• 1H23 earnings was within expectations. Revenue and adjusted PATMI were 45%/48% of our FY23e forecasts. 1H23 adjusted PATMI declined 11% YoY to S$14.1mn due to the completion of a worker dormitory contract in May22.
• Co-living and car park revenues jumped 50% and 28% YoY respectively in 1H23. The interim dividend was raised 67% to 1 cent, implying an annualised yield of 6%.
• 2H23e earnings growth will be supported by: 1) additional 516 keys of co-living capacity; and 2) Expansion of 2,800 car park lots. Meanwhile, FY24e will benefit from 3) commencement of a new ISO Tank Depot; 4) launch of food factory development project. Our FY23e earnings is unchanged. We maintain a BUY with an unchanged TP of S$0.47. Core business valuations are pegged to 6.5x FY23e P/E, while the industry is trading around 13x. LHN is trading at 4x PE and a 28% discount to book value of S$0.487.

The Positive

+ Growth in co-living and car park. Co-living revenue surged 50% to S$10.4mn. The improvement came largely from higher room rates and a new 105 keys Coliwoo Lavender (opened in Sep22). The 411 key Coliwoo Orchard started only in Feb23. And contribution in 1H23 has been minimal. Car park revenue rose on the back of increased volumes. This was despite the number of car parks remaining flat at 74 (or ~21,500 vehicle parking lots).

The Negative

- Higher interest expense due to expansion. Interest expense almost doubled to S$4.4mn in 1H23 due to higher interest rates and an increase in net debt to S$144mn (1H22: S$98mn). The rise in debt was due to acquisition of 404 Pasir Panjang and 48 Arab Street. Other options for LHN to de-gear include monetising its properties. A further source of recycling capital is the completion of the 55 Tuas food factory project, where strata units will be sold.

• We visited LHN’s recently launched 411 keys co-living property in Orchard. The new project will raise LHN co-living capacity by around 40%.
• Co-living is a product with a flexible lease to serve the medium-term residential lease market. It fits in between tenants requiring longer stays than a hotel and shorter than a rented apartment. It is more affordable than service apartments with an added community experience.
• No change to our FY23e forecast. Coliwoo is a major earnings driver for LHN in FY23e. Capacity over FY21-FY23e is expected to double to around 1,600 keys. The current pipeline is 2,500 keys. Coliwoo Orchard can generate more than S$15mn in revenue, doubling FY22 co-living revenue. We maintain a BUY with a lower TP of S$0.47. Core business valuations are pegged to 6.5x FY23e P/E, while the industry is trading at 13x. The stock is also trading at 38% discount to book value of S$0.455 with a dividend yield of around 6%.

Highlights

• Demand is healthy with a waiting list. Since launch, the take-up rate has been encouraging. The good location near Orchard MRT and access to shopping, entertainment and Mount Elizabeth hospital will cater to a wide mix of tenants. Rental per month is more than S$3,000. This is compared with surrounding area apartment rents of around S$5,000 per month with a 1-2 year commitment. Another advantage of co-living over rental apartments is the ability to occupy immediately with all available utilities including internet, etc.
• Riding on the strong rental market. Co-living will benefit from the buoyant rental market. The residential rental index is up 30% in 2022 and the re-opening of borders will further boost demand. The breakdown of tenants is around 70% foreigners, 20% locals and 10% students. LHN conducts direct marketing to corporates and nearby hospitals in addition to other marketing channels such as the internet, social media and property agents.
• Optimising space, sustainability driven and asset light. After taking over the previous Fraser Residence, LHN drew on its sustainability-driven method to optimise the rental space without having to demolish and reconstruct the building. From the previous building’s 72 units, 135 units with 411 keys product was created. LHN has built its chain of Coliwoo properties on a master lease basis.
• Multiple attractions. Every unit comes complete with an attached bathroom, queen bed, TV, washing machine, kitchenette and refrigerator. Housekeeping of the unit is done once a week. The average daily rate per night is $200 compared to nearby service apartments that are close to S$400.

