Initiation (Updated 28 September 2021)
A diversified real estate management service provider
- LHN is a real estate management service group which specialises in space optimisation. The company also provide facilities management and logistics services, which complements its space optimisation business.
- Catalysts. A solid FY22 revenue growth is expected from the space optimization business, given that 4 residential properties are expected to commence operations. Revenue and earnings drivers include reopening of borders and positive momentum of co-living trends. Meanwhile, the facilities management segment is expected to grow in tandem with the space optimization business, coupled with recurring dormitory management income. Finally, the logistics management segment is expected to grow in line with robust shipping activity.
- We initiate with an OUTPERFORM recommendation and TP of S$0.49, based on 6.0x FY22F P/E.
LHN’s primary business involves space optimization, where old, unused and under-utilised industrial, commercial and residential properties are transformed into highly usable space. LHN’s facilities management segment consists of 3 main areas, namely cleaning, car park management and security services, which complements its space optimization business. In 2020, the company established a new revenue stream – providing dormitory management services under the facilities management segment. Lastly, the company’s logistics management segment consists of transportation services in Singapore and container depot management services in Singapore and Thailand.
2020 financials: Strong top and bottom line
Revenue increased 20.8% YoY to S$134mn in FY20, while net profit surged 183.0% YoY to S$24mn. The jump in net profit was mainly due to better gross margins of 47.4%, which was almost double from the prior year. Strong bottom-line was supported by Job Support Scheme (JSS) and rental rebates of S$4.7mn, as well as an investment gain in subleases of S$6.9mn. Eliminating one-off gains, core PATMI for FY20 stood at S$11.3mn, an increase of 40.9% from FY19.
Facilities management segment spearheading 1H21 growth
Revenue rose 24.9% YoY to S$64.5mn in 1H21, while net profit jumped 340.3% to S$15.3mn. Solid net profit growth was attributable to further improvement in gross margins, which increased from 47.4% in FY20 to 54.6% in 1H21.
Expansion of residential business
LHN has acquired 4 properties in FY21. The properties acquired were 40/42 Amber Road in June 2021, 115 Geylang and 75 Beach Road in July 2021, and 320 Balestier Road in December 2020. All 4 properties are expected to commence operations in FY22. With the gradual reopening of borders, increased vaccinations rates and an increasing trend among millennials shifting out of their homes, we expect the residential segment to recover going forward.
Facilities management segment: The new winner
The facilities management segment emerged stronger in 1H21, as revenue increased 225.5% YoY to S$31.6mn. In terms of revenue contribution, the facilities management segment contributed 49% of total revenue in 1H21, outshining the space optimization business whose contribution to total sales declined from 51.8% in FY20 to 30% in 1H21. The shift in income proportion was mainly due to the commencement of dormitory management services in 3Q20. Being a supplement to the space optimization business, both segments are expected to expand.
Valuation & Action
We initiate LHN with an Outperform recommendation and a TP of S$0.49. Our TP is based on 6.0x P/E to its FY22F EPS of S$0.082.
Prolonged Covid-19 pandemic to impact reopening of borders, saturated self-storage market, fair value gains/losses sensitive to Singapore’s economy and property outlook.