Centurion Corporation - UOB Kay Hian 2020-10-16: Strong Performance Amid COVID-19 Impact; Initiate Coverage With BUY

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CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corporation - Strong Performance Amid COVID-19 Impact; Initiate Coverage With BUY

• As one of the largest workers’ dormitory operators in Singapore, Centurion offers good earnings visibility with its resilient business model and favourable long-term supply-demand dynamics following the COVID-19 trough.
• Centurion Corp's share price currently trades at a trough of 0.47x 2020F P/B – providing for an opportune time to buy into the stock, given the increased likelihood of a vaccine discovery.
• Initiate coverage on Centurion with a BUY and target price of S$0.44 - implying 30.7% upside.

Centurion – Company Background

• Centurion Corporation (SGX:OU8) owns, develops and manages quality PBWA assets in Singapore and Malaysia, and PBSA assets in Singapore, Australia, the UK, the US and South Korea. Centurion has a strong portfolio of 33 operational assets totalling c.65,133 beds. It plans to sustain its growth momentum through successful asset enhancements, acquisitions and asset-light strategies.

Westlite – Workers Accommodation

• Centurion’s workers’ accommodations business in Singapore and Malaysia are managed under the “Westlite” brand. The group currently operates five PBWAs in Singapore, namely Westlite Toh Guan, Westlite Mandai, Westlite Woodlands, Westlite Papan and Westlite Juniper. In Malaysia, the group operates seven PBWAs, namely Westlite Bukit Minkyak, Westlite Senai II, Westlite Johor Technology Park, Westlite Tampoi, Westlite Senai, Westlite Pasir Gudang and Westlite Tebrau.
• Centurion is one of the largest providers of PBWAs in Singapore and Malaysia, with approximately 28,000 beds across four workers accommodation assets in Singapore and approximately 30,700 beds across seven workers accommodation assets in Malaysia.
• See PDF report attached below for images of Centurion's PBWA poftfolio highlights.

“dwell” – Student Accommodations

• Centurion operates a portfolio of 21 quality PBSAs in Australia, Singapore, South Korea, the UK and the US with a total capacity of 6,433 beds. With the exception of RMIT Village in Australia, all Centurion's student accommodation assets under the group are managed under the ‘dwell” brand. Renowned universities are located within close proximity to these student accommodation assets and the dwell brand has become a recognised name amongst student communities in urban centres.
• See PDF report attached below for images of Centurion's PBSA poftfolio highlights.

Centurion – Management Team

• CEO: Mr Kong Chee Min
• CFO: Ms Foo Ai Huey
• Chief Investment Officer – Accommodations Business: Mr Ho Lip Chin
• Executive Director and COO – Accommodations Business: Mr Teo Peng Kwang
• See appendix in PDF report attached below for experiences of Centurion's key personnel.

Centurion – Investment Highlights

Market leader with significant pricing power.

• Centurion’s strategy involves building up a resilient portfolio by diversifying into two niche and highly resilient business segments (workers’ and student accommodations) across many geographical regions. For both segments, Centurion has established itself as a dominant market player.
  • For the workers’ accommodations segment, Centurion has the biggest market share in Singapore and Malaysia according to Euromonitor, which we believe affords them substantial pricing power.
  • For the student accommodations segment, compared to similar competitors listed in Singapore, Centurion has the largest PBSA portfolio and global presence.
• Centurion has consistently grown its bed capacity in the two accommodations segments through both developments and acquisitions. This balanced portfolio mix has helped to strengthen the company’s overall earnings resiliency. Moreover, these two segments are historically undersupplied, which gives operators such as Centurion significant bargaining power over rental rates.
• For workers’ accommodations, the Ministry of Manpower in Singapore reported that the number of non-domestic foreign workers with work permits (excluding foreign domestic workers) was at 687,600 as of Jun 20; however, on congruent terms, the segment is short of 120,000-150,000 beds.
• For student accommodations, the countries where Centurion has a presence in have experienced chronic undersupply of available beds relative to growing student populations. According to Knight Frank’s Global Student Property Report in 2019, countries where Centurion has a strong PBSA presence remain structurally undersupplied.

Workers’ accommodation business brings in two-thirds of revenue and has strong track record throughout periods of difficulty.

• Since Centurion’s acquisition of the workers’ accommodation business in 2011, the segment’s occupancy rates in Singapore have always hovered above 84% even during periods of economic uncertainty. For example, during the 2015 O&G crisis when foreign worker numbers dipped, the group still observed healthy occupancy levels. Occupancy rates for its Singapore PBWA portfolio were at 99% in 2016, 98.4% in 2017, 96% in 2018 and 97.9% in 2019.
• Despite recent calls to reduce Singapore’s reliance on migrant workers, many trade and industry associations have reiterated that Singapore remains heavily dependent on these workers in many sectors such as construction and O&G. According to the Singapore Contractors Association, migrant workers in the construction industry outnumber Singapore workers by three to one. As such, we believe that Centurion will be able to navigate the current COVID-19-induced recession well.

Concentration risk minimised.

• Furthermore, Centurion has sought to further reduce concentration risk by diversifying its customer base across various industries. In 1H20, 48% of its customer base came from construction, 24% from O&G, 12% from manufacturing, 6% from marine, 5% from service and 4% from engineering segments.
• Centurion's ability to cater to multiple industries insulates the group from economic fluctuations or government policies affecting any one industry. Customers are mostly established multinational corporations looking to provide accommodation for their workers in reputable and well-run lodgings – in line with their corporate ethical standards.

