UOB Kay Hian sets higher target of $1.00 for CENTURION

Excerpts from analysts' reports

UOB KAY HIAN analyst: Loke Chunying
 

VALUATION  · Maintain BUY and with a higher target price of S$1.00   WHAT’S NEW  · Centurion announced the acquisition of four student dormitories (1,906 beds) in UK for £77m (S$164.5m). Strategically located near renowned institutions, all the dormitories are operating near full occupancy rates.  OUR VIEW  · We raised our FY14-16 profit forecasts by 3.8% to 14.1%. The UK dormitories are expected to contribute profit from 4Q14, as the acquisition will only be completed on 1 Sep 14.

 

 Competition for local workers’ dormitory assets heats up. We noted that in Oct 12, the tender for a 16,800-beds workers’ dormitory at Tuas (3+3 years lease), was awarded at a monthly rental of about S$1.2m (about S$800/bed/year).

However by Aug 13, a tender for a 9,000 beds workers’ dormitory at Admiralty, (3+3+3 years lease) was awarded at a monthly rental of about S$1.4m (about S$1,900/bed/year). 

 

While the lease term for the second tender is slightly longer, the significant jump in tender price is a cause for concern. 

The kopitiam at Westlite Mandai Dormitory -- 45% owned by Centurion and 55% owned by Lian Beng Group -- features several stalls offering Indian food. NextInsight file photo  Acquisition provides expansion… Despite the favourable operating dynamics of the workers’ dormitory market, stiff competition for dormitory assets has affected Centurion’s ability to expand its local portfolio aggressively while maintaining a reasonable return on investment. 

As such, we view the acquisition positively as it will immediately increase Centurion’s bed capacity by 5% to 40,362 beds. Following the acquisition, 2,362 beds (5.8% of portfolio) will be students’ dormitories beds, and the profit from student dormitories will form about 30% of our FY15F net profit. 
 

 …and diversifies portfolio to a defensive recurring income source. We like the students’ dormitories portfolio, as they provide a defensive profit base to Centurion’s already recurring income source.

While the current imbalance in supply/demand of the workers’ dormitories market is supporting strong occupancy and rental growth rates, gradual addition in supply and/or a downturn in Singapore’s economy may reduce the flow of foreign labour, which may affect future rental income. On the other hand, student dormitories are highly defensive in nature. 

Student enrollments are unlikely to be affected by business cycles and may even increase during recessions, as the workforce enroll to upgrade and increase their employability.