Small Caps | Feb 21 2022
This story features LIFESTYLE COMMUNITIES LIMITED. For more info SHARE ANALYSIS: LIC
Lifestyle Communities remains on track for longer-term growth with the ageing population underpinning demand for its retirement accommodations.
-More settlements expected in the second half after strong first half
-Lifestyle Communities' gearing level is high, but should stabilise in 2H
-Development pipeline is strong
-Company withstands supply chain problems
By Nicki Bourlioufas
Higher building costs don’t alter strong outlook
Lifestyle Communities ((LIC)) has enjoyed a strong rise in first-half earnings on the back of firmer property prices and analysts believe the company is on track for longer-term growth with the ageing population underpinning demand for its retirement accommodations.
The company’s first-half net profit after tax almost doubled to $27.5m in 1H FY2021-22, up from $14.1m a year earlier, driven higher by rising settlement numbers.
Homes under management rose to 2,958 from 2,625 a year earlier. The company said it plans to deliver 1,100 to 1,300 new home settlements between FY2021-22 and FY2023-24 and 450 – 550 resale settlements.
Lifestyle Communities currently has a portfolio of 5,231 home sites of which 2,958 home sites are occupied by 4,245 homeowners. The company engages in the development, ownership, and management of retirement communities.
Goldman Sachs is upbeat on the stock, and has been for a while, saying the company is well capitalised to organically grow its developments and settlement numbers.
A sharp rise in property prices buoyed the first-half results, underpinned by long-term demand for retirement accommodation given an ageing population.
“In the near term, we see recent property price strength as enhancing the value proposition for incoming residents which has seen the cost of an LIC home fall to less than 70% of the median house price in some areas versus ~75% to 80% typically.”
The company increased its debt facility to $375m from $100m during the half to support the acquisition of three new sites and support its development pipeline. However, its gearing level struck 40.6%. But the company expects its gross debt will decline in 2H22 as rising settlement numbers allow debt to be repaid.
Goldman Sachs has a 12-month price target on the stock of $24.50 and it rates the stock a Buy. The broker isn’t worried about the high gearing level and says it should fall as Lifestyle’s communities move to the settlement phase from development.
Cannacord Genuity is similarly upbeat on the company, noting that a higher-than-expected average home sales price boosted revenue; the average sales price was $437,000 in the first half 2022 versus $391,000 a year earlier, up 12%, boosting revenue to $72.5m from the sale of new homes.
Over the six months to December, the company recorded 68 resales, up from 32 in the same period a year earlier – more than doubling deferred management fees to $4.7m while site rental fees rose to $14.5m from $12.3m.
“Overall, the result was strong in our view given the impact of lockdowns and challenges around materials and costs,” said the broker.
The company reiterated its guidance for FY22-FY24 settlements of 1,100-1,300 homes. In addition, resale guidance was maintained for 450 to 550 resales over the same period. The company also noted on an investor call that there has been an increased level of enquiry and sales.
“Together with the strength in the property market, this should help deliver strong sales and settlement rates.”
Post the results-release, Cannacord has raised its target price to $19.50 per share from $17.30 and lifted its recommendation to Buy.
Developments on track
Lifestyle Communities said its property development program is on track despite global supply chain challenges. Jarden observes while supply chain problems and a shortage of building materials has pushed up costs, the rises have not hurt Lifestyle’s results significantly.
Jarden had expected some margin erosion but declares it was pleasantly surprised at the limited impact this is having on margins. Gross margins were maintained at around 22%.
Managing director James Kelly said the supply chain in the construction industry has come under substantial pressure in the last few months and the company’s construction team and supply partners “have done an outstanding job leveraging loyal relationships built over many years to keep our build program on track.”
However, supply chain risk remains a threat to second half and ongoing profitability as building material shortages emerge and prices rise. Jarden has not changed its Underweight rating, though it has slightly lifted the target price on lifestyle communities to $18.60 from $18.50.
Jarden, like Goldman Sachs, isn’t worried about high debt, and expects the gearing level to moderate in 2H22 as projects stabilise and to be offset by valuations.
Shares in Lifestyle Communities tend to trade on high multiples, which means the dividend yield on offer is usually below 1%, as is currently the case if one takes guidance from the forecasts by the three brokers mentioned.
The shares are on Goldman Sachs' list of Conviction Buys.
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