Post-COVID-19 recession may lead to higher university enrolments and boost student accommodations demand for Centurion.

• Despite the recent occupancy rate dips for student accommodations across Centurion’s portfolio due to international travel restrictions and the adoption of blended online and on-campus programmes, an increase in domestic demand should partially offset this loss in the medium term.
• As many countries are currently struggling with COVID-induced recessions, for many domestic students, higher education may seem like a viable choice against the backdrop of dim employment prospects. In particular, domestic postgraduate numbers are expected to rise temporarily in countries where the group has a presence.
• For example, in the UK, the Office for Budget Responsibility has increased their forecasts for new UK-domiciled students by 35,000 for 2020, 36,000 for 2021 and 35,000 for 2022. According to Universities and Colleges Admissions Service’s (UCAS) statistics, approximately 460,000 UK-domiciled students were accepted into university courses last year, which means that this forecasted increase is significant at over 7% per year. This pattern is likely to benefit Centurion and offset some of the short-term disruptions caused by the pandemic.
• For Centurion’s US student accommodations portfolio, the segment looks poised to benefit from the historical imbalance of supply and demand which looks set to continue given the insufficient pipeline of new bed spaces. According to Knight Frank’s Global Student Property Report 2019, student enrolments in the US are expected to set new records from 2020 to 2026 with undergraduate numbers expected to increase by 13% over this period. This could exacerbate the issue of existing undersupply of student accommodations.
• Moreover, the student accommodations segment is expected to recover and eventually absorb pent-up demand - boding well for Centurion. Notwithstanding the merits of online teaching, face-to-face teaching is still preferred as students as it allows for a holistic varsity learning experience in a remote learning environment which cannot be replicated online.

Healthy liquidity and robust cash flow management.

• As at end-2H20, Centurion’s balance sheet remained healthy and the group had S$65.1m in cash. The group’s net gearing also remains healthy at 50% as at 30 Jun 20 and they have managed to reduce their leverage from 58% at end-17.
• Liquidity remains sufficient with total cash and unutilised committed credit facilities of S$167.2m. Its debt maturity profile is also well-staggered with average debt maturity of 7 years, which will minimise the strain on its capital structure while it grapples with the effects of COVID-19. In addition, in anticipation of possible debt delinquencies from tenants, Centurion has requested its bankers to provide additional working capital facilities and provide moratoria on repayments of principal. The banks have by and large, been supportive of these requests, which will provide Centurion with additional buffer should circumstances necessitate it.
• Given Centurion’s strong balance sheet, we also believe that they may be able to make use of its market leader position to buy assets owned by smaller firms undergoing financial distress. This will further strength its portfolio and market position.

Long-term catalysts abound for Centurion.

• The Singapore government has been piloting new specifications for migrant workers in purpose-built dormitories and will roll-out 60,000 new beds by end-20 and another 100,000 should be ready over an accelerated timeline in the next few years. Centurion’s market leading position provides opportunities for them to further expand their workers’ accommodations portfolio.
• Centurion has already managed to secure the tender to lease and manage four new dormitories and has enlarged their Singapore PBWA bed capacity by 22.9%. Given this first-mover advantage within the PBWA segment, they are likely to clinch more tenders in the coming years.

Centurion – Business & Earnings Outlook

• See PDF report attached below for details on Centurion's business & earnings outlook.

Centurion – Valuation & Recommendation

Initiate with BUY.

• We initiate coverage on Centurion with a BUY recommendation and a target price of S$0.44, implying 30.7% upside. Our target price is based on the discounted free cash flow (DCF) with the following assumptions. See PDF report attached below for DCF valuation details.

Potential impairments from PBSA portfolio unlikely to be material.

• Management guided that only a small number of PBSA properties have been affected by new infection waves, namely one property in Melbourne - Australia and a few in Manchester - UK. These properties account for less than 4% of Centurion’s total capacity by bed count, and the occupancy rate dips are also expected to be temporary.
• We should see a recovery as soon as local movement restrictions are relaxed. As such, we believe that potential impairments are unlikely to be significant.
• See Centurion Corp Share Price; Centurion Corp Target Price; Centurion Corp Analyst Reports; Centurion Corp Dividend History; Centurion Corp Announcements; Centurion Corp Latest News.

Current P/B of 0.48x at historical trough (-2SD).

• Centurion’s current P/B is 37% below its five-year average of 0.76x and is at all-time lows. In our view, Centurion’s shares are inexpensive and the current share price represents an attractive entry level given that its business model has remained resilient. This, coupled with the recent news of the group securing new management service contracts, will bring in additional rental income and improve its market position. Hence, we believe that the stock is undervalued.

Current P/E near -1SD to the five-year average.

• Centurion’s 2020F P/E of 8.5x is 13% below its five-year average of 9.8x. Compared to industry peers with an average current P/E of 25.2x, Centurion’s valuation is relatively undemanding.

Peer comparison.

• While Centurion’s ROE and yield are in-line with its industry peers’, we note that it trades at a hefty 52% discount to peers based on 2020F P/B and an even larger 66% discount based on 2020F PE. Even despite excluding the outlier, American Campus Commun ties, Centurion’s 2020F PE of 8.5x is at a 40% discount to the global median PE of 14.2x.

Nicola Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-19

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