GCP Student Living PLC – Supply constraints shall continue supporting the occupancy rates.

GCP Student Living PLC (LON: DIGS) is a FTSE-250 index listed Investment Trusts, which is focused on student residential assets. It makes investments in properties in and around London.  

Investment Rationale – Speculative Buy at GBX 114.20

• From a technical standpoint, 14-Day RSI (32.62) is supporting the upside potential.
• As per valuation metrics, EV/EBITDA Value multiple of the GCP Student Living is currently lower as compared to the corresponding multiples of the Residential and Commercial REITs sector.
• Over the past four years (FY16 to FY20), the current ratio has stayed above 2.5%, and debt/equity ratio has remained below 0.4x. Both the ratio demonstrated position than the industry median in FY20.
• The net asset value has been increasing, while the 100% occupancy rate has been maintained since the FY16.
• 68% of rooms across the portfolio are already booked for FY21, which provides substantial visibility.
• The ongoing supply constraints shall continue to support rental prospects, occupancy rates, and property valuations.

Risk Assessments

• Heavy reliance over third-party service providers can put business performance at risk.
• Value of the property portfolio can be impacted by Brexit and Covid-19 adversities.
• Any fall in the number of students can impact the occupancy rates.

Recent News

1 October 2020: Jefferies International Limited has been appointed as the financial adviser and corporate broker, with immediate effect.

Financial highlights for the year ended 30 June 2020

 (Source: Company Website)

• During FY20, total shareholder return declined 20.6%; however, the Company has delivered an annualised total shareholder return of 7.4% since the IPO.
• Since the IPO, NAV total return is 12.9% while it was 7.6% for FY20.
• The Company paid a dividend per share of 6.15 pence for FY20 following the growth in total rental income.
• The Company also raised £77 million through new ordinary shares.
• The occupancy remained full during the year while there was 4.4% student rental growth year-on-year.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

GCP’s student portfolio comprises 11 assets with nearly 4,100 beds. As of 30 June 2020, the property was valued around £1.0 billion. As 68% of rooms across the portfolio are already booked for the 2020/21 academic year, it provides resilience and visibility to future performance. Moreover, attractive locations for student accommodation benefits the portfolio valuation as well. However, the long-term impact of the pandemic remained difficult to ascertain. Notwithstanding, the Company has substantial financial resources to deliver long-term returns. Stock 52 week High and Low were GBX 212.50 and GBX 90.00, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on GCP Student Living PLC at the current market price of GBX 114.20 (as on 27 October 2020, before the market close at 1:05 PM GMT) with lower double-digit upside potential based 38.01 Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Empiric Student Property PLC – Welcomed the new CEO amid strong market fundamentals.

Empiric Student Property PLC (LON: ESP) is a FTSE All-Share index listed Company, which owns premium student accommodation across the UK.

Investment Rationale – Speculative Buy at GBX 57.00

• From a technical standpoint, 14-Day RSI (48.85) is supporting the upside potential.
• As per the valuation metrics, EV/Sales, and EV/EBITDA multiples of the Empiric Student Property PLC are currently lower as compared to the corresponding multiples of the Residential and Commercial REITs sector.
• Over the past three months, the stock has yielded a return of ~11.21%, which has outperformed the benchmark index.
• The Company has substantial financial resources, and it does not require any refinancing until November 2022.
• Despite uncertainties, solid performance has been delivered with regards to occupancy since the supply remained restricted, which ensured rental growth.

Recent News

10 September 2020: The board announced that Duncan Garrood would be joining as Chief Executive Officer on 28 September 2020.

Risk Assessments

• The disruption of Covid-19 pandemic can put operational ability and customer demand at risk.
• The risk of potential downturn in the property market. During H1 FY20, property portfolio valuation decreased by 2% year-on-year.
• The unavailability of debt or equity to finance the strategic objectives.
• The occupancy can be further impacted by decreasing student demand.

Business and Trading Update (as on 23 October 2020)

• Despite the challenging trading conditions, at least 70% of YTD occupancy was achieved though booking continued to be lower than the prior years.
• YTD like-for-like rent growth is 2.4% against 3.1 in FY20.
• It has a good level of visibility of booking since students reconfirmed their intentions to occupy the accommodations.
• As of 30 September 2020, loan to value ratio was 36.8% while the interest cover ratio covenant was 185% (calculated on an average basis).
• Regarding liquidity at 30 September 2020, the Company had £48 million of undrawn debt facilities and cash and having no refinancing requirements until November 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The demand and fundamentals for premium student accommodation remained strong while the supply continued to be restricted. Although the Company has not reinstated dividends; albeit it traded profitably and remain confident of long-term prospects. During H1 FY20 gross margin was ahead of H1 FY19, which offset the rent forgone due to lower bookings. ESP also has expanded digital marketing activity to target a wider UK audience and reach students as well as parents. It has also appointed new international agents to diversify international student base. Overall, the Company has a robust financial position and high-quality portfolio to complement the strong fundamentals of the student housing sector. Stock 52 week High and Low were GBX 104.00 and GBX 50.30, respectively.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on Empiric Student Property PLC at the current market price of GBX 57.00 (as on 27 October 2020, before the market close at 11:40 AM GMT) with lower double-digit upside potential based 27.46x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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