UOB Kay Hian (UOBKH) has taken a liking for dormitory operator Centurion Corporation, due to its “resilient business model” for workers’ accommodation.
See also: Front-running in management of QBDs gives Centurion a thumbs up from CGS-CIMB
“Its business model provides good earnings visibility, with contracts typically being 12 months long and with rent payments collected in advance,” notes analyst Nicola Ho in an initiation report released on Oct 19.
“With 1-2 months’ of rental deposits collected in advance, risk of non-collection is therefore low,” she adds.
One of the largest dormitory operators in Singapore, Centurion offers some 28,000 beds across its five workers’ dormitories.
It operates another seven such facilities in Malaysia, with a total of 30,700 beds. When an eighth dormitory is completed in FY2021, another 9,800 beds will be added.
Ho notes that occupancy levels across these facilities have not fallen below 84% since 2011. She expects levels to remain healthy – particularly in Singapore – as sectors such as construction and oil and gas remain reliant on migrant workers and will be less affected by Covid-19 induced recession.
See also: Centurion Corp knocked down but not out by Covid-19 pandemic
Centurion is presently en route to increasing capacity by 60,000 beds in Singapore.
Presently, these facilities account for two-thirds of the mainboard-listed company's revenue, says Ho.
The rest of Centurion’s income comes from its purpose-built student accommodation (PBSA) facilities. It owns a portfolio of some 6,400 beds mainly in the UK, US, but also Australia, Singapore and South Korea.
So far, Ho notes that only a “small number” of PBSA properties such as one property in Melbourne, Australia and a few in Manchester in the UK, have been affected by a new wave of Covid-19 infections.
“These properties account for less than 4% of Centurion’s total capacity by bed count, and the occupancy dips are also expected to be temporary and should recover as soon as local movement restrictions are relaxed,” she notes, adding that potential impairments are unlikely to be significant.
Ho expects demand for PBSAs to increase, particularly in UK and Australia, due to high domestic demand in the medium term.
This will help bridge the shortfall in demand from international students who may not be able to travel to these institutions for in-person lessons due to the travel restrictions, she says.
To this end, she is initiating a “buy” call on the counter at a target price of 44 cents. This gives it a 30.7% upside from its 34 cent price on Oct 16.
“Our target price is based on the discounted free cash flow (DCF) (WACC 5.5%, terminal growth: 1.0%), implying 11.1x 2020F PE and 0.63x 2020F P/B. This factors in bed capacity growth and a gradual recovery in occupancies,” explains Ho.
As at 12.24pm, shares of Centurion Corp were flat at 33 cents.
