CIMB: "Centurion to experience some headwinds from the foreseeable increase in supply"
Analysts: Roy CHEN & William TNG, CFA
▊ Centurion was a first mover that capitalized on Singapore’s previous undersupply of quality worker dormitories and booming construction activities. However, these underlying factors that had led to Centurion’s previous success are likely to fade in future. Centurion has achieved remarkable growth in the last few years due to Singapore’s previous shortage of purpose-built worker dormitories and expanding foreign worker population. However, we expect these factors to be attenuated going forward. Centurion could be worth between S$0.49 (based on 1x CY15 P/BV) and S$0.67 (based on CY15 DCF).
@ Centurion-Lian Beng's Westlite Mandai Dormitory: Basketball, volleyball, sepak takraw, futsal and cricket batting courts for foreign workers. NextInsight file photo.
Near-term headwinds
We expect Centurion to experience some headwinds from the foreseeable increase in supply of bed space in the market and a potential slowdown in demand. Singapore will add c.100k beds for worker accommodation in the next two years (currently c.180k beds). Even with a reduction of 30k-40k beds from termination of some short-lease dormitories, net addition still represents a 30-40% increase in bed space. Moreover, demand could soften as the nation’s construction sector slows down and construction firms that are facing margin pressure could opt for cheaper accommodation solutions. Centurion may face stiffer competition from peers hungry to stem rising vacancies.
Singapore remains key
We expect continued profit contribution of 70%-80% from the Singapore dormitories. We deem Singapore as the best fit for Centurion’s core worker dormitory business due to higher bed rates and the nation’s heavy reliance on foreign workforce. We like the group’s diversifying ventures into Australia and UK student accommodation but believe the value creation of the arms-length transaction to be limited.
Pricing in falling occupancy
We estimate that the current share price has yet to price in potentially >5% fall in occupancies, despite having retreated 20% from its last high. We estimate that Centurion is worth S$0.67 (CY15-DCF WACC: 6.9%, terminal growth 2.0%) at 95% occupancy in Singapore. Our valuation will drop 7 Scts for every 5% drop in occupancy. Potential positive catalyst from spinning out the assets into a REIT looks limited, when 1) its asset base is relatively small; and 2) valuation at 1.4x P/BV makes it difficult to create value from a spin-off, when industrial REITs are trading at close to 1x P/BV. Centurion has some earning growth from new overseas assets, but with Singapore earnings (70%-80% of Group) at risk, we would prefer more palatable valuation of 1x CY15 P/BV to be attracted.
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