Centurion Corporation Ltd - CGS-CIMB Research 2020-01-07: Don’t Sleep On This

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CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corporation Ltd - Don’t Sleep On This

• FY20-21F PATMI growth of 7.7-13.8% likely to be driven by 15.2% growth in bed capacity and gross margin expansion from high operating leverage.
• Shift to asset-light model offers opportunity to scale up quickly, unlock value and recycle capital towards a possible REIT spin-off in the long term.
• Initiate coverage on CENTURION CORPORATION (SGX:OU8) with an ADD rating.

COMPANY OVERVIEW

• CENTURION CORPORATION (SGX:OU8) is a global property investor, developer and owner of quality, purpose-built workers accommodation assets (PBWA) and purpose-built student accommodation (PBSA) assets in Singapore, Malaysia, Australia, the United Kingdom, the United States and South Korea. The company was established in 1981 and formerly known as SM Summit Holdings Limited, which was an audio cassette tape manufacturer.
• In 2011, a reverse takeover occurred during which the group was renamed Centurion Corporation and diversified into the accommodation business. In 2015, Centurion Corporation explored a potential REIT listing to unlock value in certain assets as well as to recycle capital to pursue its growth strategies. This was rejected by the Singapore Exchange (SGX) on the grounds of being a chain listing under the Listing Rule 210(6) of the Listing Manual of the SGX-ST. A chain listing refers to a scenario whereby the assets and operations of the listing applicant are substantially the same as those of the existing issuer.
• Centurion Corporation embarked on a dual primary listing in Dec 2017 on the main board of the Hong Kong Stock Exchange (SEHK:6090), raising total net proceeds of S$11,859,248. 90% of the proceeds was used to fund the development of student accommodation in Adelaide, Australia and the remaining 10% was used for general working capital. The proceeds have since been fully utilised.
• See Centurion Corp Share Price; Centurion Corp Target Price; Centurion Corp Analyst Reports; Centurion Corp Dividend History; Centurion Corp Announcements; Centurion Corp Latest News.

BUSINESS OVERVIEW

• Centurion Corp focuses on two specialised accommodation asset classes: PBWA and PBSA. As of Sep 2019, Centurion Corp owns and manages a portfolio of 32 accommodation assets with a total bed count of 64,956.
• The workers accommodation assets are managed under the “Westlite” brand and accounted for c.67% of FY18 revenue while the student accommodation assets are managed under the “dwell” brand and made up c.31% of FY18 revenue.
• Other revenue refers to the group’s optical storage business, which accounted for 1.4% of the group’s total revenue in FY18.

Workers Accommodation Business

• Centurion Corp started its PBWA business in Singapore in 2011, and the group has grown to become one of the largest PBWA owner-operators in Singapore and Malaysia. Centurion Corp was ranked as the largest PBWA provider in Singapore and Malaysia by Euromonitor in 2017. As of Sep 2019, the group has a total of 12 workers dormitories: 5 in Singapore and 7 in Malaysia. PBWA accounts for around 2/3 of the group’s revenue (67.1% of FY18 revenue).
• Based on FY18 results, Singapore and Malaysia accounted for c.88%/12% of PBWA revenue respectively. Centurion Corp collects a 1-2 months deposit from the employer, contracts are typically 12 months and rent is paid in advance, on a monthly basis.
• Centurion Corp continues to grow its PBWA portfolio in Singapore and Malaysia with a visible growth pipeline in FY19-21F.
  • Singapore – Westlite Juniper (1,900 beds) in Sep 2019
  • Malaysia – Westlite Bukit Minyak (6,600 beds) in FY19F
  • Malaysia – Westlite Pasir Gudang (400 beds) in FY19F
  • Malaysia – Westlite Tampoi II (3,600 beds) in FY20F
  • Malaysia – Westlite Juru (6,100 beds) in FY21F

Well-diversified customer base.

• Customers come from a wide range of sectors from construction to marine, oil and gas to manufacturing, logistics and services. Customers are typically established multinational corporations that seek to house their workers in a more structured PBWA, in accordance with corporate ethical compliance.

Dominant market share.

• The PBWA industry in Singapore is fragmented with the top 5 players taking c.50% market share in terms of bed capacity and revenue in 2016, according to Euromonitor. In the same Euromonitor report, it was mentioned that Centurion Corp has the biggest market share in Singapore with 11.0% share of industry revenue receipts and 13.5% of bed capacity in 2016. In Malaysia, Centurion Corp is also the biggest player with 50% market share of industry revenue receipts and 54.1% of bed capacity according to Euromonitor.
• With such dominance in PBWA, we think that this allows Centurion Corp, as a market leader, to have a certain amount of pricing power and also allows its Westlite brand to set the benchmark for PBWA operations. Its first-mover advantage in Malaysia has allowed it to lead the way in partnering with authorities and non-governmental organisations. Its reputation and relationships have led to Centurion Corp establishing the first PBWA dormitory in Penang at Westlite Bukit Minyak in 2018.

