Centurion Corporation Limited - Phillip Securities 2016-11-24: Oversold and underrated

Centurion Corporation Limited - Phillip Securities 2016-11-24: Oversold and underrated CENTURION CORPORATION LIMITED OU8.SI

Centurion Corporation Limited - Oversold and underrated

  • Singapore’s 2nd largest Purpose-Built Workers’ Accommodation operator by number of beds and the only Purpose-Built Workers’ Accommodation provider in Malaysia.
  • Exposure to rising demand of mobile student population in UK and Australia.
  • Initiate with “Buy” rating with S$0.42 TP, implying an upside 37.53% (including dividends).



Investment Highlights 


1. Demand for workers’ and students’ accommodation is resilient. 

  • We believe that demand for student and workers’ accommodation remains resilient even in a weak economic environment. The accommodation business deals with the most rudimentary needs which provides for stable demand and a defensive business model.
  • Centurion is the only listed pure play professional student and workers’ accommodation in Singapore. In our initiation report we argue that policy changes and supply and demand dynamics in Singapore are favourable for Centurion’s PurposeBuilt Workers’ Dormitories. 
  • The strong and growing demand from mobile students for Purpose-Built Student Accommodation in United Kingdom and Australia supports the top-line. And in Malaysia, Centurion’s value proposition as the only Purpose-Built Worker Dormitory supports the supply of skilled labour.


2. Concerns over high debt levels underrates the strong cash flow generated. 

  • We believe that the high debt levels and concerns over the expiration of the land lease for Westlite Tuas in April 2017 have cast a pall on Centurion’s share price. 
  • In our Analysis and Forecast Assumptions section, we show that even without the contributions from Westlite Tuas, Total Debt to EBITDA less dividend remains at a lower multiple than the remaining lease for ASPRI-Westlite Papan and Westlite Woodlands. This means cashflow after dividends are able to service total debt before the land lease on ASPRI-Westlite Papan and Westlite Woodlands expires. 
  • In addition, properties in United Kingdom, Australia and Malaysia are mostly freehold or have long leasehold period thus supporting a long runway to service debt.


3. Board of Directors and Senior Management own substantial stakes in the Centurion Corporation Limited. 

  • We believe that the substantial stakes owned by members of the Board of Directors and Executive Directors in the Senior Management team will help align corporate decisions to shareholders’ interests.


Valuation 

  • We think that Centurion has a resilient top line that ensures a reliable and steady cash flow.
    1. Owing to finite leases for Singapore properties, we have excluded the cash flow from Singapore properties in the DCF model. Singapore contribution to total gross rental income is 64%. Therefore for simplicity, we have reduced the OCF by 64%.
    2. Maintaining the payout ratio at c.40% could translate to c.6% yield in FY17F at current share price of S$0.355 or c.4.8% yield at share price of S$0.42.
    3. There are 74,792,734 warrants outstanding. Each warrant carries the right to subscribe for one new ordinary share in the capital of the Company at an exercise price of S$0.50 for each ordinary share. Our target price is lower than the exercise price so we do not expect any negative impact on our target price due to warrants being exercised.
  • We initiate coverage on Centurion Corporation Limited with a “Buy” rating with a target price of S$0.42 based on discounted cash flow (DCF) methodology. 
  • This implies an upside of 37.53% (with dividend) from its last done price.






Jeremy Teong Phillip Securities | http://www.poems.com.sg/ 2016-11-24
Phillip Securities SGX Stock Analyst Report BUY Initiate BUY 0.42 Same 0.42




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