Sandstone Insights: enduring growth at a discount

ASX code: APZ

Need to know

• Aspen Group (APZ) has shown strong growth in FY24, with a notable 31% increase in EBITDA
• The company's focus on affordable housing has led to robust demand, with residential portfolio value rising by 23%
• Future growth is supported by a strong development pipeline and strategic acquisitions.

FY24 results showcase strong growth in rental income and development profit

Residential rental revenue surged 36%, boosting net operating income (NOI) by 46%. Retirement rental revenue increased by 36%, with a 23% rise in NOI despite margin pressure. Parks NOI grew 19%, driven by better Aspen Karrinyup Village (AKV) performance, while development profit rose 39% due to strong land sales and leases.

Focus on affordable housing drives competitive advantage

The company's competitive edge lies in its focus on affordable housing, targeting the 40% of Australian households that can pay no more than A$400 per week in rent or A$400,000 to purchase a home. This approach has resulted in a 23% increase in the value of its residential portfolio to A$261 million.

FY25 guidance anticipates 24% EBITDA growth

Growth is expected to be driven by higher rents, full-year contributions from CoVE Maylands and Burwood, Viveash, and a 36% stake in EGH, as well as rising development profits. We view this guidance as conservative and are increasing our FY25-27 EBITDA forecasts by 3-4%.

Investment view

Strong demand for affordable housing: Aspen Group is well-positioned to benefit from the rising demand for affordable housing in Australia. The company’s focus on providing quality accommodation at competitive prices has resulted in high occupancy rates and robust rent increases.

Consistent development profits: The company has a strong development pipeline that is expected to sustain current sales for over 12 years. Successful execution of these developments will drive significant growth in both development profits and annuity rental income streams.

Resilient park communities: Aspen’s park communities are experiencing strong demand, enabling operators to maintain gains achieved during the COVID-19 pandemic. The company’s dynamic yield management approach optimises lease duration, occupancy, rates, and operational expenses, ensuring market-leading margins.

Risks to investment view

Key risks for Aspen Group include volatility in settlement growth, fluctuating demand for affordable housing, variability in rental income, increased competition, and potential regulatory changes.

Valuation

The valuation for Aspen Group is set at A$4.05 per share, up from the previous A$3.80. This is based on a blend of relative price-to-earnings (PE) multiples and price-to-book value (P/BV) ratios. Key assumptions include a 17x PE multiple applied to the 24-month forward operating earnings per share (EPS) of 17.2c and a 1.5x P/BV multiple applied to the 24-month forward BV/share of A$3.45.

Catalysts

• Upcoming AGM in November 2024: The Annual General Meeting will provide further insights into the company’s strategic direction and financial performance.
• 1H25 results in February 2025: The release of first-half results for FY25 will offer a clearer picture of the company's progress and financial health.
• Continued development pipeline execution: Successful execution of the development pipeline will be crucial for sustaining growth in development profits and annuity rental income streams.

_{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}