Centurion Corp - DBS Research 2019-10-25: A Home, Away From Home

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CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corp - A Home, Away From Home

• Unique pure play in workers’ and students’ accommodation with expansion opportunities.
• Resilient occupancies and FY19F yield of c.4.9% an attractive trait amid an uncertain economic outlook.
• Potential asset divestments to unlock value and reduce gearing.
• Initiate coverage on Centurion with BUY and Target Price of S$0.52.

Centurion Corp Investment Summary

Initiating coverage with BUY, DCF-based Target Price of S$0.52 with 27% upside.

• We believe CENTURION CORPORATION (SGX:OU8)’s purpose-built workers accommodation (PBWA) occupancies will remain resilient aided by the supportive regulatory environment and training centres it has despite concerns over the tightening on foreign workers in both Singapore and Malaysia.
• On the purpose-built student accommodation (PBSA) front, we are optimistic on its Australian expansion and occupancies in the UK even as Brexit approaches.
• Overall, we believe Centurion’s ability to address these concerns and record a recovery in earnings to the level seen before the Westlite Tuas PBWA lease expiry in December 2017 could prompt a re-rating of the stock.
• See Centurion Corp Dividend History.

Growth in PBWA and healthy occupancy rates hint at a strong and sustainable base.

• The PBWA segment has expanded strongly since Centurion made its first investment in 2011, with bed capacity registering a CAGR of 37% over 2011-2019. In 2020 and 2021, PBWA bed capacity is expected to rise by another 6.1% and 9.8% respectively. Additionally, since Centurion entered into a reverse takeover and acquired the PBWA business in 2011, occupancy rates for its Singapore PBWA have stayed healthy at above 84% even through bouts of uncertainty. This was observed both during the Oil & Gas sector downturn in 2015 where there was a drop in foreign workers and in 2015-2016 when PBWA supply surged.
• As one of the top five players in the Singapore PBWA space with a market share of over 10% (based on our estimates), Centurion may be affected by policies set by the Singapore Government. For example, starting 1 Jan 2020, the dependency ratio ceiling (i.e. the proportion of foreign workers that a firm can employ) for the services sector will be lowered from 40% to 38%, and revised further down to 35% by 2021. That said, we believe that Centurion would be able to overcome these setbacks. Evidently, Centurion’s Singapore PBWA assets have weathered previous storms remarkably well with occupancies rising to 96.9% as of 1H19 even as foreign worker numbers declined over the years.
• In Malaysia, barring the dip in 2016 when the Malaysian government ordered a foreign worker hiring freeze, occupancy rates have remained healthy despite the government’s efforts to tighten the noose around foreign worker employment. We attribute this to Centurion’s first mover advantage where it is currently one of the few, if not the only company that offers PBWAs with comprehensive amenities and facilities.

Well-timed expansion and favourable revisions to regulations bodes well for Malaysian PBWA.

• In July 2019, a bill was passed to extend the purview of the Workers’ Minimum Standards of Housing and Amenities (WMSHA) Act in Malaysia to cover foreign workers in employment sectors other than the estate sector. Minimum standards such as fire safety requirements could be imposed on the accommodation that these foreign workers resided in.
• Other positive regulations for the industry include the 40% reduction in levy fees for foreign workers in the Construction, Manufacturing and Services sector which was announced in Feb 2019 (for the period 1 Mar 2019 to 29 Feb 2020). This bodes well for the opening of the 6,600-bed Westlite Bukit Minyak facility in 1Q19 which could potentially add c.S$3.5m to top line by FY21.
• Overall, Centurion is set to tap on the supportive regulatory environment with the construction of the 3,600 bed Westlite Tampoi II and 6,100 bed Westlite Juru. The Westlite Tampoi II alone is expected to add c.S$1.2m in total revenue by FY21.

Nascent Australian PBSA market beckons.

• The imminent completion of the asset enhancement program at RMIT Village coupled with the commencement of operations of dwell East End Adelaide will almost double the bed count in Australia to c.900 beds. Both RMIT Village and East End Adelaide are situated within a kilometre from their target universities and are hence ideally situated. With student numbers rising in both RMIT and University of Melbourne, the RMIT Village expansion is poised to benefit with the PBSA bed-to-student ratio currently only standing at 3.4 PBSA beds to 100 students in Greater Melbourne as reported by Savills. This is one-ninth compared to the UK with c.30 PBSA beds per 100 students, based on estimates provided by Knight Frank.
• The ratio is even lower in Adelaide where there were only 3.2 PBSA beds per 100 students, meaning that dwell East End Adelaide will face relatively less competition and may see healthy demand.
• We estimate that average bed rentals per month are in the c.A$1,300 – c.A$1,700 range, with RMIT Village at the higher end of the range and East End Adelaide at the lower end.
• Accordingly, the Australia PBSA segment is set to form Centurion’s third largest segment with top line expected to come in at c.A$15.0m by FY20.

Value unlocking through REIT, divestment or an asset-light model.