Strategically located

• Strategically located near major industrial zones and multinational corporations. Zooming in on two examples in Singapore, Westlite Woodlands is within close proximity to Woodlands Industrial Hub and caters to workers from the marine and manufacturing industries. Similarly, Westlite Papan is strategically located near Jurong Island, home to more than 100 global energy and chemical companies.
• In Malaysia, Westlite Tampoi is located within a key industrial zone in Iskandar Malaysia, within close proximity to the manufacturing facilities of several renowned Japanese brands and major multinational electronics manufacturers. Good locations tend to lead to higher occupancy rates and higher pre-commitment levels as employers prefer housing their workers as close as possible to their worksite.

Location, facilities and intangibles make the difference.

• We visited Centurion Corp’s Westlite Woodlands dormitory in the evening to get a sense of the crowd after work, see the facilities being used and interact with residents there. Compared to a day visit, the evening visit allowed us to gauge the utilisation of amenities like the canteen, the gym and the games room.
• During our visit, we also had the opportunity to interact with five residents from various backgrounds about their experience staying in the dormitory. The residents were from India, Bangladesh and Malaysia. They work in companies located in the vicinity in industries like construction, marine and services. With their workplaces nearby, residents either walked or cycled to work.
• The residents were generally very happy with the amenities provided and particularly liked the cooking facilities, gym and the games room. Despite being in blue-collar/physically-demanding roles, many residents were seen in the gym lifting weights and running on the treadmill.
• Being fairly cost-conscious, residents we spoke to generally preferred to cook their own meals as opposed to paying for ready-made meals at the dormitory canteen. Due to this, we found the dormitory supermarket packed during our visit. To ensure affordability and relevance of items, the supermarket operator directly sources goods from residents’ home countries like India and Bangladesh. Being in an industrial estate, the convenience of having a supermarket within the same building as the dormitory was also greatly appreciated by residents.
• Apart from facilities, Centurion Corp also has provisions to ensure the psychological well-being and morale of residents are kept up as counselling sessions are provided free of charge. Activities organised by Centurion Corp for the residents are well received, and residents participate in festival celebrations, the inter-dormitory cricket tournament and other sporting activities.
• For residents who have stayed in other dormitories before, they preferred Westlite Woodlands due to the facilities and the security, which is in the form of a facial recognition gantry. Interestingly, one resident felt that the dormitory setting allowed him to mix with residents from other countries. This cultural exchange extended to cooking and sharing food with one another, which he was not able to experience in his previous accommodation, which was a private apartment provided by his employer.
• The visit and interactions with residents further reaffirm our view that Centurion Corp is able to differentiate itself from its peers by adopting a holistic approach to resident welfare, taking care of physical needs as well as the psychological and social well-being of residents.

Student Accommodation Business

• Centurion Corp ventured into the student accommodation business in Feb 2014, with the acquisition of RMIT (Royal Melbourne Institute of Technology) Village in Melbourne. Subsequently, Centurion Corp expanded to the UK in Sep 2014, Singapore in May 2015, the US in Nov 2017 and South Korea in Nov 2018. Based on FY18, PBSA contributes 31.4% of revenue and 21.3% of segment profits as disclosed by Centurion Corp.
• As of Sep 2019, the group’s portfolio has grown to a total of 20 student accommodation assets: 10 in the United Kingdom, six in the United States, two in Australia, one in Korea and one in Singapore. See attached PDF report for summary on Centurion’s portfolio of student accommodation assets.
• On 6 Dec 2019, Centurion Corp announced the proposed acquisition of Archer House in Nottingham, UK at a purchase price of S$26.98m. Archer House is a student accommodation asset with 177 beds and is in close proximity to the University of Nottingham and Nottingham Trent University. According to Centurion Corp, the property was completed in late Sep 2018 and has full occupancy for the academic year 2019F/20F.

Student accommodation features

• Centurion Corp’s PBSA properties are located within walking distance or close proximity to university campuses and city centres. Resident mix is well-balanced between domestic students in each country and international students from China, SEA, Europe, India, etc. Centurion Corp’s student accommodation properties are typically in the mid-range category, catering to a variety of students.

