Brokers’ take: Lim & Tan expects LHN to benefit from co-living boom; initiates ‘buy’
Samuel Oh
LIM & Tan Securities has initiated a “buy” call on LHN with a target price of S$0.50. It believes the company will stand to gain the most from the growth in the co-living sector.
In a report on Monday (Jul 3), the research team noted that the co-living business under LHN’s Coliwoo branding has been thriving. With the reopening of international travel, co-living spaces have seen a sharp increase in residential rents and a surge in demand.
Lim & Tan’s target price is pegged to a core FY2023 price-to-earnings (PE) ratio of 7.5 times. In addition, it is at a 25 per cent discount to LHN’s core historical average PE ratio of 10 times.
The target implies a potential upside of 25 per cent from LHN’s share price of S$0.375 as at 1.50 pm on Monday. Shares of LHN were up 2.7 per cent or S$0.01 at the time.
The analysts added that the co-living sector is poised to be the “key growth driver over the next few years from positive uplifts in demand, significant increases in capacities, as well as higher room rates”.
As the market leader, Coliwoo has seen overall strong occupancy rates for its properties at 96.7 per cent, despite rising rentals. Its capacities will also be boosted by an addition of 663 keys by the end of FY2023 to the 1,015 room keys under FY2022.
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There are also plans to add at least 800 rooms per year for the next three years, noted Lim & Tan.
The analysts also like the stock for its attractive valuations and resilient balance sheet. It said LHN is currently trading at 5.4 times the company’s core forward PE ratio, which is 0.5 standard deviation below its mean PE ratio since its initial public offering.
With a market cap of S$149.3 million, the analysts noted the stock trades at 0.7 times its price-to-book ratio with a dividend yield of 6.3 per cent. This implies LHN is trading at a deep discount to other property companies.
Furthermore, LHN has managed its interest cost “very well” in spite of a high net gearing ratio of 52.4 per cent – by unlocking interest rates at less than 1.5 per cent for most of its properties until mid-2024, and having an interest coverage ratio of eight times.
In June 2023, LHN said Milkyway Chemical, a supply chain service provider in China, proposed an offer of S$0.2266 per share for the former’s indirect stake in LHN Logistics.
The deal, expected to be completed in August 2023, would “unlock shareholders’ value” and provide LHN with S$31.9 million in cash proceeds with a one-off gain of S$21 million.
LHN had said earlier it would use this cash proceeds to deleverage its balance sheet and channel resources to its other core business segments.
The research team also noted that LHN had a strong track record in buying underutilised properties or undervalued investments, and selling them at a premium. The group is also experienced in asset recycling initiatives to enhance the return-on-equity for shareholders.
It said such initiatives have allowed “the market to rerate the company’s shares closer to its intrinsic value, as well as allow management to implement a new dividend policy to distribute at least 30 per cent of recurring earnings as dividends”.
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