24-Mar-2021: Taylor Collison: Aspen Group (APZ): "Diverse Business Model Driving Growth"
Analyst: CAMPBELL RAWSON, crawson@taylorcollison.com.au, +61 415 146 725, www.taylorcollison.com.au
- Recommendation: Outperform
- Market Capitalisation: $139m
- Share price: $1.20 ($1.18 on 26-Mar-2021)
- 52 week low: $0.80
- 52 week high: $1.25
Aspen’s Business Model:
Aspen is a leading provider of quality accommodation on competitive terms in the residential, retirement and short stay sectors. Aspen’s opportunities are enormous within Australia’s $7 trillion residential market given significant unsatisfied demand for suitable accommodation at more affordable prices and rents. Aspen has a fully integrated platform across operations, asset management, development and capital management that provides a broad spectrum of products and services to customers under different regulatory regimes and ownership schemes: Rentals – Shared Equity – Sales. Aspen provides one, some or the entire range of accommodation products and services at each of its properties. Aspen seeks to maximise the profitability and value of properties and to reduce risk by optimising customer mix based on demand, length of stay, service offering, relative pricing and expenses, regulation, capital costs and other factors.
Our View:
Despite Covid-19 heavily impacting short-stay assets, APZ has delivered 37% operating EBITDA growth on 8% revenue growth. We expect continued long-term NOI growth irrespective of economic conditions as demand grows for APZ’s portfolio of affordable accommodation. Given management continue to deliver on strategy and grow earnings in a depressed economy, we believe a premium to NAV is warranted, particularly as we believe the $1.20 NAV is understated with numerous assets valued below replacement cost and market value. Assuming the Perth portfolio is valued in line with the recent sale and Karratha projects go ahead, we believe the true NAV is $1.35, notwithstanding the upside potential of development activities. With consistent earnings and dividend growth now prevalent, we see APZ as a low-risk growth investment and continue to back management’s ability to purchase and operate a variety of assets.
Key Points:
- True value of assets being recognised within Perth residential portfolio
- Perth rental vacancy remains <1% with house prices beginning to reflect the pent-up demand. Despite original intentions upon purchase to operate the Perth residential portfolio as rentals, management tested the market and sold a property for $440k, well above the average property cost of $238k. The intention is to now gradually sell the remainder of the 84-property portfolio and we anticipate an average gain on sale of $100k per property ($8.4m total). Having purchased the portfolio of properties less than 18 months ago for $21m, the expected ~40% return on capital is further evidence of management’s ability to purchase assets well below replacement cost. With numerous project opportunities in the APZ portfolio, we note the efficient capital recycling as $30m is expected to be freed up through this process with future development returns likely to exceed 30%.
- Karratha asset NOI set to grow; Valuation still ~50% below replacement cost
- Despite recent govt subsidies, housing in Karratha remains heavily under supplied with rents up >50% yoy. With Woodside and Perdamen set to begin multi-billion-dollar projects in the region, supply is going to come under further pressure with an expected combined peak workforce of 5,200. AKV (Karratha asset) is APZ’s largest NOI contributor (>30% of group NOI) and management have decided to run the 180-room asset under a short-stay model. Current room rates of ~$135/night are almost 60% higher than under the previous Woodside contract. Although not having the security of contracted income, we expect the under-supply of housing to underpin improved NOI. We note that discussions are on-going with the above corporates on fixed room contracts and we expect these would be at current market rates plus a food provision. Contracts could be up to three years and will provide a baseline for revaluation from current BV of $16m.
- Pipeline of development opportunities to deliver steady return on capital
- Through acquisition and redevelopment of existing sites, APZ has built a pipeline of opportunity (>200 sites) to provide consistent development NOI in the short-term. With purchase prices to date below replacement cost and selling prices well below local median house prices, we see this as being completed in a low-risk manner. We believe investors can expect somewhat linear growth in this area rather than the lumpiness of some competitors. See page 2 where we outline sites confirmed to require capital in FY21/FY22 and the expected return.
--- click on the link at the top for the full report, including page 2 ---
[I do not currently hold APZ shares, but they are on one of my watchlists.]
