Company Overview: Lifestyle Communities Ltd (ASX: LIC) is an Australian property development and management company, which was listed on ASX on 15^th December 1998. The company builds, owns and operates land lease communities and offers affordable housing options to Australians aged over 50. As of April 2022, 322 new homes were sold with the settlements awaiting (an uptick from 252 on 31^st December 2021); where 166 new home settlements and 68 resales settlements were executed in the first half of FY22.

LIC Details

Key Takeaway from Half-Yearly Results 2022:

• Revenue Front: During the period, a total of 168 new homes were sold and 166 new homes (88 on pcp basis) were settled. Despite COVID-19 impacting the sales, the company managed its home settlement revenue to hike ~110.9% Y-o-Y to $72.49 million in 1HFY22. With the increasing home under management by ~6% in the past six months, its revenue from site rentals increased by ~18.5% and Deferred Management Fee (DMF) revenue by ~123.9% on pcp basis.
• Expenditure Front: In 1HFY22, the corporate costs escalated ~46.3%, due to increased headcount, new employee share scheme structure and increased insurance premiums due to prevailing market conditions. The sale management cost increased by ~52% and DMF costs increased by ~79.8% on pcp basis. Moreover, with the increment of ~111.4% in cost of sales, the home settlement margins shrank by ~0.9% from ~22.3% to ~22.1% in 1HFY22.
• Key Homes’ Information: Cash flow of LIC was majorly underpinned by the ongoing annuity rentals arising from the 2,958 homes under management (occupied by 4,245 homeowners). Out of 73 resale settlements, 68 attracted deferred management fees contributing $4.7 million income (an uptick of ~124% on pcp basis). DMF was increased ~4% per year capped at ~20% of the resale price.

*DMF – Deferred Management Fees

Homes’ Information (Source: Analysis by Kalkine Group)

• Non-Executive Director’s Appointment: Ms Claire Hatton was recently appointed as a Non-Executive Director of the Company, effective from 1 May 2022.

Top 10 Shareholders: The top ten shareholders together form around 45.86% of the total shareholding, while the top 4 constitute the maximum holding. Brahman Capital Management Pte Ltd. and Australian Super are holding a maximum stake in the company at ~8.96% and ~8.50%, respectively, as also highlighted in the chart below:

Source: Analysis by Kalkine Group

Key Metrics: LIC’s cash cycle days reduced in 2HFY21, but then it further increased to 285.30 days in 1HFY22. With the increment of net debt to $273.5 million, its debt-to-equity ratio increased to 0.69x in 1HFY22 as compared to 0.50x in 2HFY21.

Cash Cycle (in Days) and Debt Profile (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company could be affected by the lockdown regulations and restrictions, impacting sales and operations. Its sales and settlements got impacted by Covid-19 pandemic and associated restrictions in Melbourne.
• Commodity Price Risks: The business is susceptible to the risk associated with commodity price fluctuations.
• Supply Chain Risks: Considering the market volatility, its properties prices are dependent on the external demand and supply of the raw material, it’s sourcing, and properties’ valuations etc.
• Labour Supply: Apart from the above, the business’ operations are also dependent on the labour availability market, and hence the functions might be affected.

Outlook (Guidance Reaffirmation): As per its recent update on 10^th May 2022, the company re-affirmed the guidance stated earlier, with an expectation to deliver between 390 and 405 new home settlements and between 140 and 150 resale settlements attracting a deferred management fee. With the selling of ~322 new homes (awaiting the settlement) as at the ending of April 2022, LIC reconfirmed the forecast of delivering 1,100 to 1,300 new home settlements and 450 to 550 resale settlements between FY22 and FY24. The company updated about the receiving of planning permit for their latest development at Woodlea and plans to commence the construction soon.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: As per ASX, the stock of LIC is trading lower than its 52-weeks’ average levels of $11.43 - $23.850. The stock gave a negative return of ~43.67% in the past six months and a positive return of ~14.44% in the past one year. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average multiple, mainly due to the increased corporate costs because of increase in head count and supply chain constraints. For the purpose of valuation, few peers like Charter Hall Group (ASX: CHC), Mirvac Group (ASX: MGR), and Centuria Office REIT (ASX: COF) and others have been considered. Considering the positive gross and net margins, surging revenue and NPAT, upside potential in valuation, reaffirmation of guidance, current trading levels, growing HUM (homes under management), decent long-term outlook, along with key risks associated with the business and current market volatility due to global tensions, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $11.810, 01:20 PM (GMT+10), Sydney, Eastern Australia, as of 14^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

LIC Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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