Centurion Corp - DBS Research 2020-03-27: Rising Pressures

CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corp - Rising Pressures

COVID-19 drives Centurion Corp (SGX:OU8)'s FY20F/FY21F earnings cut by 16%/9%.
Recession and O&G turmoil may lead to dip in Singapore PBWA occupancies.
PBSA occupancies to decline on movement restrictions.
Cut to HOLD with Target Price of S$0.41; Centurion Corp offers resilient FY20F yield of 5.2% as global slowdown looms.

As a measure to deal with the COVID-19 outbreak, the UK has gone into lockdown and implemented restrictions on the movement of people.
Universities in the UK have been affected by these measures with many suspending face-to-face teaching and closing non-essential facilities. UK university residences, which includes Centurion Corp’s PBSAs, shall remain open during the lockdown.
We expect these measures to have an impact on Centurion Corp’s occupancies for the next academic year (Sep 2020 – Jun 2021).
For the current academic year (Sep 2019 – Jun 2020), we believe most rentals have been paid for and so will remain financially occupied even if they may not be physically occupied.
Centurion Corp’s concerns are now more operational in nature while securing occupants for the next academic year could also be challenging. As a result, we are pencilling in lower operating margins for FY20F driven by higher operating costs (from having to implement measures such as delivered catering) and lower occupancies in the second academic year.

Oil prices fell sharply as Saudi Arabia launched a price war and announced intentions to increase production. As of end-FY19, Centurion Corp’s PBWA assets derived c.27% of revenue from providing accommodation to workers in the O&G industry.
An extended price war may soften demand for these workers, resulting in lower PBWA occupancies. That said, Centurion Corp’s Singapore PBWA occupancies have historically been resilient, never dipping below 84%.
In light of this and the imminent recession, we are assuming slight declines in PBWA occupancies.

As of 26 Mar 2020, Malaysia has also gone into lockdown and has extended the period until 14 April. Currently, we do not see significant impact on Centurion Corp’s Malaysian PBWA occupancies as the lockdown is for a relatively short period as compared to the PBWA rental terms.
Singapore PBWAs could also see slight upside from Malaysians looking for a temporary residence after border restrictions came into effect between Malaysia and Singapore.

Australia has similarly implemented widespread restrictions, closing establishments such as cinemas and gyms.
Many universities including RMIT University and the University of South Australia (Centurion Corp’s PBSAs serve students from these universities) have also shifted classes online. As the semester for these universities began in early March before the restrictions were announced, we think Centurion Corp’s Australian PBSAs are mostly substantially occupied.
The challenge will be in securing occupants for the next semester beginning in July. We have assumed lower Australian PBSA occupancies for FY20F due to this challenge

Our DCF valuation was based on lowered FY20F average PBSA occupancies of c.78% for UK and c.70% for Australia. The relatively stronger PBSA performance in the UK reflects UK PBSA’s higher domestic student base as compared to Australia. Singapore and Malaysia PBWA occupancies were also lowered due to the O&G turmoil and weak manufacturing sentiment.
In addition, our WACC is raised to 5.9% from 5.6% to account for higher market volatility and risk premiums.
See Centurion Corp Share Price; Centurion Corp Target Price; Centurion Corp Analyst Reports; Centurion Corp Dividend History; Centurion Corp Announcements; Centurion Corp Latest News.
Given the above, we further acknowledge that the situation remains fluid and a worsening or extended COVID-19 outbreak could impact Centurion Corp.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-27

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.41 DOWN 0.530