Earnings seasonality in PBSA

• Centurion Corp’s PBSA revenue is subject to seasonality with 3Q showing dips in revenue as occupancy tends to decline during the school holidays in the months of Jun, Jul and Aug as out-of-state students return home. In line with this, Centurion Corp’s PBSA leases are also structured based on the academic year and vacancies during the long summer breaks are supplanted by leases from students on summer school/exchange programmes.
• To reduce the impact of this seasonality, Centurion Corp has continued to increase its bed count in Australia which has its summer break in a different quarter from the UK. This was done via the development of dwell East End Adelaide and the asset enhancement programme at RMIT Village; these initiatives almost doubled its bed capacity from 456 beds in FY18 to 896 beds in FY19F.

Asset-light Strategy

• To capture further opportunities and to scale, Centurion Corp has embarked on an asset-light strategy by launching two funds. In this strategy, Centurion Corp functions as both the general partner and the limited partner. As a general partner, Centurion Corp is responsible for portfolio management and earns a management fee. As a limited partner, Centurion Corp commits its own capital and benefits from investment returns of the fund.
• Centurion Corp closed its first private fund in Nov 2017, the Centurion US Student Housing Fund (CUSSHF or Fund1), raising US$89.5m, which was used to acquire six PBSA properties in the US. Centurion Corp holds c.28.7% in Fund 1. The fund has a lifespan of five years with an option to extend for an additional year. The portfolio assets will be managed under Centurion Corp’s student accommodation brand, dwell and operations will be managed through a JV with a local student accommodation manager in the US.
• Centurion Corp launched its second private fund, the Centurion Student Accommodation Fund (CSAF or Fund2), to invest in PBSA globally. The first closing of Fund2 was in Dec 2018, with an aggregate committed capital of S$70m. A reputable educational institution was the cornerstone investor for Fund2, committing S$60m of capital into the fund; Centurion Corp holds c.14.29% of Fund2. The fund has a lifespan of six years. The fund currently holds one UK property, dwell Castle Gate Haus Nottingham.
• Asset-light strategies enable fast-paced portfolio growth and expansion of the group’s management services to generate recurring income through asset and property management services.
• While Centurion Corp does not rule out a REIT as a possible exit strategy for the two funds, we think that the current size of the two PBSA portfolios together with the PBSA properties it directly owns (c.S$450m as of end-FY18) precludes Centurion Corp from using such a strategy. In our opinion, a REIT would be more viable with a total asset value of at least S$1bn to enjoy economies of scale and attract investor interest. Another REIT option could be combining its portfolios with other PBSA portfolios. A portfolio sale to another strategic investor is also a likely exit strategy.
• Going forward, we think Centurion Corp can also utilise this asset-light strategy to lower its gearing by seeding its existing PBSA assets into Fund 2 or new funds once they are stabilised.

Largest and most focused exposure to PBSA

• Compared to its Singapore-listed peers, Centurion Corp has the largest number of PBSA beds under management across a more diversified range of five countries as at 30 Sep 2019. Based on publicly-disclosed information, Centurion Corp also has the largest exposure to PBSA based on contribution to most recent financial year revenue. Therefore, we think Centurion Corp would be the best Singapore-listed proxy to the growing PBSA segment.

Optical disc business

• The optical disc business was a holdover from the pre-reverse takeover days. As of FY18, it contributed S$1.7m (1.4%) of revenue and has experienced a declining trend over the past five years. Despite the decline in the use of optical discs, the business remains profit making and cashflow generative.
• According to Centurion Corp, while the business could continue to see weakness, it has no plans to shut down this segment until it turns loss-making.

INDUSTRY OUTLOOK

• Click on view full report button below to read the analysis on industry outlook of Workers accommodation in Singapore & Malaysia and also the industry outlook of student accommodation in the UK, Australia & the US.

FINANCIALS

Growth from a stable base and visible pipeline of new beds

• Centurion Corp experienced a 12.4% y-o-y decline in revenue for FY18 due to the expiry of Westlite Tuas, but this was slightly offset by stronger performance of PBWA in Malaysia and PBSA in the UK. We expect Centurion Corp to experience a 10.8% improvement in revenue in FY19F due to full contributions from the multiple acquisitions and completions made in FY18:
  • Jul 2018: Acquisition of 100% interest in dwell Princess Street with 127 beds.
  • Oct 2018: Completion of dwell East End Adelaide with 280 beds.
  • Nov 2018: Acquisition of 14.29% interest in dwell Castle Gate Haus with 133 beds.
  • Nov 2018: Acquisition of dwell Dongdaemun with 208 beds.
• For FY19F, we expect Centurion Corp to benefit from additional growth drivers secured during the year:
  • Jan 2019: Completed Westlite Bukit Minyak with 6,600 beds.
  • Jun 2019: Completed majority of asset enhancement programme for 160 new beds at dwell RMIT Village.
  • Jun 2019: Secured 9-year lease at adjacent block to Westlite Pasir Gudang to add 400 beds.
  • Sep 2019: Secured 10-year lease at Westlite Juniper for 1,900 beds.
• We expect 4Q19F to perform better than 3Q19 as a result of the seasonally low PBSA revenue from the UK summer break in 3Q, and a full quarter’s contribution from Westlite Juniper; Centurion Corp’s lease at Westlite Juniper started in Sep 2019 representing one month of contribution to 3Q19.
• Looking further ahead, 3,777 beds could be added with the expected completion of Westlite Tampoi II and the acquisition of Archer House in FY20F, according to Centurion Corp, and another 6,100 beds could be added at Westlite Juru with expected completion in FY21F. We expect Centurion Corp’s revenue to grow by 8.3%/4.0% in a result of the growth in beds.

