LIC’s result demonstrated resilience despite weakness across the broader Australian property market, providing us confidence in the positive outlook for the earnings profile. Four out of seven planned project launches for FY23 have been completed and LIC will have eleven projects in various stages of delivery by the end of FY23.
Result summary. NPAT of $25.3m was down ~8% driven by lower new home settlements. Annuity revenue increased by 20.7% with higher rental revenue from an increased number of homes under management and higher deferred management fees from an increased number of established home resales and higher resale prices. Development margins were 21.2%, down 83bps on 1H22, but up 135bps on 2H22, which is solid considering the cost inflation and supply constraints evident across the market and LIC’s ability to pass through cost increases.
Unchanged guidance. LIC maintained its guidance of delivering between 1,400-1,700 new home settlements between FY23 and FY25. FY23 settlements are expected to be consistent with FY22, before a step-change up in FY24 and FY25 as the new projects come online and increase projects contributing to settlements.
Balance sheet. The debt facility rose by $150m to $525m, with additional debt supporting continued growth of the development pipeline. Net debt for the period ended at ~$350m, a gearing ratio of 42.5%, with $174m in available headroom, where management is confident that the group can fund the existing pipeline with current debt facilities.
Investment View
A solid result despite cost inflation and supply constraints provides us confidence that LIC has reached the low point of its earnings in this cycle. With a significant development pipeline heavily weighted towards areas of above average sales growth ahead of it, we believe LIC can deliver on its guidance. FY24 and FY25 earnings are expected to be a positive step up as new projects come online.
After the recent sell down, LIC is trading on an FY24 PER of ~20x with earnings growth of >10%+, we upgrade our recommendation from Hold to Buy based on significant earnings momentum and valuation upside.
Risks to Investment View
The acquisition, development and settlement of properties may not achieve expectations. The resale of properties might not achieve the anticipated turnover or deferred management fees expected. Demand for land lease communities might not be as high as expected, depending on competition, or other factors. A sharp drop in the value of residential housing markets and rising raw material costs may dampen development margins. Higher than expected cap rates utilised to value the rental revenue streams.
Recommendation
We have upgraded our recommendation to Buy.
Figure 1: Minor margin compression suggests LIC is fairing better than other property developers, providing confidence LIC is reaching the low point in earnings
Figure 2: PER in line with 5-year average, although positive earnings momentum
