DBS Research Group is maintaining its ‘hold’ call on dormitory operator Centurion Corp, at a revised target price of 39 cents.
This is down 3 cents from its previous 42 cent call and is believed to give the counter an 11% upside from its 35.5 cent price on August 12, explains analyst Ling Lee Keng.
“We revise FY20F earnings up by 29% mainly on lower interest expense and better-than-expected cost control leading to higher margins. FY20F Singapore purpose-built worker accommodation (PBWA) occupancies were also raised, which contributed to the uplift in earnings."
Her call comes despite Centurion’s “decent set of results for 1H2020, buoyed by a strong 1Q20 performance, lower interest expense and contributions from newly acquired properties last year such as Archer House”.
See: Centurion reels from Covid-19 as earnings dip 10% from costs to manage infection spread
Ling’s move stems from the uncertainty the company is facing from the recent regulatory developments on the standards of Singapore’s PBWAs.
“While tightened PBWA regulations are a concern, any changes may surprise to the upside,” Ling explains. “A few possibilities could include lengthened land lease periods in exchange for PBWA upgrades or even a requirement that only new PBWAs are required to comply with the changes”.
These rules are presently in pilot-phase and will be examined in the Quick Build Dormitories (QBD) which will boast more space per resident and the usage of single deck beds only.
Ling believes a reasonable outcome will be arrived at, but cautions a decreasing in dormitory operators’ operating margins due to the higher operating costs from the reduced bed capacity per dormitory.
Meanwhile, she warns that headwinds from a second wave of Covid-19 infections may affect Centurion’s purpose-built student accommodation (PBSA) segment.
For instance, the Greater Manchester area in the UK is experiencing a mini-outbreak, despite the stable infection-rate in the UK.
However, with the easing of movement restrictions there, UK universities are moving their online lectures to face-to-face teaching for tutorials in small groups. Barring a second wave of infections Ling says overall occupancy in UK PBSA’s can hit 70% in FY20F.
The same cannot be said for dormitories in Australia, with the state of Victoria having to go into lockdown for six weeks in early August following a second wave of infections.
All face-to-face activities have been paused at RMIT University – where Centurion’s dwell Village Melbourne City (former RMIT Village) is located. Ling has thus revised her forecast for PBSA occupancies in Australia downwards to 65%, from her previous 70% prediction.
Looking ahead, Ling sees bright spots in the 4,000 beds Centurion has secured to operate in three factory-converted dormitories. These contracts span across six months and have the option for a further six month extension.
Another opportunity is the option to participate in the building of over 10 PBWA to house 100,000 workers.
“While the operating model has not been confirmed (government building PBD vs operator building PBD), we believe Centurion will be deeply involved in these tenders especially after the company successfully clinched the management contracts,” says Ling.
Shares in Centurion closed flat at 35.5 cents on August 13.
