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Ingenia: Initiating Coverage; Stock Screens as Fairly Valued

Illustration of a black two story house outlined in blue and part of a black two story house outlined in yellow in front of a black background depicting the real estate industry

We initiate research coverage of Ingenia Communities INA, with a fair value estimate of AUD 3.90 per security and a no-moat rating. Ingenia is an Australian real estate investment trust with a property portfolio capitalizing on tourism, retirement, and low-cost housing needs. The largest and fastest-growing source of income is the firm’s land-lease communities targeted at the over-55s population. In a land lease, the resident owns their own premanufactured home and pays rent for the land their home occupies. It appeals to customers who have most of their net wealth tied up in their homes and depend on downsizing to free up wealth to fund their retirement years.

Securities currently trade close to fair value, on a P/E ratio of 21, and offer a dividend yield of 3%. We apply a weighted average cost of capital of 8% to our estimates of free cash flow to the firm.

We assign Ingenia a Medium Morningstar Uncertainty Rating. Ingenia has less development risk than some of its REIT peers because it is easier and less costly to build land lease communities than some other developments. However, it has less diversification as it is more dependent on pension and regulation rules than its diversified peers. As well, gearing is higher than some peers, albeit comfortably within covenants. A fiscal 2023 interest coverage ratio of five times was above the firm’s covenant of two times and even if the firm were to refinance at our long-term cost of debt of 6.5%, we still project an interest coverage ratio above three, which is well above the covenant.

We forecast group EBITDA to grow at a CAGR of 15% over the next five years. Our midcycle EBITA margin assumption is 31% from fiscal 2028, in line with the recent three-year historical average. We forecast a lower EBITDA margin averaging 28% over fiscal 2024 to 2027 due to the impact of housing cyclicality in the development business, leading to near-term lower demand for new houses and greater sales and marketing costs to encourage sales.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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