Foreign workers dormitory are the latest hot spots of local Covid-19 cases. Incidents spiked lately to reach 1050 on 21st Apr, constituting more than 90% of the daily reported case. 

Among the foreign worker dormitories affected are Westlite Toh Guan, Westlite Woodlands, and Westlite Mandai which have been gazetted as isolation areas. These assets are owned by Centurion Corp Ltd (SGX: OU8).

How will Centurion be impacted by the latest Covid-19 development? Let’s find out in this article.  

Business Overview 

Centurion is an owner and developer of purpose-built accommodation assets for workers and students. As of end-2019, it owns 33 assets with more than 65,000 beds. 

Centurion operates five and seven workers dormitories in Singapore and Malaysia respectively under its Westlite brand. Besides basic accommodation and meals, Centurion also seeks to enhance the workers’ well-being by organising recreational activities such as excursions and carnivals to encourage social interaction. 

Westlite Bukit Minyak | Penang Property Talk

Westlite Bukit Minyak, Penang. Source: Google.com

The group expanded into the student accommodation business in 2014. A portfolio of eleven assets providing a conducive environment for living and schooling are found near major tertiary institutions in the UK, Singapore, Australia, and South Korea. 

The group derives its revenue primarily from the workers accommodation that contributed 64.6% of the total revenue in the financial year 2019. Student accommodation’s 2019 revenue contribution stood at 34.3%. 

Latest Financials 

In FY2019, Centurion achieved a healthy revenue growth of 11% to $133.4 million. Net profit increased by a similar percentage to $43.6 million. 

Source: FY2019 Annual Report

The student accommodation segment had higher sales due to new assets acquired and asset enhancement projects in Australia and the UK. On the other hand, workers accommodation segment revenue increased by a modest 7%, due to better occupancy and new lease secured. 

The workers dormitory assets had an average occupancy rate of 95%, while student accommodation occupancy was 89%. 

Net cash from operating activities grew to $70 million, a healthy 23% increase. 

Historical Earnings

Centurion’s revenue has been rising year-after-year, except for 2018 when revenue dropped to $120 million. Over five years, revenue grew by 6.3% per year.  

Net profit from the core business of workers and students accommodation increased by a much slower rate of 1.6% per year. This is probably caused by the varied performance in its associate companies and joint venture and fluctuating level of expenses over the period. 

On the other hand, the net asset value per share shows a consistent rise of 7.1% yearly. Management is adept at growing the company equity, giving good returns on shareholders’ funds. 

Source: FY2019 Annual Report

Cash Flow Trend

Net operating cash flow increased at an annual rate of 6.5% per year. This is almost identical to the revenue growth rate. I would say that Centurion’s business is a cash flow machine, bolstered by the group’s ability to collect cash rentals from its clients promptly. 

Source: Shareinvestor.com

Balance Sheet Strength

As Centurion raise capital to fund its purchase of dormitories, it is important to monitor its balance sheet strength. The group’s gearing ratio decreased slightly from 54% to 51% in FY2019. 

Centurion’s debt repayment schedule is well-spread across the next five years to reduce strain on its capital structure. Only $56 million out of the total $738 million of borrowings are due for payment in this year. 

Source: FY2019 Annual Report

Workers Accommodation Affected by Covid-19 Outbreak

As mentioned above, Centurion has three out of its five local workers dormitories declared Covid-19 cluster, which has been declared isolation areas with little access in and out of the compound. 

In the short term, this could adversely impact the group as cleaning and maintenance are ramped up to contain the virus, leading to higher operational costs.

The outbreak has also brought to light the issue of living conditions for foreign workers, as reported widely in mainstream media. The government is likely to introduce more stringent hygiene requirements going forward, creating a more challenging business environment for Centurion. 

However, I do not think that the demand for workers dormitory will fall over the long term. Public sector civil engineering and construction works that require foreign workers’ labour input will continue well for the long term.  

Centurion can also seize this opportunity to further differentiate itself from the smaller firms by highlighting the superior quality of its assets. As the market leader, it can also flex its financial muscle to buy up other assets owned by smaller firms that collapse from this crisis. This could be a good chance to deepen Centurion’s market-leading position. 

Growth Opportunities in Student Accommodation

Purpose-built student accommodation is the new growth area for Centurion. It has a firm foothold in the US, the UK, and Australia which are the powerhouses of global tertiary education. International students from Asia and less-developed countries are likely to continue flocking to these countries for further studies. 

To further capture the growth opportunities, Centurion has established two private funds that invest in student accommodation assets primarily in the US. Such an operating model is in-line with the group’s asset-light strategy as it reduces borrowings and capital outlay. 

Weakness

Centurion’s business model involves buying assets and operate them efficiently to derive regular accommodation income. This requires constant access to loans as fund source for asset purchase, causing the balance sheet to be highly geared with a gearing ratio of more than 50%. 

While major property developers have diversified sources of capital, such as development and sales, or even REITs, Centurion does not have such luxury currently. Hence, the group needs to manage its loans and interest payment very carefully. 

Conclusion

With a share price of $0.39, Centurion is currently trading at a price-earnings ratio of 8.5 and a price-to-book value of 0.55. It also has a rather high yield of 5.1% based on the 2 cents dividend in FY2019. 

Overall, this set of valuation figures do seem cheap. However, investors who buy its shares based on cheap valuation should do so with both eyes opened, as the company is likely to cut dividends during challenging times. A good example would be SPH REIT’s recent quarterly earnings

Furthermore, its assets are mainly hostels and dormitories which are fundamentally different from retail or office properties. A large discount to book value may be the norm for this asset class and it may not be likely for the share price to close its valuation gap. 

Nevertheless, I have no doubts that Centurion will survive the Covid-19 crisis. The fundamentals of the purpose-built accommodation sector is still favourable. This could be an interesting turnaround stock. 

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