LHN Limited - Phillip Securities 2022-12-11: Co-living The Growth Driver

• LHN Limited (SGX:41O)'s FY22 revenue and adjusted PATMI was 91%/100% of our FY22e forecasts. 2H22 adjusted PATMI declined 19% y-o-y to S$13.4mil due to the absence of worker dormitory earnings.
• Co-living revenue continues to grow strongly with 38% y-o-y growth in 2H22. Growth was driven by an estimated 25% growth in rooms and a mid-teens rise in room rates.
• LHN's earnings in FY23e will be supported by an estimated 60% expansion in co-living capacity (under Coliwoo brand) by 600 rooms to around 1,600. The new 411 units in Mount Elizabeth will be one of the largest sites for Coliwoo. The absence of dorm earnings will be a drag in 1H23.
• We maintain a BUY call on LHN with lower target price of S$0.47 (previously S$0.51) due to decline in valuations of listed LHN Logistics (SGX:GIH). Valuations of LHN's core business are pegged to 6.5x FY23e P/E, while the industry is trading at 13x. LHN's share price is also trading at 35% discount to book value of S$0.455 with a dividend yield of around 6%.

LHN's FY22 – The Positive

Co-living riding on surge in rental rates and capacity.

• Co-living revenue jumped 38% y-o-y from higher rental rates and a 25% rise in room capacity in FY22e. New capacity additions were 320 Balestier Road, 75 Beach Road, 115 Geylang Road and a JV properties at 40 and 42 Amber Road and 471 Balestier Road. Fair value gains caused a spike in PBT for co-living.

LHN's FY22 – The Negatives

Facilities management dragged down by dormitory.

• Facilities management earnings dropped 37% y-o-y in 2H22 to S$4.4mil. The decline was due to the exit of the dormitory business in mid-2022. The drag from dorm earnings will persist into 1H23.

Rise in net debt from investment properties.

• LHN's net debt has risen from S$63mil to S$107mil in FY22. The increase in net debt was due to S$53mil invested in investment properties. We expect stability in FY23e cash-flows, as the focus will be on launching and raising occupancy levels of Mount Elizabeth Coliwoo. Bulk of the debt is on fixed rates for the next two years.

LHN – Outlook

• We expect stable growth for LHN in FY23e.
  1. Space Optimization (38% of FY22 revenue)
     • Industrial (17%): Expect muted growth from higher rental rates in Tampines.
     • Commercial (7%): Modest growth from increased occupancy in existing portfolio such as 1557 Keppel Road.
     • Residential (14%): Stellar growth is expected from Coliwoo, with a 60% jump in rooms and a rise in rental rates.
  2. Facilities Management (38%): Growth driven by expansion in new car packs under management, and more contracts secured in facilities management. The sale of solar power will be a new revenue stream for this segment.
  3. Logistics Services (24%): Expect 4% revenue growth in FY23e. The completion of a new ISO depot in 7 Gul Avenue (mid-2023) and higher utilization of container terminals in Thailand and Myanmar will be the key growth driver for this division. The new ISO depot can provide cleaning, repair, survey and storage services of ISO tanks that carry dangerous chemicals.

Maintain BUY on LHN with a lower target price of S$0.47 (previously S$0.51)

• We maintain a BUY recommendation on LHN with lower target price of S$0.47 due to decline in valuations of listed LHN Logistics (SGX:GIH). Core business valuations pegged to 6.5x FY23e P/E, while the industry is trading at 13x.
• LHN's share price is also trading at 35% discount to book value of S$0.455 with a dividend yield of around 6%.