Centurion Corp - DBS Research 2019-11-13: More Beds & Higher Occupancies

CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corp - More Beds & Higher Occupancies

Centurion’s 3Q19 results in line, driven by increase in beds from RMIT Village AEP and Westlite Juniper.
Occupancies improved in all key geographies; Singapore workers accommodation occupancy rose to 97.4% for 9M19.
Gearing improved marginally to 1.25x.
Maintain BUY with Target Price of S$0.52.

Historical occupancy at CENTURION CORPORATION (SGX:OU8)’s Singapore purpose-built workers accommodation (PBWA) segment has never fallen below c.84%, signalling its resilience even during uncertain times. The occupancy rate has been rising steadily during 9M19 to 97.4% even as the segment faces a potential decline in the number of foreign workers and regulatory headwinds.
The expected increase of 3,600 beds in PBWA segment over the next 2 years may boost operating income by c.11% by FY21F. The PBWA segment currently accounts for c.65% of the group’s revenue.

Centurion’s presence in purpose-built student accommodation (PBSA) in the UK and Australia are expected to remain key geographies going forward given Centurion’s recent investments and 87.1% contribution to PBSA’s top line in FY18.
The PBSA bed count increased by 12.4% y-o-y in 9M19, due to the RMIT Village asset enhancement programme (AEP) in Australia and opening of dwell East End Adelaide. We expect this to translate to a 11.2% y-o-y improvement in PBSA’s top line in FY20F.

Centurion posted revenue of S$33.1m in 3Q19 (+17.2% y-o-y) supported by an increase in the number of beds from assets that included RMIT Village AEP, dwell East End Adelaide, and Westlite Juniper. See Centurion Corp Announcements.
9M19 revenue increased by 9.7% y-o-y to S$97.3m. 3Q19 pre-tax profit came in at S$12.1m, expanding 18.8% y-o-y but declining 9.3% q-o-q due to higher interest expenses and seasonality effect.
Historically, 3Q has produced lower gross margins relative to 2Q. While it appears that 9M19 net profit may beat our full year forecast, we note that 4Q18 had recorded a S$6.6m tax expense (+S$5.0m over the previous quarter) due to provision of deferred tax on fair value gains. To be conservative, we have included a similar tax provision for 4Q19.

The average occupancy rate for Centurion’s Singapore PBWA portfolio rose to 97.4% for 9M19 from 96.9% in 1H19. This was despite concerns over a tightening noose on the number of foreign workers in Singapore. Centurion believes that demand for PBWA continues to outstrip supply by c.135,000 beds.
The occupancy at its Malaysian PBWA portfolio also improved to 91.2% for 9M19 (excluding the newly opened Westlite Bukit Minyak) from 90.2% in 1H19. The gradual increase came on the back of the passing of the Worker’s Minimum Standards of Housing and Amenities (Amendment) Bill in July.

Average occupancies at UK PBSAs were resilient at 91.0% for 9M19, growing from 90.3% in 1H19 even as uncertainty over Brexit looms. In the short-term, average occupancies may be boosted after the UK Government reinstated two-year work rights for international students in 2020/21.
In Australia, average occupancies at RMIT Village jumped to 89.8% for 3Q19 from 80.7% in 1H19 as the completed asset enhancement programme provided a boost to the property. The recently opened dwell East End Adelaide also saw a big improvement, achieving 93.9% average occupancy for 3Q19 as compared to 82.1% in the previous quarter.

Centurion’s gearing improved slightly to 1.25x from 1.26x as the group pared down borrowings by S$8.8m and improved its cash position by S$1.2m.

The withdrawal date of the UK from the EU has now been extended to 31 January 2020 with an option to leave earlier. A general election will now be held in the UK on 12 December 2019. As such, any potential policy changes remain unknown and the impact of Brexit, if any, may still pose a risk.

Our DCF-based Target Price is unchanged as results were in line. That said, a potential surprise in the tax rate in 4Q19 may lead to slight upside. See Centurion Corp Share Price; Centurion Corp Target Price.

We have assumed lower operating profit margins of c.54.4% for FY19-20F to account for potential start-up costs incurred from ramping up new beds in the pipeline such as those from Westlite Tampoi II.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.520 SAME 0.520