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  5. LNF: This week Smoak Capital had a write up on Leons in their Mid Year letter to investors. [Leon's Furniture Limited]
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Investment Q&A

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Q: This week Smoak Capital had a write up on Leons in their Mid Year letter to investors. They figure that a combined value for Leon's for the business and the real estate is 40-60$ per share. Couple of questions what is your thoughts of the valuation of the stock right now ignoring the possible spin out of the real estate. The second question is Leons stated that they would spin out the real estate when the market looks better. I know that we have had a few days sell off but with interest rates dropping do you think things are lining up for real estate spin out. Thanks
Asked by Jerome on August 08, 2024
5i Research Answer:

Without considering the (hidden) valuation of the real estate, LNF is still trading at 13x Forward P/E, a fair valuation given that LNF is a mature company with growth expected to be around 3% going forward, but the company generates very healthy cash flow and possesses a strong balance sheet. We think with the favourable macro backdrop of declining interest rates, real estate and interest rate-sensitive assets, in general, would experience a tailwind for some time despite the recent volatility. We think the chance of a REIT spin-off is still likely to happen given the change in the CEO recently, who is committed to unlocking shareholder value through the meaningful discount of the real estate portfolio (5M sq. ft of prime real estate) and the ability to generate cash consistently. We think the risk/reward of LNF here is quite favourable.