XMH, CENTURION: What analysts now say

VALUATION

 Maintain BUY but with a lower DCF-based target price of S$0.905.

 We lower our 2014-16 net profit forecasts by 2-5% as we factor in sluggish rental reversions due to the incoming bed supply to the market.

 Supply concerns over amplified. We note that 70,800 of the new beds (73% of total new beds) are temporary dormitories (on a 3+3 or 3+3+3 years’ lease); while 70% of Centurion’s local beds including Woodlands) are permanent dormitories with more than 20 years of lease remaining. With bulk of the supply being temporary dormitories, we believe the government can easily control the number of dormitories should there be an oversupply. We also note that the current leases for 30,000-40,000 temporary beds are expiring in the next few years, which could help ease the supply gut if the leases are not renewed.

 New supply not in direct competition to Centurion’s dormitories. Some 54,000 of the new beds supply (55.7% of total new beds) cater to foreign workers in the construction sector only, and are located in the northern part of Singapore. These dormitories are unlikely to be in direct competition to Centurion’s dormitories (Toh Guan, Mandai and Woodlands) which can house foreign workers from other industries such as the marine and manufacturing industries). In addition, some 38,800 of the new beds located in Tuas can house workers only from the marine, processing and manufacturing industries, in contrast to Centurion’s Tuas dormitory which houses only construction workers. Hence we believe the new supply is not in direct competition with Centurion’s existing dormitories, in terms of location.

 Tuas dormitory facing some pressures. While Centurion’s dormitories at Toh Guan and Mandai continue to enjoy near-full occupancies, its Tuas dormitory is starting to see demand weakening although current occupancy rates remain above 90%. However, we remain optimistic in the medium-term demand for Centurion’s Tuas dormitory (which can house only foreign construction workers). In Oct 12, Transport Minister Mr Lui Tuck Yew announced the plan to consolidate all container port activities at Tuas. The first sets of berths at Tuas are expected to be operational in 10 years’ time. With the port terminals moving into Tuas, we expect an increase in construction activity for the ports in Tuas, which may increase the number of foreign construction workers, and hence, the demand for quality accommodation in the area.

 Our view. While we see near-term headwinds from the increase in bed supply, as it reduces the bargaining power of dormitory suppliers, we think the recent sell-down (-6.5% in last 3 days) has been overdone. Centurion is currently trading at only 14.2x FY15F PE. Given Centurion’s business is still highly cash flow generative and recurring in nature, coupled with its diversification into the defensive student dormitories, we believe the group is still good in the long haul.

Watch CNA video above for glimpses of Centurion's Westlite dormitory in Mandai which is jointly owned by Centurion and Lian Beng Group.