Analysts from UOB Kay Hian Research and CGS-CIMB Research have maintained their “buy” and “add” ratings on Centurion Corporation
OU8 with increased target prices of 50 cents and 60 cents, up from 43 cents and 58 cents, respectively.
In his report dated Aug 15, Adrian Loh of UOB Kay Hian says that Centurion’s strong 1HFY2023 ended June 30 revenue and patmi of $98 million and $38 million, up 8% and 16% y-o-y, came in line with expectations.
One of the largest providers of purpose-built workers' accommodation (PBWA) in Singapore and Malaysia, the company saw a 4.6 percentage point expansion in gross profit margin to nearly 72%, due to strong occupancies and positive rental revisions across all of its asset classes, which also includes purpose-built student accommodation (PBSA) in Australia, the UK and the US.
Revenue and patmi for the period formed 52% and 59%, respectively, of Loh’s full-year estimates, and an interim dividend of 1 cent per share was declared compared to 0.5 cents in 1HFY2022, implying 2.3% yield.
The analyst says this robust performance was driven by strong occupancies and positive rental revisions across both of Centurion’s PBWA and PBSA segments which were able to cushion the impact of higher interest rates. Both segments performed well in 1HFY2023 with profit growths of 21% and 17% y-o-y, respectively.
Occupancy rates for PBWA in Singapore and Malaysia were strong at 98% and 94% respectively, while PBSA also had a significant occupancy increase, with Australia in particular witnessing a marked improvement to 86% in 1HFY2023 from 58% the year before, when Covid-related travel restrictions were not yet fully lifted.
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The lifting of Covid-related restrictions has also created an increase in the migrant worker population to address deferred projects during the pandemic. This has resulted in supply and demand imbalances which have driven high occupancy rates for PBWAs of 98% in Singapore and 94% in Malaysia, up from 70% in 2021, adds Loh.
He notes that the positive rental rate reversions that began in 4QFY2022 will continue to be priced into new leases expiring over the next few quarters.
Meanwhile, Singapore’s Ministry of Manpower reported 434,000 foreign workers in Singapore as of May, which is in excess of the supply of 401,000 beds. “As a result, Cent believes that it may take until 2025 for new PBWAs to cater to demand, assuming that demand remains static. Channel checks with dormitory users indicate that they are prepared for 8% to 10% rental reversions in the near to medium term,” the analyst says.
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Loh adds: “The better-than-expected numbers were driven by better metrics across Singapore, Malaysia and Australia, and more importantly, were able to demonstrate Centurion’s ability to increase rentals to cushion the impact of higher finance expenses.”
Meanwhile, there is a healthy pipeline of new PBWA contracts and expanding bed capacities, such as a 10-year management contract for Westlite Cemerlang in Johor, Malaysia with a 2,196-bed PBWA to commence operations in 4Q23. Centurion also intends to continue to enlarge its portfolio bed capacity in Johor, with another 1,060 beds by 3Q23 and 2,720 beds by 2024.
In Singapore, Centurion was also awarded a JTC tender to develop and operate a new Purpose Built Dormitory starting from 2025. “The company appears to have high expectations for occupancy rates due to a shortage of quality bed supply in East Singapore,” says Loh. “Going forward, we expect Centurion to continue to see strong volume and rental growth with a strong pipeline of new contracts and robust demand.”
The UOB Kay Hian analyst’s target price-to-earnings ratio (P/E) has been upgraded to 6.1x, which is 1.5 standard deviations (s.d.) above the company’s average P/E multiple since 2020, and has been applied to his FY2024 earnings per share (EPS) estimate. As such, he has raised his target price to 60 cents. “In our view, our prior target P/E multiple of 5.8x, or 1s.d. above Centurion’s mean P/E, is an inadequate reflection of the company’s ability to continue to deliver earnings growth out to 2025.”
“In addition, we believe that the company’s current metrics are inexpensive, trading at FY2023 P/E of 5.3x and 0.5x price-to-book value (P/Bv). Year-to-date, Centurion’s share price has easily outperformed the STI’s -0.1% return and we expect continued outperformance in the next 12 months,” Loh adds.
Meanwhile, Ong Khang Chuen and William Tng of CGS-CIMB are also positive on Centurion’s results. They have raised their FY2023 to FY2025 EPS by 3.3% to 6.4% on higher rental rate assumptions, which has lifted their blended target price to 60 cents.
Similar to UOB Kay Hian’s Loh, they believe Centurion’s valuation is undemanding at 5.1x FY2024F P/E, or a 53% discount to its revalued net asset value (RNAV).
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Emphasising further rental growth that will arise from the tight PBWA supply in Singapore, Ong and Tng note that Centurion is actively bidding for new leases in the country across dormitory types, such as quick build dormitory (QBD) purpose-built dorms and healthcare worker hostels.
Post-asset enhancement initiatives (AEIs in the PBSA segment, they expect Centurion’s PBSA’s financial occupancy to further recover to 94% and 85% in the UK and Australia for FY2024, compared to 90% and 80% last year. Rents could grow by another 10% to 15% in the upcoming academic year, they add.
The CGS-CIMB analysts re-rating catalysts include the gradual resumption of Centurion’s dividend payout ratio (DPR) to pre-pandemic levels of 40% to 50% and the successful execution of its capital recycling strategy. Meanwhile, downside risks include a higher-than-expected increase in financing costs, and a slowdown in the construction and oil and gas sectors, which would impact worker requirements.
As at 11.57am, shares in Centurion were trading 1 cent or 2.35% up at 43.5 cents.
