Buying healthcare stocks is the most obvious way to play the aging population phenomenon, but companies which provide housing to older people are also exposed to this tailwind. Two such ASX stocks are Lifestyle Communities Limited (ASX: LIC) and Ingenia Stapled (ASX: INA).
Ingenia owns and runs 62 communities across all states in Australia, but has a particularly strong presence in New South Wales where around half of its properties are located.
The company has so far grown primarily through acquisitions and its property portfolio had a fair value of $327 million in its latest set of accounts. Since then, it has acquired two further communities, one in Sydney and the other just outside Brisbane.
In the latest half year report, the company posted an “underlying” profit of $6.7 million but a statutory loss of $1 million. Personally, I usually take little notice of “underlying” results, since I find most businesses incur one off costs every year and so these should be included when appraising an investment opportunity.
Being generous, and annualising the “underlying” result, Ingenia currently generates about $13.4 million profit each year. This works out at a return on its investment properties of just over 4% which is not particularly strong given risk free returns are available at similar rates.
The current market capitalisation of Ingenia is over $380 million and it is therefore trading at both a premium to book value and a high price to earnings ratio (PER) of almost 29, based on “underlying” rather than statutory numbers. So not only is Ingenia a weak business evidenced by its low return on assets, it is also expensive.
Lifestyle Communities Limited
Lifestyle Communities is smaller than Ingenia with just 12 communities either in operation or under development. The company’s strategy is to grow organically by developing a new community every 12-18 months and it is based solely in Victoria. This business model is far simpler and in my view far superior to that which is employed by Ingenia.
The numbers confirm this view. Annualised profit attributable to shareholders is $15 million based on “underlying” result for the half year ending December 2014. Investment properties are valued at $123 million and so return on assets is in excess of 12%.
On a valuation basis, whilst Lifestyle trades at a huge premium to its book value, on a PER basis it offers decent value at under 17x. The exciting thing about Lifestyle Communities is that only just over half of its homes are currently occupied, indicating that significant growth lies ahead.
This example shows that macroeconomic factors alone cannot be relied upon for making investment decisions. Both of these companies are benefitting from the same favourable industry conditions, but Lifestyle Communities is performing well whilst Ingenia appears to be struggling. It is essential to carefully consider internal factors as well as the business environment before buying shares in any company.
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Motley Fool contributor Matt Brazier owns shares of Lifestyle Communities Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.