• Other co-living operators in Singapore. The other co-living operator includes lyf (Ascott), YOLOLive, Hmlet, Login Apartment (Shanghai), COVE, CP Residences and Commontown (S Korea).

Maintain BUY with unchanged TP of S$0.47

We maintain a BUY with an unchanged TP of S$0.47. Valuations are attractive at 4x PE and a dividend yield of 6%. The two major earnings drivers will be the expansion of the Coliwoo footprint across Singapore and the completion of a new ISO depot by mid-2023.

• FY22 revenue and adjusted PATMI was 91%/100% of our FY22e forecasts. 2H22 adjusted PATMI declined 19% YoY to S$13.4mn due to the absence of worker dormitory earnings.
• Co-living revenue continues to grow strongly with 38% YoY growth in 2H22. Growth was driven by an estimated 25% growth in rooms and a mid-teens rise in room rates.
• 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 with lower TP of S$0.47 (prev. S$0.51) due to decline in valuations of listed LHN Logistics (LHNL SP, Not Rated). Core business valuations are pegged to 6.5x FY23e P/E, while the industry is trading at 13x. Stock is also trading at 35% discount to book value of S$0.455 with a dividend yield of around 6%.

The Positive

+ Co-living riding on surge in rental rates and capacity. Co-living revenue jumped 38% YoY 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.

The Negatives

- Facilities management dragged down by dormitory. Facilities management earnings dropped 37% YoY in 2H22 to S$4.4mn. 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. Net debt has risen from S$63mn to S$107mn in FY22. The increase in net debt was due to S$53mn 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.

• 1H22 results within expectations, with revenue and adjusted PATMI at 46%/55% of our FY22e forecasts. Excluding one-off items, adjusted PATMI was down 7.6% YoY.
• Co-living is the major revenue driver, up 40.6% in 1H22. We expect the number of rooms to double over the next two years.
• Maintain BUY with a higher TP of S$0.51, from S$0.49. FY22e forecasts remain largely unchanged. Valuation for all business segments except for LHN Logistics (LHNL SP, Not Rated) is pegged to 6.5x FY22e P/E, while the industry is trading at 13x. This gives us S$0.40/share. We add another S$0.11/share from the market value of its listed subsidiary, LHN Logistics. We build in a 20% discount buffer to account for any volatility in its share price.

The Positive

+ Co-living (Coliwoo) is main driver of revenue and profit growth. Co-living revenue was a record S$7mn. This was due to full half-yearly revenue recognised from the property at 1557 Keppel Road, which turned operational in 3Q21. Two other properties, including 320 Balestier Road, and a JV property at 40 and 42 Amber Road commenced operations in 1H22. Profit of S$23.9mn in 1H22 was mainly due to fair value gain on investment properties of S$10.8mn and on JV investment properties of S$9mn.

The Negatives

- Lower revenue from commercial properties and facilities management. Revenue from commercial properties decreased but profit was higher. This was due to the disposal of loss-making properties. Revenue from the carpark business under facilities management continues to perform well, but overall revenue dropped due to lower demand for dormitory management services.

- Higher net debt. In 1H22, LHN recorded net debt of S$97.9mn, which is up 51% from S$64.6mn in 2H21. Long-term bank borrowings were up 28% to S$115.4mn, mainly used to finance the acquisition of the property at 55 Tuas South Avenue 1, renovation and working capital for the co-living business.

Other updates

Strong demand for industrial properties. The Work Plus Store outlets are seeing full occupancy, as demand from e-commerce business owners remains strong. The online retail sales proportion remains elevated at an average of 16% in the first quarter of 2022.

According to Edgeprop, industrial rents in Singapore climbed 1% in the first quarter of 2022, which marks the sixth consecutive quarter of rental increase. Industrial leasing demand is expected to be strong, as demand for logistics remains high, combined with tight supply. Supply chain disruptions and demand for storage requirements from semiconductors, pharmaceutical and biomedical sectors are expected to remain strong.

