Company Overview: Lifestyle Communities Ltd (ASX: LIC) is an Australian property development and management company, which builds, owns and operates land lease communities. It gives affordable housing options to Australians over 50. During the first half of FY22, LIC has executed 166 new home settlements, 68 resales settlements, and 68 contracts to purchase three new parcels of land. The company got listed on ASX in December 1998.

LIC Details

1HFY22 Financials:

• Expanding Top-line: With the increasing home under management by ~6% in the past six months to 2,958, its revenue from site rentals increased. The same led to ~83.4% increase in total revenue on pcp basis and stood at $93.9 million in 1HFY22.
• Cost Chunks: Along with the increasing home numbers, the community operating expenses increased in line and the cost of sales hiked by ~111%, from $26.72 million to $56.49 million. This made home settlement margin fall from ~22.3% to ~22.1% in 1HFY22. Moreover, the corporate costs increased due to increased headcount, new employee share scheme structure and increased share price and increased insurance premiums due to prevailing market conditions.
• Profitability: Despite of the boost in the above-mentioned costs, the company reported a ~88% hike in its EBIT to $40 million, along with a ~95% uptick in its NPAT from $14.1 million in 1HFY21 to $27.5 million in 1HFY22.
• Change in Director’s Interest: Its Directors, Mark Sutherland Blackburn and David Paul Blight, acquired 5,600 and 6,000 fully paid ordinary shares, respectively, during March 2022 via on-market purchase.

Key Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top ten shareholders together form around 45.33% 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: The company’s debt has increased from $175.70 million to $274.50 million, and cash has decreased from $1.6 million to $0.50 million from 1HFY21 to 1HF22.

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

Key Risks:

• COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant Omicron, 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: After releasing its new website in October 2021 and new finance system in January 2022, LIC remains on track to launch its salesforce build in the last quarter of FY22. The company enhanced its existing debt facility by $100 million to $375 million, to finance the three new sites acquisition and continued growth of the development pipeline over the next 3 – 5 years. LIC entered the 2HFY22 with 252 new homes sold and awaits their settlement. Moreover, the company reasserted its plans to deliver 1,100 to 1,300 new home settlements and 450 - 550 resale settlements between FY22 and FY24.

Lifestyle Communities focuses on the strategy to cater for a niche segment and provide high quality affordable housing to the over 50s in Melbourne’s growth corridors and key Victorian regional centres. Out of the portfolio of 5,231 home sites, of which 2,958 home sites are occupied by 4,245 homeowners, which includes the new sites: Phillip Island, Merrifield, and Ocean Grove. These sites are expected to be developed in the coming years.

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 $13.260 - $23.850. The stock gave a negative return of ~25.28% in the past six months and a positive return of ~18.97% 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, owing to the increased head count, corporate costs and expected supply chain constraints due to COVID-19. For the purpose of valuation, few peers like Centuria Industrial REIT (ASX: CIP), Vicinity Centres (ASX: VCX), and Charter Hall Group (ASX: CHC) and others have been considered, which comes under Real Estate Sector. Considering the surging revenue and NPAT, positive margins with rising ROE of the company, upside potential in valuation, probable two to three new sites acquisition per year, current trading levels, growing HUM (homes under management), decent long-term outlook, and the 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 closing market price of $16.200, as of 5^th April 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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