• With gearing at 1.26x as at end-1H19, we estimate that Centurion still has c.S$75m of ammunition for acquisitions and expansion that would bring gearing to c.1.40x which has been indicated as the upper gearing limit. That said, Centurion may seek to unlock the value of its assets to realise gains and reduce gearing. Some plausible paths include creating a REIT, divestment, or a gradual switch to an asset-light strategy.
• REIT: The Group is not entirely new to the REIT option, having explored it in Jan 2015 before pushing back the idea in Mar 2015 as the proposed REIT listing was considered a chain listing under the SGX Listing Rule. That said, with PBSA properties valued at c.S$450m as at end-FY18, there remains a slight chance that this could be pursued in the near term.
• Divestment: The divestment of assets within the PBSA portfolio is another option. Housing prices have risen significantly in the UK since Centurion ventured into the market, representing an opportunity to unlock value. PBSA has become a new asset class for investment globally, due to its higher yield of about 3% to 4% above the 10-year government bond yield, according to a report by Savills. Investor interest in PBSA assets remains high while the option of converting to residential use (subject to approval by the authorities) exists as well. In particular, the Manchester region has seen housing prices appreciate by 30.6% (5.7% CAGR) since Centurion acquired its Manchester PBSA portfolio in 2014. Unsurprisingly, Centurion is already in the midst of divesting Beechwood House in Manchester.
• Asset-light strategy: Alternatively, Centurion could gradually shift towards an asset-light strategy, similar to the arrangement it has with the 1,900-bed Westlite Juniper at Mandai in Singapore. As the master tenant, Centurion pays for the master lease instead of owning the asset.
• See Centurion Corp Announcements; Centurion Corp Latest News.

Workers Accommodation - A Strong and Sustainable Base

• Centurion’s Singapore PBWA assets have formed the backbone of the company for almost a decade with 58.9% of FY18 revenue driven by this segment. Segment operating margins were also high at c.62.0% in the same year, far higher than the c.36.2% margin from the PBSA segment.
• Undoubtedly, Singapore PBWA remains the most important segment for Centurion. We see sustained strength in this segment even as the Singapore Government tightens the noose around foreign worker supply.

Well-situated assets near upcoming major construction projects.

• Westlite Juniper, Westlite Mandai and Westlite Woodlands are located near major construction sites that are expected to require a steady stream of foreign workers.
• Zooming down on Westlite Mandai and Westlite Juniper (both of which have construction workers making up a large portion of their resident base), the assets are positioned near the sites of the upcoming Mandai Project and the Sungei Kadut Interchange.
• Similarly, Westlite Woodlands is stationed close to the sites of the Micron facility expansion and the potential Singapore-Johor Bahru RTS Link.

Lower levies through foreign worker upskilling a major draw.

• Following the partnership with the Association of Process Industry (ASPRI) on Westlite Papan, Centurion has developed foreign worker training capabilities that could lower the levies that employers are required to pay (depends on type of training). With a block in Westlite Toh Guan set to add an industrial training centre, both Westlite Toh Guan and Westlite Papan could see sustained demand from employers seeking to train their foreign workers.

Strong accommodation growth profile on steady occupancy rate.

• Overall, the PBWA segment has expanded strongly, with bed capacity registering a CAGR of 37% over 2011-2019.
• PBWA bed capacity is expected to rise by another 6.1% in 2020 and 9.8% in 2021 with the acquisition of Westlite Juniper leading to a potential c.S$6.4m (c.4.5% of FY21F revenue) increase in revenue by FY21. Together with this growth is a character for resilience.
• In 2015, when the industry faced a downturn in the Oil & Gas sector and an oversupply of bed space, Singapore PBWA occupancy rates at Centurion’s assets remained high, decreasing only slightly to 85.9% from 89.8%.

Supportive Regulatory Environment for Workers Accommodation

Singapore

• Licensing of foreign dormitory operators regulates supply and plays to Centurion’s strength of high housing standards. Passed in Jan 2015, the Foreign Employee Dormitories Act (FEDA) prescribed rules on the licensing of foreign worker dormitory operators. It required these operators to hold a license that was subject to renewal every period (not exceeding 3 years). The license was awarded if the operators’ premises met standards on factors such as safety, public health and sanitation.
• Employment of Foreign Manpower Act (EFMA) restricts housing for many foreign workers to FCDs and PBWA. The EFMA provides for the imposition of conditions on employers of foreign workers if the matter relates to the worker’s employment. These conditions have resulted in restrictions on the type of housing foreign workers may live in. Specifically, foreign workers (except for construction sector workers) are required to stay in PBWAs, factory converted dormitories (FCD), HDB flats or private residential premises (PRP). The high cost of HDB flats and PRPs coupled with the unwillingness of employers to pay for these housing types have pushed foreign workers to FCDs and PBWA.
• FCDs facing increasing regulation. In addition, recent revisions to regulations on FCDs have resulted in higher operating costs for FCDs. We opine that this may reduce their popularity with employers and drive PBWA demand. Together, we think that these regulations are supportive of PBWA demand in Singapore and may help sustain PBWA occupancies in future.

