DBS Vickers 2015-08-13: Centurion Corporation Ltd - 2Q15; Another solid quarter. Maintain BUY.

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CENTURION CORPORATION LIMITED OU8.SI

Another solid quarter 

• 2Q15 results in line. 
• Market for purpose-built beds holding up well, underpinned by the shift towards purpose-built dorms. 
• Poor economic sentiment could be a drag on medium-term growth, but mitigated by diversified earnings base. 
• TP adjusted to S$0.59 as we factor in a bearish medium-term scenario. 
• Maintain BUY. 

1H15 PATMI of S$19.3m comprised 49% of our FY15 estimates. 

• Centurion reported 2Q15 core PATMI of S$9.8m (+30% y-o-y), driven by contribution from UK student dormitories, and the completion of Westlite Toh Guan Phase 2. 
• Earnings from Australia and Malaysia were slightly below due to the depreciation of the AUD and MYR against the SGD, but this was offset by a stronger GBP. 
• Westlite brand flexes its muscles amid oversupply concerns. 
• Singapore delivered another strong set of results, with bed rents holding steady and occupancy rates at close to 100%, backed by the Group’s well-located portfolio (particularly in Toh Guan and Mandai) and the Westlite brand’s strong operational track record (which resulted in some stickiness in demand despite openings by newer operators). 
• Looking ahead, we expect incremental contribution from Woodlands, which received TOP in July. 
• We understand that the ramping up period for this dormitory could take 6-12 months (vs. 3-6 months previously), as it is restricted largely to workers in the process, marine and manufacturing industries, where demand is weaker relative to the construction industry, which accounts for the bulk of Centurion’s customer base. 

Uncertain economic outlook poses a medium-term risk. 

• Looking ahead, we expect Centurion’s near-term performance to remain resilient, with demand driven by the government’s active push towards purpose-built dorms. 
• Medium-term outlook is more uncertain however, due to poor economic sentiment, compounded by the fact that the Group will be increasingly exposed to the slumping oil and gas sector (with 12k beds in Woodlands and Papan). 
• In this light, we are heartened that the Group has diversified to the more stable student accommodation business, reducing its Singapore exposure to c.60% of revenue by FY17. 

Maintain BUY, TP revised to S$0.59. 

• As we roll forward our valuations, we have adjusted our earnings and valuation assumptions to factor in a more bearish medium-term outlook – we 
  1. lower our occupancy assumptions by 50bps from FY17 onwards, 
  2. drop terminal growth to 1% from 1.5% previously, 
  3. raise our after-tax cost of debt assumptions by 50bps, and 
  4. raise our beta assumptions to 1.0. 
• As a result, we cut our FY16-17 net profit assumptions by 9-17%. 
• Our revised TP of S$0.59 still offers 24% upside at current prices and as such, we maintain our BUY call.

Rachael TAN | http://www.dbsvickers.com/ DBS Vickers Securities 2015-08-13

BUY Maintain BUY 0.59 Down 0.85