Margin expansion as PBWA grows

• While some of Centurion Corp’s new PBSA assets have been seeded into its funds and contribute to earnings via share of associate/JV profits, income from Centurion Corp’s PBWA assets tend to be consolidated. Hence, the proportion of PBWA in the consolidated revenue and gross profit could gradually increase if Centurion Corp continues with this strategy, in our view. As PBWA tends to have a higher gross margin due to the advantages of scale vis-a-vis PBSA, as fixed overheads are spread over a larger base, we think that the larger proportion of PBWA could lead to an expansion in gross margins from 71.9% in FY18 to 72.2% in FY19F and 72.9% in FY20F.
• In addition, due to the high level of operating leverage on its distribution and administrative expenses, we expect this expansion in gross margins to flow down to an improvement in core PATMI margins from 25.6% in FY18 to 26.7% in FY19F and 28.0% in FY20F.

5.4% FY20F dividend yield to reward shareholders

• While Centurion Corp does not have a fixed dividend policy, in FY18, Centurion Corp declared a total dividend of 2.0 Scts comprising an interim and final dividend of 1.0 Sct each; this represented a c.55% payout ratio. For 1H19, Centurion Corp declared an interim dividend of 1.0 Sct which implies a c.50% payout ratio.
• Going forward, while there has been no specific guidance on dividend payouts, we think a 50% payout ratio continues to be a reasonable guideline for Centurion Corp as it strikes a balance between rewarding shareholders and retaining cash for future acquisitions/developments and to pare down debt. For FY20F, a c.50% payout ratio translates into a 2.4 Scts dividend per share, implying a 5.4% yield. See Centurion Corp Dividend History.

VALUATION & RECOMMENDATION

Initiate with ADD at S$0.61

• We initiate coverage on Centurion Corp with an ADD rating and a target price of S$0.61. We like Centurion Corp due to its proven track record of growing bed capacity at a 14.7% CAGR from 2012 to 2018 via developments and acquisitions; we think there are indications that this will continue due to the visible pipeline of new beds and additional acquisition capacity via its funds.
• Organically, its PBWA and PBSA rents are helped by being in under-supplied markets with tightening supply of PBWA in Singapore and Malaysia. Dividend yield forecast of 5.4% for FY20F is supported by strong positive operating cash flow generation.
• Our target price was derived based on the DCF valuation methodology assuming a blended terminal growth rate of 0.99%, risk-free rate of 1.92% and WACC of 4.86%. We included capex for the PBWA developments of Tampoi II and Juru assuming they were 50% debt-funded and the rest with internal cash balances. Our Target Price of S$0.61 implies 12.8x FY20F P/E and 0.9x FY20F P/BV.
• These multiples are between its average and 1SD above its historical mean since 2012, which was after the addition of the accommodation business from the reverse takeover. We think these levels are justified due to the visible growth profile in bed capacity, potential in Malaysia PBWA and possible expansion of asset-light strategies in PBSA. We continue to expect Centurion Corp to trade below its peers due to their larger market cap and trading liquidity.
• See Centurion Corp Share Price; Centurion Corp Target Price; Centurion Corp Analyst Reports; Centurion Corp Dividend History.
• We think key re-rating catalysts would be major acquisitions, especially in PBSA, as this could increase its AUM and make a future REIT spin-off more viable. Stronger project rollouts in the construction and oil & gas industries could also boost demand for PBWA beds if the non-domestic foreign worker workforce is expanded.
• Key risks include a significant slowdown in the aforementioned sectors leading to higher vacancies or lower bed rates.

See attached 38-page initiation coverage report for complete analysis on CENTURION CORPORATION (SGX:OU8).

Ervin SEOW CGS-CIMB Research | NGOH Yi Sin CGS-CIMB Research | Caleb PANG Huan Zhong CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-07

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