In 1H22, occupancy rate for LHN’s industrial properties inched up 1.9 ppts to 95.4%.

Aggressively expanding Coliwoo portfolio. LHN continues to ride on the promising prospect of the residential rental market in Singapore. Despite hitting a seven-year high, the local private residential property rental index has continued rising, and by 12% YoY in the first quarter of 2022. Amidst the various options, LHN provides flexible and affordable residential offerings. As the Singapore borders reopen, we are expecting stronger demand from expats and international students returning to the country.

In 1H22, the property at 320 Balestier Rd, and a joint venture property at 40 and 42 Amber Road have commenced operations. There are four other residential properties expected to commence operations in 2H22 under the Coliwoo co-living portfolio. In FY22, we expect the six properties to add 250 keys in total, which implies an increase of 30% on a full-year basis.

LHN has also entered into a master lease for a block of serviced residences at 2 Mount Elizabeth Link, Singapore. The company expects operations at this property to commence in 1Q23, which would be adding 411 keys to the portfolio. We are expecting the number of keys to increase by 50% in FY23.

From FY21 to FY23, the number of keys is expected to double.

• Spin-off of logistics arm by parent company LHN Group (BUY, TP: S$0.49).
• To raise 167.7mn shares, including 25.2mn placement shares, at S$0.20 per share, to raise gross proceeds of S$5mn. Post-IPO market cap will be S$33.5mn.
• Two main segments, transportation and container depot services. Growth drivers include new ISO tank depot and expected recovery of container depot utilisation rates.

Company Background

LHN Logistics is a division of LHN Ltd. The company has two principal business segments, transportation (66% of FY21 revenue) and container depot services (34%).

Under the transportation segment, LHN Logistics provides domestic and cross-border ISO tank and container transportation services for various petrochemical products, base oils, bitumen and bulk cargo to customers in Singapore and Malaysia.

As for container depot services, the company provides container storage, surveying, cleaning, repair and maintenance services for general purpose and refrigerated containers.

Key Highlights

1. Growth Driver 1: Construction of 7 Gul Avenue ISO tank depot. ISO tanks are designed to transport chemicals, which the company does between major petrochemical industries located in Jurong Island, Pasir Gudang, Kuantan and Port Klang. This new ISO tank depot will integrate all services necessary for an ISO tank, including transportation, washing and storage. It provides convenience for customers and the ISO tank operators as it reduces number of procedures needed to utilise and maintain the tanks. Construction would commence in April 2022 and is expected to be completed within 12 months.
2. Growth Driver 2: Expansion in container depot services and recovery. LHN Logistics operates two container depots in Singapore - at Benoi Sector and Gul Circle - and two in Thailand, in Laem Chabang and in the vicinity of Bangkok. The company is undertaking preparatory works to establish an additional overseas container depot in Yangon, Myanmar. Growth drivers include the expected rebound in economic activity as the pandemic cases wane, which would push utilisation rates of container depots in Thailand up, and for the additional container depot in Yangon. Capacity of new depot in Yangon is about 6,000 TEUs, an increase of 22%.
3. Attractive indicative dividend yield. LHN Logistics intends to recommend and distribute dividends of not less than 40% of the Group’s profit attributable to equity holders for FY22-24. Based on the IPO price of S$0.20, FY21 EPS of 1.98 Scts and the post-placement share capital, the indicative dividend yield is 4%. This compares to other local listed logistics players with either no dividends distributed in FY21 or an average of 1.4%.

Outlook

Container depot services. Strong demand for logistics continues to fuel container volumes, even as supply chain issues gradually ease. On a 12-month moving average basis, container throughput in Singapore in February 2022 increased 1.6% to 3.12mn TEUs, while the volume at the Laem Chabang port increased 13.5% to 721k TEUs. The container depots in Thailand are expected to see recovery in volumes following the easing of Covid-19 restrictions.

