PhilipCapital head of research, Paul Chew, has maintained his “buy” call on LHN Limited (LHN) at a lowered target price of 39 cents from 47 cents previously.
The analyst’s valuation is pegged to 6.5x FY2024 price-to-earnings ratio (P/E), while the industry trades around 13x.
Chew’s lowering of his target price also derives from a lower estimation for LHN’s FY2024 earnings by 24%, following the disposal of LHN Logistics in August, which led to a $18.1 million gain and a special dividend of one cent.
“Bulk of the proceeds will be redeployed to expand the co-living franchise in Singapore with a target of 800 keys per annum (p.a.) for three years, or 30% compound annual growth rate (CAGR),” writes Chew.
Chew notes in his Dec 12 report that while the company’s 2HFY2023 ended Sept 30 revenue was within expectations, its earnings were below expectations.
LHN’s revenue and adjusted profit after tax and minority interests (patmi) were at 98% and 90% of the analyst’s FY2023 forecasts excluding logistics.
He notes: “2HFY2023 adjusted profit before tax (pbt) was 5% y-o-y lower due to reduced sublease gains in the commercial segment.”
The company’s co-living segment, its primary revenue and growth driver, saw both its revenue and earnings jump an estimated 115% and 97% y-o-y respectively in 2HFY2023.
In 2HFY2023, LHN’s co-living revenue more than doubled to $17.8 million, driven by the new 411 key Coliwoo Orchard, launched in February.
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Room rates have been rising for the company’s Coliwoo business and occupancy remains high at 94.7%.
Chew adds: “We expect 1HFY2024 growth will be driven by Coliwoo Orchard and additional new projects, 404 Pasir Panjang with 63 keys and 48 & 50 Arab Street with 26 keys. Both assets will be operational in 2QFY2024.”
Conversely, LHN’s 2HFY2023 pbt for its commercial segment declined significantly due to lower gains from subleases.
Although the company’s commercial segment recognised a $5.8 million “upfront gain” in FY2022, Chew notes that such gains are “lumpy” and “represent the fair value” of the remaining lease of the asset once tenanted.
Outlook
The analyst expects another year of growth for LHN in FY2024, driven by contribution from Coliwoo Orchard in 1HFY2024 and its Coliwoo expansion of 347 keys in the pipeline in Singapore as well as firm rental rates.
On the company’s facilities management segment, Chew writes: “Growth in car park usage and new locations will be a driver to revenue. LHN currently manages 80 car parks, including one in Hong Kong, with over 26,000 parking lots.”
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Its industrial segment on the other hand, will see tight supply due to difficulty in obtaining approval to sublet space.
On a positive note, Chew adds: “LHN’s work plus store concept catering to small and medium e-commerce operators will enjoy healthier demand.”
Meanwhile, other potential growth opportunities include co-living projects around the region and the management of healthcare dorms.
The sale of 49 units of the food factory development project in 55 Tuas South Ave 1 will be the major engine for earnings growth in FY25e. Our forecast does not incorporate these development earnings.
Not included in the analyst’s forecast is the sale of 49 units of LHN’s food factory development project in 55 Tuas South Ave 1 which will be a “major engine” for earnings growth in FY2025, according to Chew.
Currently, LHN pays a dividend yield of 6%, and trades at a 39% discount-to-book value (B/V) of 53 cents.
As at 2.00 pm, shares in LHN are trading at 0.5 cents higher or 1.54% up at 33 cents.
