Affordable Opportunity In Aspen Group

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Affordable housing developer Aspen Group is growing earnings above the sector average. Analysts see the current share price as offering an affordable entry point.

-Aspen Group delivers above-consensus first half earnings
-Development business now ramping up
-Residential rental firing, tourism flat
-Conservative valuation

By Greg Peel

Aspen Group ((APZ)) is a leading provider of quality accommodation on competitive terms in retirement lifestyle, holiday and residential living, and is well-positioned to capitalise on Australia’s growing, under-supplied affordable housing market, Morrison Securities suggests.

Aspen targets the 40% of Australian households earning under $90,000 annually — many facing housing stress. Morrison notes that by providing affordable rentals and managing a diverse property portfolio, the company meets a critical need while delivering value to shareholders. Its integrated platform –spanning ownership, operations, development, and capital management– offers a competitive edge, maximising efficiency and returns.

Aspen’s integrated platform strengthens its market presence through four core functions: (1) Owner: proprietary approach to maximise shareholder returns; (2) Operator: operational management driving enhanced profitability; (3) Developer: cost-effective accommodation development; and (4) Capital Manager: disciplined acquisition strategy and active capital recycling.

Last month, Aspen reported first half FY25 operating earnings of 8.07cps, up 18% year on year, in line with Moelis’ expectations but 8% ahead of consensus. FY25 guidance was upgraded for the second time, from 16.0cps to 16.7cps, versus 15.2cps guided in August 2024 and 13.8cps reported in FY23. The upgrade follows a relatively strong operating run rate across the business.

A dividend of 10cps was re-iterated.

Ramping Up

Aspen is now ramping up its development business, which represented 24% of first half earnings. Management has set a new medium-term development target for settlements of 110, 140 and 170 lots over FY25 to FY27. This follows the recent announcement of a relaxation of management’s previous 80/20 target for property net operating income versus development income.

Based on this revised guidance, Moelis now expects development profit to make up 33% of underlying earnings by FY27, more than doubling development earnings from FY24-27.

Development profit has improved year on year, Bell Potter notes, driven by both higher settlements (48 lots versus 42 lots a year ago) and margins ($114k per dwelling versus $77k). With 48 settlements secured and a further 53 contracts on hand, Bell Potter sees limited risk to FY25 settlement earnings.

Aspen settled on 30 new land lease homes and 18 land lots in the first half against its target of 110 settlements for FY25, with an earnings margin improving year on year from 27% to 33%, and earnings up 68%. Aspen announced it had acquired a block of land at Ravenswood on the southern outskirts of Perth for -$12m, on which it expects to build a 360-house land lease community.

This implies $33k per site, Moelis notes, and should take Aspen’s land bank to 1,220 sites, or seven years at the FY27 target run rate.

The transaction settles on short terms (this month) which will help to restock the forward book. Bell Potter sees restocking more broadly as the key test for Aspen going forward, with the Ravenswood acquisition encouraging based on yield (size) and synergies to existing projects (Mandurah Gardens).

Other Segments

Aspen’s residential rental income (30% of first half earnings; 47% of property assets) was up 36% year on year, primarily driven by the letting up of 132 Guildford Rd, the last major vacant Perth apartment asset. Income was also positively impacted by the 2024 acquisition of two apartment buildings in Sydney and Melbourne, and the substantial uplift in residential rents across Australia in the past two years.

Nearly all of this portfolio is now operational and productive, and growth from here should be organic, Moelis notes, bolstered by above-trend uplift mechanisms at a number of assets (mostly under-rented positions being realised).

Tourism is not yet firing, Bell Potter points out. While rental and development contributions to earnings have driven upgrades, Tourism (Parks) has been less of a contributor but has scope for improvement given Aspen’s estimate of a -$1m negative hit to rental income in the first half from one-offs in South Australia and the Northern Territory.

Park assets (36% of first half earnings; 33% of property assets) reported flat earnings year on year, with tourism largely flat. One-off disruptions at some assets were offset by improved performances at others.

Capital Management

Aspen’s net asset value per share increased to $2.39 at the end of December from $2.23 at at the end of June, following a 5% uplift for asset values in the half –much of which was realised through divestment– and earnings retention.

Gearing fell to 21% at end-December from 26% at end-June following the divestment of half of Aspen’s stake in Eureka Group ((EGH)) and the ongoing sale of mature housing product in Perth and the Gold Coast.

The acquisition of Ravenswood should be offset by ongoing house sales, Moelis notes, while management has also flagged the $34m in Eureka shares as a potential funding source.

Positive Views

Moelis has increased its earnings profile, now factoring in Aspen’s medium-term development targets, which the broker views as feasible. Factoring in first half valuation gains, a further improved residential outlook in Aspen’s markets, and an expanding development business, Moelis has lifted its target price to $3.15 from $2.73, and maintains a Buy rating.

Aspen trades at a 13% premium to its revised net asset value. Moelis views this valuation as relatively conservative in the context of the company’s return on equity track record.

Notwithstanding a strong result, Aspen’s balance sheet is lowly levered, Bell Potter notes, ($100m of capacity with 21% gearing versus a 30-40% target). Net tangible asset valuation grew 5% half on half and earnings are growing well above the sector average, yet on Bell Potter’s calculation Aspen trades at just an 18% premium to net tangible assets.

Bell Potter sees a strong runway ahead, with the stock sitting just outside the ASX300, and conservative book values. The broker retains Buy, increasing its target to $3.05 from $2.80.

Aspen is well-positioned to capitalise on key trends in the Australian housing market, Morrison Securities suggests. Private rentals represent the fastest-growing segment, a high proportion of low-income household’s face housing stress, and demand for affordable rental solutions continues to rise across various household types.

With a solid financial foundation and a strategic focus on affordability, Aspen Group remains a strong contender in the Australian real estate sector, Morrison believes, offering potential growth and investment opportunities.

Morrison has initiated coverage of Aspen with a $3.25 target, but does not provide a recommendation.

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