20 July 2017

Professional’s Pick - lifestyle communities

Fund manager of the Pengana Emerging Companies Fund, Ed Prendergast, discusses the lifestyle communities sector.

What is the stock?

Lifestyle Communities (ASX: LIC)

How long have you held the stock?

LIC has been held by the Pengana Emerging Companies Fund for over two years.

What do you like about it?

Demand for retirement accommodation is growing strongly as the population ages. Lifestyle Communities core focus is at the affordable end of the market, which is not well-served by other players who are focussed on higher priced suburbs. They have a range of projects underway, and have shown consistent growth in the rate of sales, which adds to the pool of long-term recurring revenues.

The company applies conservative accounting policies, and seeks to build a long-term recurring book of revenue, rather than focus on maximising short-term development profits.

The attraction to LIC is based on a growing underlying market, favourable economics, and a very capable, stable management team.

How is it better than its competitors?

Most competitors in retirement villages are focussed on higher priced suburbs, whereas Lifestyle focuses on the affordable areas in outer suburbs of Victoria.

The company has built expertise in lower cost construction and management systems, which the larger players are not accustomed to.

What do you like about its management?

Management has deep industry experience and tenure with the business. Founder James Kelly owns 14% of the company and remains CEO.

The top four executives below James have been with the company for 7-12 years. Since listing in 2007, the company has not changed its strategy or strayed from its core operation.

What is your target price?

Our target price based on existing operations is around $5.00, however we can see upside to this based on stronger rates of sales growth in the medium term.

At what point would you sell it?

We would sell the stock if we assessed the share price had exceeded our assumed value, or if the industry structure, earnings quality, or strategy changed dramatically.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

The stock has risen 40% over the past 12 months, versus a 7% rise in the small ordinaries, making it one of our key contributors for FY17.

Is it a liquid stock?

Lifestyle is not particularly liquid, given that it is tightly held by loyal long-term shareholders.

Where do you see value?

The value lies squarely in the long-term growth potential, steered by a stable, proven management team.

Importantly, the capital structure enables the company to recycle capital and hence avoid dilutive capital raisings to fund growth.