year, and with the upcoming complete disposal of LHN Logistics in Aug, Yon and Chan believe that there is a good chance for another special dividend given the huge one-off gain of $21 million or 5.1 cents per share, along with incoming proceeds of $31.9 million or 7.8 cents per share.
According to Yon and Chan, LHN trades at distressed valuations at 5.4x core forward P/E and 0.7x P/B for a growth company with sustainable cash flows, backed by a dividend yield of 6.3% based on 2.3 cents per share. Compared to property peers, this implies a deep discount to larger and more established firms such as UOL and CDL who are trading at 14-15x forward P/E and has a much lower yield of 2.8% to 4.1%.
Despite a relatively high net gearing ratio of 52.4%, LHN has managed its interest cost very well by locking in interest rates at less than1.5% for most of their properties until around mid-2024 and possesses a healthy interest coverage ratio of 8x.
As for UOBKH, analyst Heidi Mo is expecting the group’s Coliwoo to drive FY2023 core earnings by about 46% y-o-y from a 70% increase in number of new keys.
Despite competing with established peers such as Ascott’s Lyf and Cove, Coliwoo stands out with its ability to offer accommodations in good locations with a full suite of room amenities at an affordable rate.
LHN’s growth strategy is to expand its current property portfolio through master leases and acquisitions, and targets to add around 800 keys per year for the next three years. LHN’s FY2021/FY2022 earnings of $6.5 million/$3.5 million from Coliwoo are made up of 976/1,602 keys respectively which will increase by about 700 keys (+44% y-o-y) by end-FY2023.
“As the new keys will take six to nine months to reach steady state, we expect FY2024/2025’s Coliwoo earnings to grow 211%/76% y-o-y to $11.0 million/$19.4 million, respectively. This will likely lift LHN’s FY2023 core earnings by 46% y-o-y to $25 million,” says Mo.
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Meanwhile, LHN’s strategy to further enhance shareholder value by considering capital recycling and move towards an asset-light model could lead to more special dividends. On June 9, LHN received an offer to take over its 84%-owned subsidiary LHN Logistics. This is expected to generate a disposal gain of $21 million and cash proceeds of $32 million, representing about 21% of LHN’s market cap.
Currently, LHN owns 12 properties, estimated to be worth $178 million as of FY2022, which could be divested to unlock more value.
The analyst has yet to factor in any special dividends into her estimates.
“We think that LHN’s current valuation of 6x FY2024 P/E and dividend yield of 6.3% are attractive, given the group’s leading market share in the co-living space, robust expansion pipeline and strong EPS growth,” says Mo.
As at 4.11pm, shares in LHN are trading at 38 cents.
