Centurion offers steady growth for investors
By Chan Chao Peh
While investors worry about the effects tapering can have on the market, there are the stocks of some companies that seem to remain impervious to what Ben Bernanke says. One such company is Centurion Corporation.
The surging construction demand in Singapore, underpinned by multi-year public sector housing and infrastructure projects, means the armies of foreign workers will not go away anytime soon, even though the government has urged the sector to improve its productivity. Meanwhile, the existing 740,000 foreign workers still need a place to stay.
Today, there are only some 160,000 beds available within so-called purpose-built workers' dormitories, which has helped driven monthly rental up by 30%, notes DBS Vickers analyst Tan Ai Teng in a Sept 19 report. Centurion, Singapore's only listed dormitory operator, now manages 18,000 such beds. The company is therefore in a good position to take advantage of this demand, notes Tan. He has initiated coverage on the company with a ?buy? call and target price of 77 cents. The company closed 0.5 cent higher to 59 cents on Friday, Sept 20.
Centurion, which earned $16 million on revenues of $65 million in FY12, is projected to grow its earnings to $35 million in the current FY13, on revenues of $64 million. Come FY15, earnings are likely to reach $39 million on revenue of $79 million, according to Tan. The growth will be boosted by not only rental increases, estimated at 5% per year, but also the additional capacity. 'Further acquisitions and higher than expected rent rates are potential upsides,' she writes.
Centurion, which was previously known as SM Summit Holdings, traces its history back to 1981 as a manufacturer of data storage products. SM Summit was listed on the SGX in 1995. After a reverse takeover by Westlite Dormitory in 2011 for $85 million, it was transformed into the Centurion of today. Since the RTO, the company has grown the number of dorm beds it has from 5,300 to around 30,000 beds today. There is an additional 25,000 beds planned in total.
Interestingly, Centurion has retained the former core business of making optical disks. However, management has stated it has no further investment plans for this business. Following a one-off $3.9 million write-off of related assets, Tan believes the company will quit the optical disk business by 2016.
Centurion now operates three dormitories in Singapore: Westlite Toh Guan, which has 4,836 beds, located on 60-year leasehold land with 45 years remaining the 8,600-bed Westlite Tuas, a temporary dormitory with 3.5 years remaining on its lease and Westlite Mandai, which is a 45%-owned joint venture with construction and property firm, Lian Beng. Ths dormitory, which has 4,750 beds, sits on a freehold site. By early next year, an additional 5,300 beds will be added to the capacity.
Centurion is not only operating within Singapore. Since 2011, the company has expanded across the Causeway, with 11,000 beds across four different dormitories, which are used to house manufacturing industry workers. 'The key advantage of Centurion's Malaysia dormitories is that they are able to house thousands of workers, which allows MNCs to consolidate all their foreign workers in one location, as opposed to housing them in separate smaller dormitories,' writes Tan. The company has plans to double this existing capacity to 23,000 by 2015 as existing developments are completed.
Tan believes that Centurion, given its recurring income nature, should be compared to other local landlords, namely, SingLand and UIC, both of which earns around 80% of their profit from rental income.
SingLand and UIC are now valued by investors at 13.1 times and 13.4 times FY14 earnings respectively, while Centurion, at a slightly higher 14.4 times. Tan says Centurion's slight premium is justifiable given the company's better potential for earnings growth. Seen from another metric, Centurion has a price/earnings to growth ratio (PEG) of 0.4 times, compared to 1.1 times for SingLand and same as UIC?s 0.4 times. Tan's target price of 77 cents implies a PEG of 0.52 times for FY14 putting Centurion in line with the average ratios of the other two landlord plays.