ISO tanks. Construction of the new ISO tank depot will provide a comprehensive range of solutions for customers, from transportation, to washing and storage. LHN Logistics will enjoy a first-mover advantage in integrating all these services in a single location.

• FY21 results were below expectations. FY21 revenue and PATMI at 89%/84% of our forecasts. Revenue from commercial and residential properties and facilities management were lower than expected.
• Maintain BUY with a lower TP of S$0.49 from S$0.54. We roll over our P/E target to FY22e or 7x PE. Our FY22e PATMI has been lowered by 16% as we reduce our forecast revenue for the same segments mentioned. Industry is trading at 14x FY22e, down from 19x. Growth for FY22e includes the five new Coliwoo co-living properties and a new Work Plus Store outlet at 202 Kallang Bahru.

The Positives

+ Higher profit contribution from industrial and co-living properties. FY21 PATMI increased 16% to S$28.1mn. Profit before tax for Coliwoo co-living properties in FY21 was almost thrice that of S$898k in FY20. Industrial properties turned around from a net loss of S$1.9mn in FY20 to a net profit of S$10.9mn in FY21.

+ Higher revenue and profit from facilities management. Profit before tax for facilities management jumped 85%, driven by the joint venture acquisition of Bukit Timah Shopping Centre carpark in December 2020 and the acquisition of 33 JTC carparks in January 2021. There was also an increase in facilities management services amid the pandemic.

The Negatives

- Lower revenue due to streamlining of operations. Revenue contribution from industrial properties decreased due to the expiry of four master leases in FY20. Revenue contribution from commercial properties was lower due to the expiry of three master leases in FY21.

- Commercial properties suffered net loss.  Commercial properties swung from a net profit of S$3.2mn in FY20 to net loss of S$938k in FY21. This was mainly due to the lower demand for offices amidst the prolonged work-from-home trend becoming the new normal.

Other updates

Aggressively expanding Coliwoo portfolio. There are five residential properties expected to commence operations in FY22 under the Coliwoo co-living portfolio. Most recently, a Mount Elizabeth Property was acquired, which will be part of LHN’s expansion of its Coliwoo portfolio. It is a residential property with a Gross Floor Area of approximately 104,375 sqft, and 22 storeys. Excluding the Mount Elizabeth Property, we expect five properties to add 200 keys, representing a 25% increase for FY22. The strong momentum of demand for these properties is also expected to continue, with the trend of more millennials moving out, the work-from-home trend becoming the new normal and a gradual reopening of borders.

Proposed spin-off and separate listing of LHN Logistics on Catalist. LHN has submitted a spin-off application to The Stock Exchange of Hong Kong Limited for the proposed spin-off and separate listing of the shares of LHN Logistics Pte Ltd, which will hold the logistics services business of LHN. It is expected that LHN will continue to hold majority shareholding in LHN Logistics, which will remain consolidated with LHN.

The Stock Exchange of Hong Kong Limited and Singapore Exchange are still considering the applications and there is no assurance that the proposed spin-off will be approved.

Maintain BUY with a lower TP of S$0.49, from S$0.54

 We have a lower TP of S$0.49, from S$0.54. FY22e PATMI has been lowered by 16% to S$33.8mn as we lower our forecasts of contribution from residential and commercial properties and facilities management. The outlook continues to remain strong for all business segments, especially space optimisation, as we adapt to the new normal. Higher demand for co-living and self-storage spaces are expected.

We now peg the stock to 7x FY22e P/E, down from 9.5x FY22e P/E, still a 50% discount to the industry average.

• Work Plus Stores’ industrial space riding on the boom in e-commerce spending. Earnings growth expected to be supported by high occupancy, higher rentals and net lettable area (NLA) CAGR of 12% for next two years.
• Demand for co-living space under Coliwoo rising, thanks to flexible lease terms, affordable rents and attractive locations. Occupancy in mid-90s. We expect LHN to add 210 residential keys by end-FY22e, at CAGR of 13%.
• Initiate coverage with BUY and TP of S$0.54. Few direct comparables, given LHN’s diverse exposure to hospitality, industrial and logistics. Industry is trading at 19x FY21e PE. We apply a 50% discount owing to a lack of comparables and large volatility in historical PE. Historical adjusted PE averaged 32x, with a low of 4x. We peg LHN at 9.5x FY21e PE.

