Treasure Chest: Lifestyle Communities En Vogue

This story features LIFESTYLE COMMUNITIES LIMITED. For more info SHARE ANALYSIS: LIC

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on Lifestyle Communities.

Whose Idea Is It?

Moelis

The subject:

Moelis initiates coverage of Lifestyle Communities ((LIC)) with a Buy rating

More info:

Lifestyle Communities owns, operates and develops resort-style retirement communities, which come under the umbrella of land-leased manufactured housing estates. Revenue sources include development profit on house construction, ongoing land rent, and deferred management fees on resale of houses (typically 20% of sale price).

The stock has recently fallen -17% from its December high, largely due to the company’s earnings reported released in February.

That release showed a substantial miss of consensus forecasts for operating earnings, driven by lower settlements. Management noted settlement timeframes have extended by around 90 days given low consumer confidence in building, and customers wanting to see their completed homes before they list their existing homes for sale.

The company also announced an unexpected capital raising, which further served to lower the traded price.

Importantly, suggested Citi at the time, the company retained three-year volume guidance of 1,400-1,700 homes, implying the shortfall this year will likely be made up over the next couple of years.

As for the capital raise, brokers assumed this was triggered by elevated debt and delayed settlements, with Lifestyle Communities restricted in its ability to pursue additional land acquisition opportunities. Ord Minnett called it a "necessary evil" to protect future growth.

Three brokers monitored daily by FNArena cover the stock, for a spread of one Buy, one Hold and one Sell. Today Moelis, which is not monitored every day, initiated coverage of Lifestyle Communities with a Buy rating.

The company boasts a highly accretive business model, Moelis suggests, targeting cash flow neutrality on its projects, with operating profit on home sales effectively funding upfront land and infrastructure costs. Provided targeted sales rates are achieved, growth has a relatively limited impact on gearing.

Unlike peers, Lifestyle Communities expenses, rather than capitalises, infrastructure costs, thereby reducing development profit and increasing fair value gains. This substantially reduces the company’s tax burden, as fair value gains are only taxable upon sale of the asset which, notes Moelis, is something which is not expected to occur.

For all the obvious reasons, retirement villages enjoy a growing target market. Attractive unit economics have translated to rapid growth in competition within this relatively new asset class, Moelis notes, with little certainty around how far we might be from saturation.

Medium-term, the capital raise should be earnings dilutionary in the broker’s view, but leaves the balance sheet well-capitalised, significantly lowering balance sheet risk.

When factoring in growth and earnings structure, Moelis believes Lifestyle Communities offers an attractive valuation. The broker initiates coverage with a Buy rating and $20.00 target.

The consensus target among the three daily-monitored brokers is $17.05, suggesting around 10% upside, but individually are as diverse as their ratings. Citi (Buy) has a target of $20.00, Ord Minnett (Hold) $16.90 and UBS (Sell) $14.24.

Looking beyond FNArena's daily coverage, Goldman Sachs rates Lifestyle Communities a Buy with a price target of $21.50. Jarden's rating is Overweight with a target of $17, while Canaccord Genuity has a Hold rating and $16.15 target.

A quick glance through recent REITs sector updates post the February reporting season reveals Lifestyle Communities features on multiple lists of favourite sector exposures, in line with the Buy ratings mentioned earlier.

It should also be noted that as of last week, Lifestyle Communities was 7.5% shorted.

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