Centurion Corp - UOB Kay Hian 2022-08-18: 1H22 On Recovery Trajectory; 2H22 Likely To Be Similarly Strong

CENTURION CORPORATION LIMITED (SGX:OU8)

Centurion Corp - 1H22 On Recovery Trajectory; 2H22 Likely To Be Similarly Strong

Centurion continues on its post-COVID-19-peak recovery with strong revenue and profit growth. Its bottom line was helped by a fair value gain on its investment properties.
Going forward, we expect y-o-y growth in 2H22 as we forecast occupancy rates to continue expanding while rental reversions remain positive.

Centurion (SGX:OU8) reported robust 1H22 revenue of $91m (+40% y-o-y), while the nearly threefold increase in PATMI to S$33m was largely the result of a net fair value gain of S$9.5m on its investment properties. Centurion’s revenue and gross profit made up 55% and 57% of our full-year estimates respectively. Its gross profit margin of 67% in 1H22 was similar to that seen in 1H21.
The better-than-expected numbers were due to higher revenues in Singapore, UK and Australia, as well as higher capacity in its new purpose-built workers’ accommodation (PBWA).
An interim dividend of S$0.005 per share was declared for 1H22 (1H21: nil).

While Centurion’s net gearing only mildly improved from 47% at end-21 to 46% at end-1H22, Centurion’s free cash flow generation in 1H22 improved significantly to S$44m vs S$26.9m in 1H21. With the company seeing strong occupancy recovery in its Australian and Malaysian assets, helped by decent rental reversions for its Singapore and UK assets, Centurion’s free cash lfow generation should maintain its strength.

The customer base for Centurion”s purpose-built workers’ accommodation (PBWA) business has changed slightly from the year-ago period with higher contribution from the oil and gas segment as well as the commercial and engineering sectors. Centurion stated that its existing PBWA business has recovered to pre-COVID-19 levels and it does not believe that this would retrace.
Centurion has two new purpose-built dormitories planned in Singapore, but these will only be completed in three years’ time. Going forward, Centurion’s management stated that its Singapore PBWA business should see 2-5% y-o-y rental reversions.

The purpose-built students’ accommodation (PBSA) segment saw a robust recovery in occupancy in its UK portfolio for the current academic year (started Sep 21). Centurion’s acquisition of a 103-bed freehold student accommodation asset in Nottingham in the UK for S$18m in 1H22 thus proved timely, with the outlook remaining very solid given the Nottingham City Council’s estimation that there will be a shortfall of 5,000 PBSA beds by academic year 2024/25.
In addition, the Australian PBSA market should continue contributing strongly to Centurion’s bottom line on a y-o-y and sequential basis given that the country only relaxed its travel restrictions in 1H22.
At the analyst briefing, Centurion disclosed that it has witnessed a 3-5% y-o-y rental reversion for its PBSA business year-to-date, and this could be in the high-single digits for the upcoming academic year.

Centurion’s US assets are held under a fund structure where it owns a 28.7% stake, and given that the fund is coming to the end of its life soon, it is looking to sell the assets as a whole. At Centurion’s analyst briefing, it stated that it is currently in discussions with a bidder and should be able to announce a sale in the near term.
Going forward, Centurion plans to launch another fund as it now has a solid track record, and preliminary talks with some investors indicate that there is high demand for such products as these assets are seen to be anti-recession and inflation-proof.
See

Based on the better-than-expected revenue numbers, we have upgraded our 2022-24 earnings forecasts for Centurion by 5-26%, with the largest upgrade coming in 2022 (see details in report attached below). This is largely due to the fair value gain reported in 1H22 and we expect another smaller gain in 2H22 as the company’s UK and Australian PBSA assets should do better and could potentially see further fair value gains.
In addition, we have increased our assumptions for Centurion’s occupancy rate for both PBWA and PBSA by 2-3ppt, and also increased our rental assumptions by 2-5% given the strength we have seen in 1H22.
We also highlight that Executive Director and joint chairman, David Loh, has been steadily accumulating more shares of Centurion in 2022.
Continue to read the report attached below for details on derivation of Centurion's valuation.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-17

SGX Stock Analyst Report BUY MAINTAIN BUY 0.45 UP 0.430