Company background

LHN dates back to 1991, as a real-estate management group with a track record in the re-purpose and re-leasing of real estate to capture trends. LHN takes old, unused and under-utilised industrial, commercial and residential properties and enhance and transform them into thoughtfully designed and highly usable space.

It has three main businesses: space optimisation, consisting of industrial, commercial and residential properties; facility management; and logistics services.

Investment merits

1. Work Plus Stores to ride the rise of e-commerce. Healthy occupancy rates of about 90% are underpinned by a rapid rise in e-commerce. Online retail sales in Singapore more than doubled from 6.3% of total retail sales in January 2020 to 13.3% in April 2021. Industrial property rents also rose for the second consecutive quarter, by 0.6% QoQ in 1Q21. LHN has nine Work Plus Stores, with one upcoming facility at 202 Kallang Bahru, expected to commence in July 2021. 202 Kallang Bahru will add NLA of 193k sq ft or 14% to its portfolio.
2. Demand for co-living and serviced residences to rise sustainably. LHN’s Coliwoo business is thriving, with an average occupancy of 94%. Tenants are attracted to this segment’s flexible leases of a minimum seven days and reasonable rentals of S$1.5k-2.6k per month, depending on location and property type. For properties in operation, as of end-FY20, there were 763 keys in the Coliwoo portfolio. In 1HFY21, 1557 Keppel Road was added, contributing 47 keys. Another four projects are expected to begin operations in FY22e, which would add another 166 keys to expand LHN’s co-living space offerings.
3. Facility management expanded with the acquisition of 33 JTC car parks. LHN acquired 33 JTC car parks as right-of-use assets in February 2021. The total number of car parks in Singapore under its management increased from 54 as at end-FY20 to 74 as at end-1HFY21. Car parks at some newly acquired properties such as its Boon Leat property will also be managed by LHN. The car park at Bukit Timah Shopping Centre was acquired in September 2020 under a joint venture.

COMPANY BACKGROUND

LHN was listed on the Catalist in 2015 and dual-listed on the mainboard of the Hong Kong Stock Exchange in 2017. It is a real-estate management group, generating value through expertise in space optimisation. LHN also provides facility management and logistics services, which complement its space optimisation business.

In Singapore, LHN manages 31 commercial, industrial and residential properties, two container depots and 74 carparks.

REVENUE

Revenue is derived from three businesses.

Space optimisation. Revenue is primarily generated from rental income, including warehousing service fees, from the following properties:

• Industrial properties: warehouses, factories, industrial buildings and land for open storage
• Commercial properties: offices and business space
• Residential properties: dormitories, HDB and condominium apartments

Facility management. Revenue from building maintenance, security services, cleaning, landscaping and pest control is derived from fees charged to tenants on a cost plus mark-up basis. Revenue from car-park management is derived from car-park rates which are either fixed by LHN for private car parks or regulated by the government for car parks owned by government bodies.

Logistics services. Revenue is derived from charges for the transportation and storage of containers, cargo-handling, service and repair.

An increase in revenue in FY20 stemmed primarily from higher residential revenue under its space optimisation and facility management businesses. The increase in revenue from residential properties was led by: 1) non-recurring revenue of S$16.1mn from its new dormitory business for services provided in 2HFY20; and 2) revenue of S$6.4mn mainly from co-living residences, a new serviced residence project in Myanmar and a new student hostel in Singapore.

Revenue growth was affected by the adoption of IFRS 16, as income and expenses for subleases are now reclassified as interest income and interest expenses respectively. Without the adoption of IFRS 16, FY20 revenue would have been S$151.8mn (Figure 3).