Australia | Sep 29 2015
-Strong accretion from acquisitions
-More balance sheet capacity
-Focus on brownfield conversions
Gateway Lifestyle ((GTY)) is expanding, adding another two NSW estates to its portfolio following the Cobb Haven acquisition in July. The latest two are the Myola Lifestyle Resort at Jervis Bay and the Terrigal Sands Lifestyle Village.
Management expects the acquisitions to be accretive to FY16 earnings and brokers observe additional upside from excess balance sheet capacity. The price paid per site compares favourably to industry averages, UBS notes. There are operational synergies at Terrigal given the close proximity to existing parks. UBS upgrades FY16-18 forecasts by 1-3% and its estimates now sit 7.0% above prospectus for FY16, because of the strong underlying momentum and the accretion from recent acquisitions. UBS retains a Buy rating and $2.75 target.
Brokers believe Gateway Lifestyle is well placed to participate in further sector consolidation, with a conservative balance sheet. Macquarie flags the surplus debt capacity of $127.5m that existed at the June 2015 results. There were eight parks under due diligence as of August 2015, with two of these now executed.
UBS calculates that, taking gearing to the mid point of management's 25-35% range, with an ingoing yield of 7.5-9.5% and 8.0% weighted average cost of capital, Gateway Lifestyle can generate additional annual earnings of $8-12m. The main drivers are growth in site rents and manufactured home sales as well as opportunities form converting existing sites. The company is advantaged by a capital efficient funding model, low levels of gearing while operating in a highly fragmented industry.
The Myola park, acquired for $5.4m with an initial yield of 8.4%, provides a conversion opportunity for a manufactured home estate over the next 5-7 years, with 30 existing sites and potential for the remaining "annual" tenants to be converted into another 140. The prospectus forecast is for a gross profit per house of $98,000 on development, which signals to Macquarie the park will be very accretive on conversion. The Terrigal site, located 1km for the beach, is a mature park with 198 occupied manufactured homes at a passing rent of $160/week. This was acquired for $8.5m at an initial yield of 8.2%.
Having listed on the ASX in June, Gateway Lifestyle has delivered a 20% total return, with the stock up 15.4% since Moelis initiated coverage. Further share price appreciation is expected but the broker reduces the rating to Hold from Buy with a target of $2.48. Moelis leaves estimates unchanged, given around $25m in acquisitions were assumed for the first half of FY16. So far, since IPO acquisitions have totalled $26m.
Gateway Lifestyle is the largest in the Australian domestic manufactured home market, with parks in NSW, Queensland and Victoria under its belt. It now has over 2,200 sites in its development pipeline. Industry fundamentals are underpinned by the favourable demographics, including an aging population, financial pressure on retirees and housing affordability. The company is intent on converting mixed use residential parks rather than making greenfield acquisitions, Macquarie observes. This strategy provides the cash flow benefits in the form of existing short-term site rentals. The broker retains an Outperform rating and notes that the price target of $2.83 is based on Gateway investing its undrawn bank facilities into new parks.
See also, Gateway Lifestyle Offers Potential In Affordable Homes on June 30 2015
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