LHN LIMITED (SGX:41O)
LHN Limited - Optimiser Of Real-estate Trends
- 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 on LHN with BUY and target price of S$0.54.
LHN - COMPANY BACKGROUND
- LHN Limited (SGX:41O) was listed on the Catalist in 2015 and dual-listed on the mainboard of the Hong Kong Stock Exchange in 2017.
- LHN is a real-estate management group, generating value through expertise in space optimisation. It 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.
LHN - BUSINESS SEGMENTS
Space optimisation:
- As at 31 March 2021, LHN managed 31 commercial (office suites), industrial (e-commerce) and residential (co-living) properties. Space optimisation involves the re-design and planning of properties in order to increase their NLA and minimise the amount of unutilised space, thereby increasing their rental yields. The business is asset-light as properties are primarily secured through master leases from government bodies or private owners.
- LHN has been adapting to the evolving needs of its tenants by introducing various business concepts for its industrial (Work Plus Stores), residential (Coliwoo) and commercial (Greenhub Suited Offices) properties.
Residential properties:
- Leased out under Coliwoo and 85Soho. They are mainly co-living spaces or student hostels that are rented to white-collar workers and foreign students. Apart from residential properties in Singapore, LHN also manages two serviced residences with a total of 117 units in Myanmar, Axis Residences in Cambodia and a business hotel that is expected to begin operations in Nan’an, Quanzhou, China in 2QFY21.
- Coliwoo offers premium accommodation. At Coliwoo @ Keppel for example, co-living units come fully equipped with kitchenettes, smart TVs, microwaves, fridges and washers-cum-dryers. The garden area doubles up as a communal space for the residents. Coliwoo provides flexible leases of a minimum seven days’ stay, with the majority of tenants signing between six and 12 months.
- Properties in Singapore enjoy stable occupancy of about 94%. FY20 average occupancy at LHN’s biggest Coliwoo co-living residence at 31 Boon Lay Drive was 95.6%.
Industrial properties
- LHN's industrial properties include warehouses, light to heaving industrial buildings and open storage spaces. Work Plus Stores were introduced in 2015 as a one-stop integrated solution for both the work and storage needs of businesses and individuals.
- Following e-commerce’s rapid rise in recent years, the service has become popular among e-commerce players. Up to 70% of the space in Work Plus Stores is taken up by e-commerce retailers. A typical lease lasts six to 12 months with an average renewal rate of 70%. By adopting an omni-channel strategy, online retailers with physical locations provide a multi-dimensional retail experience to customers.
- LHN offers four options for rental:
- Work Plus Store spaces ranging from 80 to 750 sq ft;
- self-storage space ranging from 6 to 450 sq ft;
- mini self-storage units in the form of large lockers; and
- event space that offers affordable solutions for events, including pop-ups.
- Work Plus Stores provide convenience to retailers. They can store and pack their goods in a well-ventilated environment with air-conditioning while buyers can pick up their goods at these locations directly, reducing waiting time. Work Plus Stores also provide event space for occupants to hold marketing events such as Facebook live. Some locations also have photography studios for photoshoots. Work Plus Stores also provide smaller work space. At its new location at 202 Kallang Bahru, LHN is creating communal breakout space for tenants.
- Businesses with physical storefronts might also opt for self-storage space as a cost-effective alternative to store their goods, compared to renting warehouse space or shops.
- As of 31 March 2021, LHN had nine outlets and one new outlet in the final stage before the commencement of operations. Occupancy at these facilities averaged 90%.
- Work Plus Store Valet is a service for occupants to contact Work Plus Stores for arranging the delivery, pick-up and despatch of items to the secured storage areas of Work Plus Stores.
Commercial properties
- LHN's commercial properties include offices, F&B and retail outlets, sports and recreation facilities and children’s enrichment centres. LHN launched its GreenHub brand of suited offices in 2012 to provide suited offices to SMEs.
- LHN currently manages seven such offices: five in Singapore, one in Yangon, Myanmar and one in Jakarta, Indonesia.
Facility management:
- LHN also manages the facilities of its properties and other properties.
- Car-park management:
- In January 2021, LHN Parking acquired 33 JTC car parks. As of 31 March 2021, LHN Parking Pte Ltd managed 74 carparks in Singapore and two carparks in Hong Kong. LHN Parking Pte Ltd uses an online portal for users to manage its car parks and monitor activities remotely.
- Cleaning and related services:
- Industrial and Commercial Facilities Management Pte Ltd (ICFM) provides services including repair and maintenance, cleaning, landscaping and the provision of amenities and utilities, customised to clients’ requirements.
Logistics services:
- LHN also provides logistics services to business partners. It provides transportation services in Singapore and Malaysia and container depot management services in Singapore and Laem Chabang, Thailand. This segment provides value-added services to customers in the supply chain sector.
- Transportation services:
- Under transportation, LHN owns more than 50 prime movers, 15 road tankers and 200 trailers. These transport chemicals in bulk within ISO tanks and containers, oversized project cargoes, general bulk and loose cargoes.
- Container depot management services:
- HLA Container Services handles up to 6,200 TEUs at its container depot at Benoi Sector and up to 3,000 TEUs at its JV container depot at Gul Circle.
- HLA Container Services provides a wide range of container depot management services such as container handling and storage, container surveying, cleaning, repair and maintenance. It primarily services the major shipping lines and container leasing companies.