Malaysia

• Workers’ Minimum Standards of Housing and Amenities (WMSHA) Act to create demand for PBWA. In July 2019, a bill was passed to extend the purview of the Act to cover foreign workers in employment sectors other than the estate sector. Minimum standards that include fire safety could be imposed on the accommodation that these foreign workers resided in.
• While enforcement of the law may be difficult, we believe that the passing of such a bill is a step in the right direction as it formally prohibits workers’ accommodation with poor standards. PBWA demand in Malaysia may hence see an uptick.

Student Accommodation – Steady UK and rising Australia

United Kingdom

• Brexit. On 23 Jun 2016, a referendum was held in the UK that would pave the way to the decision to leave the European Union (EU). With the Brexit talks still going on, the impact on universities in the UK remains uncertain and could range from a drop in international student numbers to reduced funding for UK institutions.
• International applicant pool remains robust. Despite concerns over Brexit, international applicants to universities in the UK have remained robust from both the non-EU and EU (excluding UK) regions. Applicants to the UK from the EU (excl. UK) dropped in 2017 after the Brexit result but recovered in 2018. Non-EU applicants saw an acceleration in numbers. We believe that this signals a strong demand for higher education in the UK, indicating that students still believe in the quality of UK higher education institutions, where many universities rank highly in the world.
• Centurion is well-equipped to navigate Brexit. Centurion’s PBSA properties are situated near reputable universities that we believe can drive student flows. Specifically, most of Centurion’s UK PBSA properties are located near the highly regarded University of Manchester which was ranked 27th internationally by QS World University Rankings 2020.
• Additionally, EU students, who enjoy financial support from the UK for studying in UK universities, only form a small proportion of the student population for universities targeted by Centurion (less than 6.9%). Assuming a 2020 Brexit scenario leading to a total shut off of EU students, PBSA revenue from the UK is expected to only decline by c.S$1.5m. In such a scenario, any decline is likely to be mitigated by the growth in international students (excl. EU) due to the depreciating pound. Indeed, the Brexit result in mid-2016 led to a decline in first year EU students but was outweighed by the surge in students from China, India and the rest of the world as the pound depreciated.

Australia

• Microenvironment ripe for Australian PBSA. With RMIT Village’s asset enhancement program close to completion coupled with the commencement of operations of dwell East End Adelaide, bed count in Australia will double to c.900 beds. Both RMIT Village and East End Adelaide are situated within a kilometre from their target universities. With student numbers rising in both RMIT and the UoMel, we think that the RMIT Village expansion is poised to reap rewards with the PBSA bed to student ratio only standing at an estimated 3.4 PBSA beds to 100 students in Greater Melbourne as reported by Savills. This compares to roughly c.30 PBSA beds per 100 students in the UK that Knight Frank has estimated. The ratio was even lower in Adelaide where there were 3.2 PBSA beds per 100 students, meaning that dwell East End Adelaide will face relatively less competition and may see healthy demand.
• Affiliation with RMIT University a boost. When the RMIT Village expansion completes, the asset will boast c.616 beds that may generate an estimated c.S$11.0m at full occupancy. We believe that RMIT Village will see strong occupancies given its affiliation to RMIT University where the university channels students to RMIT Village through avenues such as its website. Indeed, RMIT Village has historically seen strong occupancies, with the asset registering a dip from 2017 onwards only due to the asset enhancement program. As the AEP comes to an end in 3Q19, we expect occupancies to recover to pre-AEP levels with rentals even possibly receiving a boost.
• Overall, we estimate average bed rentals per month to be between c.A$1,300 – c.A$1,700, with RMIT Village at the higher end of the range and dwell East End Adelaide the lower end. Accordingly, the Australia PBSA segment is set to form Centurion’s third largest segment with top line expected to come in at c.A$15.0m by FY20.

Valuation

• Initiate with BUY and DCF-based Target Price of S$0.52. Considering Centurion’s strong cash flow generating ability, we believe that an appropriate valuation methodology would be the discounting of Centurion’s cash flows or DCF. See attached PDF report for DCF valuation details.
• Our WACC of 5.6% is based on a risk-free rate of 2.5%, market return of 9.4%, beta of 0.60, target gearing of 50% and cost of debt of 5.5%. We also assume terminal growth rate of 1%. We derived an equity value of S$434.6m or S$0.52 Target Price, which implies a 1-year forward PE of 13.8x. See Centurion Corp Share Price; Centurion Corp Target Price.
• Our Target Price has yet to include the potential development of Westlite Juru in Penang as discussions are still being held between Centurion and the Malaysian government. That said, if Westlite Juru is completed in FY21, Centurion’s earnings could be boosted by an estimated cS$2.0m.
• See attached 31-page PDF report for complete analysis.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-10-25

SGX Stock Analyst Report BUY INITIATE BUY 0.52 SAME 0.52