RHB Bank Singapore analyst Alfie Yeo is keeping his “buy” call on Centurion Corp as he remains positive on the counter after the Singapore government announced that it plans to upgrade the living conditions at dormitories by 2030.
On Oct 11, the Ministry of Manpower (MOM) said that it plans to transition around 1000 existing purpose-built and factory-converted dormitories approved or operational before Sept 18, 2021 to improved standards under the Dormitory Transition Scheme (DTS).
These changes require dormitories to enhance their occupancy to below 12 residents a room, with living space upgrades of more than 3.6 square metres (sqm) per resident, along with isolation spaces such as ensuite toilets, showers, and kitchen facilities.
With the changes, Centurion will have to reduce its current capacity of 14 to 16 beds per room to 12 beds per room.
However, the transition will only begin in 2027 and end by 2030 as the bed supply situation remains tight.
“We believe the overall impact on Centurion is neutral due to the longer-term nature of this development,” writes Yeo, adding that the immediate impact on the stock as well as his current earnings outlook and forecasts, is neutral.
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To the analyst, delaying the transition till 2027 will allow more new dormitories to come on-stream in the market and boost overall bed supply.
“There are at least seven new purpose-built dormitories with a total of 47,000 beds expected to be completed over the next five years before the existing bed supply marginally reduces due to the current development,” he notes.
Of Centurion’s nine dormitories in Singapore, five of its purpose build dormitories (PBDs) with a total capacity of 27,530 beds will be affected, while four of its quick build dormitories (QBDs) will remain unaffected. Excluding the Ubi Avenue 3 dormitory and QBDs, this amounts to an estimated 3% to 11% reduction in Centurion’s Singapore PBD capacity by 2030.
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“Centurion is well placed to comply with the new standards ahead of time,” says Yeo.
Furthermore, the analyst points out that Centurion has already planned to re-develop the Westlite Toh Guan and Mandai dormitories and can now conveniently incorporate the latest changes into its plans. “There may also be government grants to help defray the transition costs.”
“We continue to like Centurion for its leadership position in Singapore’s worker dormitory market, where supply remains tight. We make no changes to our forecasts for now,” writes Yeo.
Key drivers noted by the analyst include the expansion of purpose-built workers accommodation (PBWA) or purpose-built student accommodation (PBWA) assets, whilst key risks rest on the analyst’s earning forecasts, which are premised on better occupancies at the company’s PBSA assets and bed rates. Failure to achieve these revenue drivers poses downside risks to estimates.
In addition to his “buy” call, Yeo has kept his target price unchanged at 62 cents. His target price is pegged to 7.5x Centurion’s FY2024 P/E, which is below its seven-year historical mean. At its share price of 40 cents as at Yeo’s report on Oct 13, Centurion is trading at an attractive -1.5 standard deviation (s.d.) of its mean P/E with a 5% dividend yield.
As at 12.20pm, shares in Centurion Corp are trading one cent lower or 2.5% down at 39 cents.