- HLA utilises technology to provide highly efficient information flows to customers, including an automated IT system on the web with the Electronic Data Interchange (EDI) function, for customers to access accurate and up-to-date information on inventory status, sales planning, etc. Easy access to online and real-time information facilitates operational visibility and gives customers greater control and flexibility.
- HLA also operates two container depots in Thailand - Laem Chabang and the vicinity of Bangkok - with capacity of up to 10,500 TEUs and 8,500 TEUs respectively.
Impact of COVID-19.
- Most of LHN’s businesses that provide essential services, including its residential business under space optimisation, facility management and logistics services, continued to operate as usual during Singapore’s circuit breaker.
- LHN has over a decade of track record in space optimisation. It closely monitors market trends to cater to the changing needs of the market and tenants, including the trend towards digitilisation.
- We expect a continuous increase in demand for industrial space which would support LHN’s Work Plus Store business. In the logistics segment, its first logistics facility acquired in FY20 will enable the group to expand its services to better serve customers while its container depot division is extending its network of container depots in ASEAN.
LHN - FINANCIALS
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
- Revenue is primarily generated from rental income, including warehousing service fees, from the following properties:
- 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.
- Space optimisation.
- 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:
- non-recurring revenue of S$16.1mn from its new dormitory business for services provided in 2HFY20; and
- 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 IFRS16, 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.
- A decrease in revenue from commercial properties was attributed to lower occupancy rates. Higher revenue from facility management was led by services provided for its new dormitory business, which started to generate revenue from 3QFY20. This was related to the conversion and management of workers’ dormitories. Retrofitting revenue was one-off but income from managing dormitories will sustain for 6-12 months from short-term contracts. This segment’s prospects will depend on contracts awarded by the Singapore government.
- Under the Space Optimisation Business, historical tenancy renewal rate averages at around 72% for LHN’s industrial and commercial properties. This ensures a steady source of rental income.
EXPENSES
- Cost of sales include rental, labour and maintenance costs, etc. Cost has been largely stable over the past five years, and decreased by approximately S$13.1mn or 15.7% in FY20, led by decrease in rental costs of S$37.8mn due to the adoption of IFRS 16.
- Operating expenses include selling and distribution (1% of sales), administrative (23%) and other operating expenses (2%). Administrative expenses increased by 28.6% in FY20, led by an increase in staff costs of approximately S$5.2mn as LHN expanded its operations.
MARGINS
- LHN's gross profit margins from FY15 to FY19 ranged from 24.2% to 26.4% and increased to 47.4% in FY20. Adoption of IFRS 16 in FY20 meant derecognition of rental revenue, resulting in lower rental costs. Cost from subleases is now classified as finance leases, and interest expenses are recognised on these lease liabilities.
- We expect gross profit margins to increase slightly in FY21e and FY22e from further operating efficiencies. This is led by expiry of four master leases in FY20, resulting in lower rental costs, and further derecognition of rental revenue, as a result of subleases classified as finance leases, due to the adoption of IFRS 16.
OTHER INCOME
- Other income increased by S$12.1mn or 241.2% to S$17.1mn in FY20, mainly from gains from subleases of S$6.9mn upon the adoption of IFRS 16, a net Jobs Support Scheme grant of S$1.8mn and rental rebates of S$2.9mn from Governments and landlords mainly for car parks.
BALANCE SHEET
- Assets.
- The value of its investment properties steadily increased from FY16 to FY20. It increased by another S$48.3mn in FY20, mainly from additions of investment properties of S$50.6mn upon the adoption of IFRS 16.
- Right-of-use assets of S$28.3mn was recognised following the adoption of IFRS 16.
- LHN operates on an asset-light basis, where 80% of its properties by NLA are master leased and 20% owned.
- Liabilities.
- Long-term bank borrowings increased by S$14.9mn to fund the purchase of its 7 Gul Avenue property by LHN’s logistics services, a property in Cambodia and the renovation of residential properties in Singapore.
- With the adoption of IFRS 16, lease liabilities of S$66.2mn were recorded.
CASH FLOW
- LHN generated positive operating cash flows from FY16 to FY20. Operating cash flow increased to S$48.6mn in FY20, mainly from higher PATMI, depreciation of right-of-use assets and fair-value gains on investment properties.
- FCF was mostly positive from FY16 to FY20, except for FY19, due to lower PATMI and higher capex.
LHN - VALUATION
- We initiate coverage on LHN with a BUY rating and target price of S$0.54.
- LHN’s 5-year P/E based on adjusted EPS varied from 4x to 70x, with an average of 32x. Excluding outliers of above 60x, average P/E was 27x.
- See
- Few direct comparables, given LHN’s diverse exposure to hospitality, industrial and logistics. Industry is trading at 19x FY21e P/E. We apply a 50% discount owing to a lack of comparables and large volatility in historical P/E. Historical adjusted P/E averaged 32x, with a low of 4x. We peg LHN at 9.5x FY21e P/E.
LHN - INVESTMENT MERITS
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% q-o-q 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.
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.
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.
LHN - RISKS
Ability to renew or re-tender for master leases.
- The majority of its properties or 80% under its space optimisation business are obtained through master leases. If LHN is unable to renew or re-tender for the master leases, its business and financials could be materially affected. Master leases generally last three to 15 years. However, some may be terminated with a minimum of three or six months’ notice, or upon notice of planned redevelopment by the landlords or authorities.
Dependant on rental demand.
Vivian Ye
Phillip Securities Research
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https://www.stocksbnb.com/
2021-06-07
SGX Stock
Analyst Report
0.54
SAME
0.54
