Social distancing measures, closed international borders and paused work projects were hallmarks of the pandemic that also dwindled foreign manpower numbers in Singapore. As Covid-19-related restrictions eased in 2022, the buzz returned to work sites as new workers arrived in the country, bringing the number of work permit holders to a record of 434,000 in May — 18% higher than pre-pandemic levels in 2019.
Designated dormitories were quickly filled by the influx of migrant workers, pushing rents upwards. While contractors now have to put up with these higher costs, dormitory operators like mainboard-listed Centurion Corp OU8 are having their turn in the sun from this imbalance of supply and demand. The company estimates that there were about 30,000 more work-permit holders who require approved dormitory beds than available beds as at May.
For 1HFY2023 ended June, Centurion reported earnings of $38.3 million, up 16% y-o-y. Revenue from Centurion’s purpose-built workers accommodation (PBWA) portfolio in Singapore and Malaysia increased by 9.5% y-o-y to $73.3 million. Revenue in Singapore from this segment alone was up 4.6% y-o-y to $63.8 million. Coupled with the recovery in its student accommodation segment, Centurion’s overall revenue in the same period was up 8% y-o-y to $97.9 million.
Discerning expansion
Centurion now runs five purpose-built workers’ dormitories and four quick-build dormitories (QBDs). Occupancy is almost full, reaching 98% in 1HFY2023. Hoping to build on this momentum, the company is actively looking for opportunities to grow its portfolio, says CEO Kong Chee Min during the company’s recent results briefing. Besides looking for new sites, Centurion will undertake asset enhancement initiatives (AEIs) and increase capacity.
For instance, Centurion has started developing a 1,650-bed facility at Ubi Avenue 3 with joint-venture partner Lian Beng Group. According to Kong, the eastern part of Singapore is suffering from a relatively higher shortage, given fewer PBWAs in the region, with most current accommodations converted from factories. The development, under a 30-year lease from JTC, is to be completed in 2025.
Centurion’s pipeline of new PBWA contracts and expanding bed capacities in Malaysia includes a 10-year management contract for Westlite Cemerlang, a 2,196-bed property in Johor set to commence operations in 4Q2023. Centurion intends to continue to enlarge its existing bed capacity in Johor, with another 1,060 beds by 3Q2023 and 2,720 beds by 2024.
Meanwhile, Kong notes that some QBD leases in Singapore have recently been renewed by the government to meet demand. During the pandemic, such QBDs were constructed as temporary facilities to create additional bed space for safe-distancing measures but are now used as short- to medium-term living arrangements for migrant workers.
Centurion’s four QBDs have a total of 7,256 beds, which accounts for 20.9% of the company’s total beds in the country. Should the land sites remain available when their leases expire between 2024 and 2025, Kong believes their contracts will be renewed by the government to help meet the demand for beds.
However, Kong emphasises that Centurion will be discerning in its future bids. “We are more focused in terms of being able to profit [from potential leases], rather than tendering just for the sake of it,” he reasons.
Rental hikes not yet reflected in 1HFY2023
Kong believes sustained pressure on bed supply will come with the added consideration of the need to improve workers’ welfare. In Singapore, MOM’s expanded Foreign Employee Dormitories Act came into effect on April 1, instituting improved standards on minimum living space and communal facilities such as toilets and cooking stoves.
Although these requirements apply only to newly built PBWAs for now, the Singapore government is likely to introduce a transitional plan later this year for existing dormitories to adhere to the new standards in phases. While Centurion’s properties will have to undergo some level of renovation during this period to meet these requirements, Kong shares that all apartments in Centurion’s Singapore PBWA portfolio have already been equipped with en suite toilets, showers and kitchens since 2011.
These standards are also applied to Centurion’s PBWA properties in Malaysia, which recently implemented new rules for minimum housing standards for workers. The inclusion of these pre-existing facilities in the company’s dormitories means that the company has more flexibility to reconfigure its existing dormitories to adhere to the new minimum standards and adjust bed rates to keep revenues consistent even with a reduced bed count.
This is part of what Kong explains to be Centurion’s objective of balancing shareholder interests and “protecting” its existing clientele from soaring rents by differentiating pricing between new and existing customers. “We could ask for $500 per worker and [employers would] have no choice but to pay as some other operators [have chosen] — but we don’t do that,” he says. “We hope to strike a balance between shareholder returns and the business we are conducting on a long-term basis.”
Already, in Singapore, MOM has observed a 50% increment in PBWA rates from pre-pandemic to a monthly figure of around $420 per worker in 1Q2023. Kong declines to provide Centurion’s exact rates but shares that the company’s rents have been “tracking” the figures shared by MOM, and that even though the company is one of the sector’s leading players, it is not the “price leader”. He does, however, expect customers to be “reasonable” in accepting rental increments in line with increasing market prices.
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The company is continuing to carefully manage its customer base to be “diversified and stable”, such that industry fluctuations will not affect revenue generation too significantly. It continues to be the case that no single client makes up more than 5% of Centurion’s PBWA revenue.
Kong adds that the company’s results for the latest half-year period have not fully reflected the strong rental reversions in Singapore that are being priced into new leases, given that Centurion only began raising its rates in October. He expects the full impact on its revenue to emerge within the next six to 18 months.
Clientele diversification
Centurion’s revenue will be further boosted by its assets outside of its PBWA and QBD portfolio in Singapore and Malaysia. Revenue from the company’s student accommodation portfolio increased by 7.7% y-o-y to $24.3 million in 1HFY2023. This was largely due to a strong occupancy rebound in its Australian PBSA properties, which benefited from the return of international students after Australia’s strict border controls eased last year.
Aside from Centurion’s 911 beds Down Under, it also operates 2,807 beds in the UK and 1,521 beds in the US. Its student accommodation portfolio in the UK and Australia is standing at financial occupancy rates of 90% and 86%, respectively. The company expects this momentum to continue, particularly as Beijing’s move to end the recognition of online degrees has seen a “notable growth” in Chinese student numbers abroad.
The company is actively taking note of student preferences in its offerings. Its Australian portfolio was reduced by nine beds in 1HFY2023 following a reconfiguration of selected twin-occupancy rooms into single-occupancy apartments, which Kong believes will see demand increase.
Following further AEIs in the segment, CGS-CIMB analysts Ong Khang Chuen and William Tng, who have an “add” call with a target price of 60 cents on the stock, expect Centurion’s PBSA’s financial occupancy to further recover to 94% and 85% in the UK and Australia for FY2024, respectively, compared to 90% and 80% last year. Rents could grow by another 10% to 15% in the upcoming academic year, they add.
“We expect growth ahead, driven by better capacity, occupancy, and rental rates, as we see scope for these matrices to improve going forward,” concurs RHB analyst Alfie Yeo. “Valuation is undemanding, with the stock currently trading at –1.5 SD [standard deviation] of its mean P/E,” says Yeo. He has upgraded his target price from 51 cents to 62 cents based on 7.5x blended forward FY2024 earnings, which is below Centurion’s seven-year historical mean.
Looking ahead, Kong expects demand-supply dynamics to still favour Centurion, despite higher costs of doing business all around. “We are mindful we are looking closely at the high and still-rising interest rates as well as inflationary pressures in the year ahead. But we are confident that the portfolio assets will continue to do well and will continue to practise prudent financial management,” he says.
Kong sees Centurion building on its stable performance, especially through its PBWA portfolio in Singapore. “The rental revisions are only now beginning to contain the full impact of the rising rental rates, so we will continue to look at enhancing our popular assets,” he adds.
