Revaluation gains lift Centurion's earnings; company continues to expand outside Singapore

On Feb 18, the government reaffirmed a cut in the dependency ratio cap in the services sector from the current 40% to 38% on Jan 1 next year and to 35% from Jan 1, 2021. This means companies need to either hire more locals or fewer foreigners. Companies in the F&B industry are those most affected by this cap.

The occupancy rate for Centurion’s dormitories in Singapore was 96% for FY2018 and is likely to remain “stable”. The services sector accounted for just 4.6% of the company’s revenue in FY2018; as such the tightening is unlikely to cause a significant drop in its occupancy rate, says CEO Kong Chee Ming, at the company’s results briefing on March 1. He explained that the company provides accommodation for workers from multiple sectors, such as construction, marine, oil and gas and petrochemicals, logistics, manufacturing and services.

For the year ended Dec 31, 2018, Centurion suffered a 12% drop in revenue to $120.1 million from $137.1 million in FY2017. The decline was caused primarily by the expiry of the lease on the Westlite Tuas workers’ dormitory in Singapore. However, the company more than doubled its earnings to $84.2 million in the same period. The increase of 124% over FY2017 was largely due to a $48.6 million valuation gain on its students’ accommodation business in the UK. Centurion sees a positive outlook for this market, as the portfolio continues to enjoy high occupancy rates and higher rental renewal rates. While there are broader economic uncertainties in the UK with Brexit, Centurion sees a “strong market appetite to deploy capital”.

The company, which is dual-listed on the Singapore and Hong Kong exchanges, was originally a maker of optical discs. In a 2011 reverse takeover deal, it changed its core business to the provision of accommodation for workers. However, the government’s policy reversal following the 2011 general election put a cap on the foreign worker population, dampening Centurion’s growth.

In the commentary on its FY2018 earnings, Centurion notes that while the government aims to lower the foreign worker population, there is a lack of supply of new accommodation. As such, the market is expected to “remain stable”.

Centurion has turned its attention to growing its workers’ accommodation in Malaysia. As at Dec 31, 2018, it operated 23,700 beds in six workers’ accommodation assets in Johor, and enjoyed an occupancy rate of 94% throughout the year.

Last month, the company opened its first accommodation in Penang at Bukit Minyak, where many firms have manufacturing operations. The inclusion of these 6,600 beds brings the total number of beds operated by Centurion in its seven properties in Malaysia to 30,300. The company is trying to acquire another site in Penang, on which it can build another 6,100 beds.

Centurion expects to enjoy growing demand for this business, owing to tighter requirements for employers to provide proper housing, as well as ethical compliance requirements from the Responsible Business Alliance.

Students’ accommodation

While the bulk of Centurion’s accommodation business comes from workers’ dormitories, the company has expanded into students’ accommodation too. Workers’ accommodation brought in $80.6 million and contributed 68% of revenue for FY2018, while student accommodation contributed $37.7 million, amounting to 31% of revenue.

Centurion’s investments in students’ accommodation began in 2014, when it bought a 456-bed property in RMIT Village in Melbourne. It subsequently acquired similar facilities in the UK, the US and other cities in Australia. It also acquired a facility in Selegie, Singapore, in 2015.

Most recently, it acquired three facilities for student accommodation — a 127 bed premium-built freehold asset in Manchester, a 133-bed freehold asset in Nottingham and a 208-bed asset in Seoul that is close to well-reputed universities and key attractions in Dongdaemun. To date, Centurion has 18 operating assets with a total capacity of 5,608 beds across the UK, the US, Australia and Singapore.

Kong notes that the population of international students in Australia increased by 11% to 690,468 in 2018 from the previous year. The number is seen to grow further to between 720,000 and 990,000 by 2025, underpinning demand for students’ housing.

While Kong does not expect a similar increase in the UK and the US, he says there is demand for accommodation from local students too, and not just international ones. The facilities run by Centurion have better security, compared with normal apartments near the campuses. “We remain on track to continue growing our specialised accommodation business globally, focusing on assets that generate stable, recurring income,” he says.

Asset-light strategy

The company is also tweaking its funding model. Instead of borrowing or using its own funds to acquire the properties — which soaks up a lot of capital — Centu-rion has adopted an asset-light model. The company now acts as a portfolio manager: It raises money from other investors by offering prospects of an annual yield of between 4% and 7%, puts in some of its own money and collects a fee as a manager while also enjoying the upside as an investor. “We have both organic portfolio growth and asset-light strategies in place,” says Kong.

The asset-light strategy has helped Centurion grow quickly into new markets. In 2017, it acquired six students’ accommodation assets in the US. Last December, it announced the first closing of its second student accommodation fund, with a total capital of $70 million committed. Of the $70 million, $60 million came from an unnamed educational institution.

As at Dec 31, 2018, Centurion operated a total of 55,408 beds for both workers and students across 28 properties. This portfolio is expected to grow to 62,656 beds across 31 properties by end-FY2019.

Despite the growth prospects, investors have yet to warm up to the company. Centurion shares traded on SGX closed at 41.5 cents on March 27, flat year to date. This is a 31.2% discount to its net asset value of 60.3 cents as at Dec 31, 2018. At this level, Centurion is trading at a historical price-to-earnings ratio (PER) of just 4.4 times.

Centurion shares listed in Hong Kong, which is considered a more liquid market with higher valuations, closed at HK$2.42 on March 27, up 4.76% year to date, implying a similar level of PER of 4.43 times.

The company plans to pay a final divi-dend of one cent for FY2018, bringing the total for the year to two cents — half a cent lower than the total payout in FY2017.

In a March 6 report, RHB analysts Lee Cai Ling and Jarick Seet maintain their “neutral” call and price target of 41 cents on the stock. While they take cognisance of the company’s growing portfolio, they believe Centurion needs time to extract higher returns from it. For example, for its first year in South Korea, the company might need to charge lower rates to entice occupants to take a chance on it as it is a new player.

Nevertheless, they are cheered by the company’s asset-light model, which helps grow its portfolio while maintaining its capital structure. “We believe the next leg of growth would come from the ability to increase the size of its student accommodation fund portfolio,” state Lee and Seet.

This story appears in The Edge Singapore (Issue 875, week of Apr 1) which is on sale now. Subscribe here