Centurion Corp - DBS Research 2021-03-01: Regulatory Clarity Needed

CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corp - Regulatory Clarity Needed

Centurion's FY20 earnings impacted by revaluations but core earnings higher by 8.5% y-o-y.
4 new Quick Build Dormitories (QBD) and 2 new Malaysia purpose-built student accommodations (PBSA) to mitigate possible decline in Singapore purpose-built workers accommodations (PBWA) occupancies.
UK and Australia PBSAs primed for possible 2H21 reopening.

Centurion (SGX:OU8) reported 2H20 revenue and net loss of S$61.8m (-10.7% y-o-y) and S$5.2m respectively. The lower revenue was largely due to COVID-19 restrictions implemented in the UK and Australia which affected international student travel.

Centurion's FY20 revenue and earnings attributable to equity holders came in at S$128.4m (-3.7% y-o-y) and S$17.2m (-82.8% y-o-y) The lower earnings were mostly attributed to a fair value loss of S$30.4m recorded on investment property versus a S$61.5m gain in FY19.
Despite the impact of COVID-19, Centurion's FY20 core net profit (including NCI) was up 8.5% y-o-y to S$47.3m, aided by government support and management contracts for factory converted dormitories
Centurion's net-debt equity improved to 1.07x (FY19: 1.12x) with interest coverage ratio rising to 3.0 (FY19: 2.6).

Occupancies in Singapore purpose-built workers accommodations (PBWA) declined to 93.9% in FY20 led by de-densification efforts in workers dormitories and a return of some migrant workers back to their hometown.
Malaysian PBWA occupancies was at 79.7% in FY20 as newly opened dormitories were still ramping up. FY19 occupancy of 93.2% excluded Westlite Bukit Minyak.
Occupancies at purpose-built student accommodations (PBSA) in both the UK and Australia tumbled to 69.7% and 54.0% respectively. Border closures disrupted student travel while local COVID-19 restrictions reduced the incentive for students to stay in campus.

The explosion in COVID-19 cases in Singapore workers dormitories in 2020 led to a review that paved the way for changes in dormitory regulations. The government has not firmed up these changes (e.g. size and capacity of dormitories) with pilot studies currently being conducted in Quick Build Dormitories (QBD). We believe more updates on these regulations will be provided from 2H21 given that QBD construction is only expected to complete in mid-2021.

Centurion may have to contend with lower occupancies at its Singapore PBWAs (79.1% as of 31 Dec 2020) due to de-densification efforts. This is the lowest occupancy level since at least 2014 and could prove challenging in 1H21 as the pandemic situation is not expected to improve soon.
Centurion will also be without government grants that was estimated to support core net profit to a tune of ~S$7.8m in FY20. In addition, foreign worker levy waivers provided by the government in 2020 have not been repeated in 2021 which could pressure foreign labour employers to slash their workforce.
That said, Centurion has secured leases for four QBDs to operate ~6,400 beds that we estimate could provide ~S$12m in additional revenue for FY21.

The outlook for PBWAs in Malaysia appears to be improving due to increasing enforcement of the Amendment to the Workers’ Minimum Standards of Housing and Amenities Act (WMSHAA). We think that the government believes PBWAs are an effective measure for quarantine and controlling the pandemic.
Malaysia has a large undocumented immigrant population in the millions and so a stronger enforcement of the act would be positive for dormitories.

Student accommodations (mostly in the UK and Australia) contributed ~35% of Centurion’s FY19 revenue.
In the UK, COVID-19 vaccination appears to be progressing well with England looking likely to lift restrictions in June 2021.
In Australia, vaccination efforts are expanding with new COVID-19 cases remaining low. Enrolments to Australian universities have declined but remained high at ~684,000 students (Jan – Nov 2020), down 9% y-o-y. It is noted that arrivals of international students remain weak (down over 99% y-o-y) as of December 2020 but the high enrolments point to strong student accommodation demand once restrictions are lifted.

We revise our Centurion's FY21F earnings forecast up slightly by 3% due to the additional contributions from 4 QBDs in Singapore, Westlite Tampoi II and PKNS Petaling Jaya. However, our target price for Centurion was revised slightly down due to a reduction in net cash balances (which affected our DCF model).
Notably, the QBDs are temporary in nature (lease of 3 +1 years) and we believe the change in dormitory standards will remain an overhang on the stock.
For FY21F, we are forecasting
- average Singapore PBWA occupancies (exclusive of the 4 QBDs) to dip to ~84%,
- Malaysia PBWA average occupancies (excluding the new PKNS Petaling Jaya and Westlite Tampoi II) are expected to rise to ~83% on stronger demand as a result of the stronger enforcement of WMSHAA,
- average PBSA occupancies for UK and Australia are also projected to improve to ~74% and ~67% respectively, driven by a pickup in occupancies in 2H21.
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 low valuation of Centurion is justified given regulatory headwinds and absence of dividends in FY20. No interim dividend expected from Centurion in 1H21 as business operations are not expected to improve.
Centurion is trading at 7.1x FY21F P/E, close to -1 standard deviation of its 4-year mean. Centurion's relatively high net-debt-to-equity of 1x is also a concern, especially if interest rates spike up.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2021-03-01

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