MAINBOARD-LISTED LHN : 41O 0%&rsquo s co-living business segment Coliwoo will continue to grow, backed by an increase in keys and resilient rental rates, analysts have said.

 

In particular, the company could get a boost from the award of two contracts to operate hostel-type facilities for foreign healthcare workers, which will house at least 700 such professionals. 

 

This could further catalyse the company&rsquo s stock, which generated total returns of nearly 27 per cent in the past year.

 

In comparison, the benchmark Straits Times Index&rsquo s total returns came in at 5.8 per cent in the same period.

 

Lim & Tan Securities analyst Chan En Jie sees the two upcoming healthcare lodging facilities at 100 Ulu Pandan Road and 60 Boundary Close as a positive entry into a new revenue stream for LHN. 

 

These two properties were among five earmarked by MOH Holdings &ndash the Ministry of Health&rsquo s (MOH) holding company for healthcare institutions &ndash to be retrofitted and run as co-living, hostel-type accommodation for new foreign healthcare workers. 

 

These hostel-type facilities will include amenities such as a dining area, a pantry, a laundry room and common social space each bedroom is expected to be shared by two occupants. 

 

Chan said: &ldquo The design and retrofitting of the healthcare lodging facilities will provide upfront revenue, while the operation of these accommodation facilities provides recurring revenue streams.&rdquo  

 

The two sites will add at least 350 rooms to the company&rsquo s portfolio, based on a two-person-per-room occupancy. 

 

Chan noted that LHN could also clinch contracts for 11 other sites, following a review of the five sites by MOH and MOH Holdings after operations commence.

 

The other three sites up for grabs were secured by a joint venture between non-listed players The Assembly Place and TS Group.

 

Besides LHN, one other major listed player &ndash Lyf &ndash offers co-living options. It is owned by the Ascott brand under CapitaLand, with two properties managed by CapitaLand Investment and one held in CapitaLand Ascott Trust : HMN 0%. 

 

CapitaLand Ascott Trust has returned 0.4 per cent in the same period.

 

Strong occupancy in co-living space

Coliwoo, considered the largest co-living operator by number of keys in Singapore, had an occupancy rate of over 90 per cent as at last December, the group noted in its first-quarter business update. 

 

The group has 1,770 keys in its Singapore projects, and 383 keys in China and Cambodia, where it owns the brand 85 Soho.

 

Maybank Securities analysts Li Jialin and Eric Ong said LHN&rsquo s operational performance &ldquo remains positive on the back of a buoyant Singapore hospitality market&rdquo . 

 

&ldquo We expect momentum to pick up, with more Coliwoo openings in the second half of 2024,&rdquo they said in a note. Coliwoo has 19 locations now, and plans to launch three more the company targets adding at least 800 keys each year for the next three years.

 

The Maybank analysts added that co-living room rates are holding up, despite a slower local rental market. Hotels are benefiting from the surge pricing during major events and serviced residences lend stability. 

 

Cushman & Wakefield Singapore and South-east Asia head of research Wong Xian Yang cautioned that co-living rates in Singapore could be tempered by a fall in overall private residential rates, despite co-living being a differentiated product from typical private rental units. 

 

The real estate services firm estimated that overall private residential rates could decrease by up to 5 per cent this year, as the market faces a supply surge from 2023.

 

That said, he believes demand for co-living facilities would be supported by increasing foreign demand and shifting consumer preferences. Operators with a strong brand presence and differentiated tenant experience will come out on top, he added.

 

While rising property prices could push acquisition prices higher as LHN expands its portfolio in a competitive co-living industry, Maybank&rsquo s analysts believe the group may be able to keep its gearing stable by recycling its capital.

 

&ldquo Potential divestments are supported by a portfolio of assets that are in the money, and LHN is tilting towards an asset-light strategy,&rdquo they said, adding that the FY2024 estimated price-to-earnings (P/E) ratio of less than seven times is &ldquo undemanding, compared to global hospitality peers&rdquo . 

 

Lim & Tan&rsquo s Chan finds LHN&rsquo s valuations attractive at five to six times P/E ratio, and noted that the company still trades at a price-to-book of 0.6 times, despite its asset-recycling initiatives.

 

LHN has undergone several phases of change as the company adapted its focus by diversifying into several businesses to stay relevant. It started in the sawmill and timber trading business, then entered the property sector, where it leased out underutilised spaces. In the early 2000s, the group ventured into space optimisation, logistics services and facilities management. 

 

In a previous interview, Kelvin Lim, executive chairman, executive director and group managing director of LHN, pointed out that LHN has several properties, including industrial, commercial, lifestyle, schools and residential. The diversification is a deliberate choice as Lim does not believe in putting all his eggs in one basket. 

 

Having a foothold in the different market segments will also give the company more flexibility to tap new market trends, such as the growing popularity of co-living.

