LHN Ltd – A Sustainable Growth Path

LHN Ltd – A Sustainable Growth Path

LHN Ltd (LHN SP)

Recommendation: BUY
Target Price: SGD 0.43
Current Price: SGD 0.34
Return Potential: 27%

Investment Thesis:

LHN Ltd, a Singapore-based real estate management services company, has demonstrated strong operational stability and growth, particularly in its co-living segment, Coliwoo. The company is the largest co-living operator in Singapore by the number of keys, operating at 13 locations with three more assets set to launch.

The company’s business update for 3Q24 showcased steady growth in its core operations, particularly from Coliwoo, supported by increased tourism and seasonal demand. LHN’s average occupancy rate edged up from 91.8% in 1H24 to approximately 95% in 3Q24, driven by competitive pricing and the ramping up of newly launched assets, including River Valley projects. Two additional Coliwoo assets leased to the Ministry of Health Holdings (MOHH) are set to contribute from September 2024 onwards.

Reasons for Recommendation:

1. Sustainable Growth in Co-living:
   LHN’s expansion in its co-living business has been impressive, with plans to grow its total number of keys by 8% to over 3,000 by 2Q25. The company’s projects, such as Arab Street (launching in 1H25) and the GSM building (launching in 3Q25), will further solidify its position in the market. Competitive pricing and increased demand from both expatriates and local tourists have supported its strong occupancy rate.
2. New Revenue Streams:
   The food processing factory at Tuas South Avenue is on track to receive its Temporary Occupation Permit (TOP) in September 2024. The subsequent sale of 49 strata units is expected to generate SGD 10 million in pre-tax profit over the next 6-12 months, a significant boost to the company’s bottom line.
3. Increasing Renewable Capacity:
   LHN has secured three solar energy contracts in 3Q24 with a combined capacity of 0.8 MW. Management intends to further increase its renewable energy capacity by 2 MW per year, supported by attractive internal rates of return (IRR) of 20-30%.
4. Strategic Divestments:
   LHN recently divested its 40% stake in the Bukit Timah Shopping Centre car park for estimated net proceeds of SGD 4 million, providing liquidity for future acquisitions and working capital. The company is open to master lease opportunities in ASEAN, targeting around 200 keys.
5. Strong Cash Flow:
   The company’s steady revenue growth and expanding portfolio, combined with a healthy free cash flow yield of 28.8% for FY24, make it a compelling investment. LHN also maintains a sustainable gearing ratio of 58.1%, with lower interest rates benefiting its overall financial health.

Valuation:
The target price of SGD 0.43 is based on an undemanding FY25E P/E of 6.5x, significantly lower than global peers in the hospitality sector. LHN’s ability to maintain high occupancy rates, coupled with its asset-light strategy, positions it well for continued earnings growth.

Share Price Catalysts:

• Launch of new co-living assets in Singapore and ASEAN.
• Completion of the food processing factory and successful sale of strata units.
• Expansion of renewable energy capacity.
• Continued growth in rental demand from expatriates, tourists, and students.

Risks:

• Potential delays in launching pipeline projects.
• Elevated interest rates impacting cost structures.
• Increased competition in the co-living segment.

Date of Recommendation: September 5, 2024
Broker: Maybank Research Pte Ltd

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