 

LHN first entered the co-living space when it developed a co-living property jointly with Hmlet in Cantonment, launched in November 2019. LHN acts as Hmlet&rsquo s landlord for the Cantonment property and was in charge of refurbishing and fitting out the property, while Hmlet manages it. LHN has further expanded since then, acquiring properties all around Singapore, refurbishing them and turning them into its Coliwoo brand of co-living spaces.

 

LHN stands out among regional co-living operators. While others prefer an asset-light approach with management and operating contracts, Lim, in contrast, chooses ownership of assets. This strategy provides superior control and long-term stability.

 

&ldquo We do this for profit. We are not a start-up. We do things differently from start-ups because we have the capex to spend. We can rent the whole building or even acquire it. It is more sustainable,&rdquo says Lim.

 

As at the end of FY2023, the company operates a total of 2,064 keys either wholly or as a joint venture (JV).

 

Growing spaces

 

In its latest FY2023 ended September 2023, earnings were 16.6% lower y-o-y at $38.2 million, despite revenue increasing by 10.9% y-o-y to $93.6 million. Including discontinued operations, earnings per share for FY2023 came to 9.34 cents, down from 11.21 cents last year.

 

Following the disposal of LHN Logistics on Aug 28, LHN recorded earnings of $19.7 million from discontinued operations in FY2023.

 

The earnings drop in FY2023 was attributed to fair value losses associated with its investment properties and JV investment properties of $8.7 million, compared to the fair value gains of $24.8 million recorded in FY2022. Despite the lower earnings, LHN notes that net cash generated from operating activities increased to approximately $54.2 million for FY2023 compared to $41.2 million for FY2022 due to better working capital management.

 

LHN also paid out a final dividend of 1 cent and a special dividend of 1 cent, bringing the total paid for FY2023 to 3 cents, up from 1.75 cents paid in the preceding FY2022.

 

Besides the so-called space optimisation business, LHN also operates a significant facilities management arm &ndash largely in car park management. In FY2023, this segment contributed revenue of $31.34 million, up 14.8% y-o-y. However, profit from facilities management dropped 21.6% y-o-y to $4.83 million.

 

The company&rsquo s primary focus in FY2024 for its space optimisation business will be to identify and capitalise on new opportunities within the sector, particularly in its Coliwoo co-living business sector, which is expected to experience significant growth. LHN will also continue to expand its property development, facilities management and energy businesses.

 

The Coliwoo brand is expected to see several new launches in 2024, including openings at River Valley, Rangoon Road, Balestier Road, Lavender Street and Arab Street. 

 

Lim says: &ldquo Our robust occupancy rates in the Coliwoo projects and successful divestments, like LHN Logistics, underscore our ability to adapt and thrive amidst challenging conditions.&rdquo

 

With its growing financials, LHN is also making a transit to the mainboard of the Singapore Exchange S68 - . It also currently has a dual listing on the Stock Exchange of Hong Kong (SEHK). 

 

As of Jan 23, shares of LHN have grown about 89% in the past five years to trade at 34 cents. The share price is backed by its growing net asset value per share of 45.45 cents at the end of FY2022 to 52.87 cents at the end of FY2023.

 

Analysts cautiously upbeat

 

Overall, research analysts have been positive on the stock, with Maybank Securities keeping a &ldquo buy&rdquo call but most recently cutting its target price down to 45 cents from 54 cents previously. Analysts Li Jialin and Eric Ong view the stock&rsquo s valuation as &ldquo undemanding&rdquo . LHN trades at a forward P/B of 0.63 times and a forward P/E of 7.1 times. 

 

&ldquo We remain positive on LHN&rsquo s growth strategy, but lower our FY2024&ndash 2025 core profit forecasts by 14%&ndash 16% to account for a higher-for-longer interest rate scenario,&rdquo say Li and Ong.

 

Phillip Capital has similar sentiments as it keeps its &ldquo buy&rdquo call but drops its target price to 39 cents from 47 cents. Analyst Paul Chew has lowered estimation for LHN&rsquo s FY2024 earnings by 24%, following the disposal of LHN Logistics in August, which led to a $18.1 million gain and a special dividend of one cent.

 

&ldquo Bulk of the proceeds will be redeployed to expand the co-living franchise in Singapore with a target of 800 keys per annum for three years, or 30% CAGR,&rdquo says Chew, while noting that room rates have been rising and occupancy remains high at about 94.7%. 

 

Chew adds: &ldquo We expect 1HFY2024 growth will be driven by Coliwoo Orchard and additional new projects, 404 Pasir Panjang with 63 keys and 48 and 50 Arab Street with 26 keys. Both assets will be operational in 2QFY2024.&rdquo  

 

On the facilities management side, Chew expects growth in the car park management space, with new locations expected to drive revenue. The industrial segment, however, is expected to see tight supply due to difficulty in obtaining sublet space.   

LHN rides uptrend in aggressive growth phase

LHN has undergone several phases of change as the company adapted its focus by diversifying into several businesses to stay relevant. It started in the sawmill and timber trading business, then entered the property sector, where it leased out underutilised spaces. In the early 2000s, the group ventured into space optimisation, logistics services and facilities management.