Differentiated property player

Smartkarma recent hosted a webinar with Centurion Corp (CENT SP) management, where Angus Mackintosh discussed the company's future strategy and growth prospects. The company is Singapore and Malaysia's largest purpose-built worker accommodation (PBWA) provider with 17 operating assets across the two countries. This business has been supported by consistently high occupancy and stable bed rates, even during the pandemic. The PBWA business operates through the Westlite brand in both Singapore and Malaysia.

Housing Students in Style

It also has a thriving purpose-built student accommodation business in major global education hubs including Australia, the UK, and the US. This business has also seen high occupancy rates with stable demand from rising student numbers. The company has established an investment management entity to manage its US student accommodation assets for third-party investors. The student accommodation business globally operates under the Dwell brand name, with the majority of assets being company owned.

Singapore Is a Captive Market

Singapore requires significant numbers of migrant workers to support construction, shipbuilding, and other processing industries. This means increasing demand for purpose-built worker accommodation given that workers in the construction, shipbuilding, and processing sectors are required to to housed in such accommodation in Singapore and to satisfy the need for improved welfare for migrant workers.

Pressure for Better Standards of Accomodation

There is also increasing pressure on multinationals to provide good quality accommodation with international labour organisations and responsible business alliances also exert pressure. There is also increasing regulatory pressure to provide minimum standards of living for migrant workers, with new regulations being introduced for both Singapore and Malaysia.

PBWA Is a Secular Growth Story in Singapore

Strong demand for high-standard purpose-built, professionally managed dormitory-type accommodation means that the segment continues to face undersupply. Foreign workers in the construction, marine shipyard, and process space have continued to increase in number of work permits in Singapore, increasing +6.2% YoY in 2023 to 441,000 work permits..The building and construction authority is expected to award US$32bn - US$38bn in new contracts in 2024 versus an estimated US$33,.8bn in 2023, underpinning demand for workers.

The Ministry of Manpower Issued More Work Permits in 2023

Regulations in Place for Minimum Living Standards

All dormitories are subject to a set of requirements set by various government agencies, covering areas such as building and fire safety, and minimum living and hygiene standards. The Foreign Employees Dormitories Act (FEDA) came into force in 2016 and imposes additional requirements on dorms in areas such as public health and safety, security and public order, and provision of social and commercial facilities and services.

New Regulations Cover All PBWA

It initially applied only to larger dormitories that accommodate 1,000 or more workers but was extended to cover all worker dormitories from 1st April 2023. Overnight it will cover 1,600 dorms compared with just the 53 PBDs previously, giving the MOM more levers to act against errant operators. The government has introduced quick-build dormitories (QBD) to alleviate supply issues before these can be replaced by more permanent structures. These account for over 25,000 beds currently

Govrnment Looking to the Private Sector

For instance, each QBD room is capped at 10 residents and has en-suite toilets to reduce inter-mixing and minimise transmission risks from shared facilities. QBDs today account for more than 25,000 bed spaces. The Singapore Government is expected to increasingly look to the private sector to build out new purpose-built worker accommodations, which should benefit players such as Centurion Corp (CENT SP).

Malaysia Has Huge Potential

Malaysia has an estimated total of more than three million migrant workers but only around two registered migrant workers. A large portion of around 400,000 is working in the construction sector, which continues to exhibit strong growth but manufacturing employs more than 800,000 migrant workers, with the balance coming from a range of other industries inclusing plantations.

Tightening Regulations in Malaysia

Migrants in Malaysia mostly originate from Indonesia, Bangladesh, Myanmar, Nepal, and other Asian countries in smaller numbers including India, Cambodia, and Lao PDR. Malaysia has also enacted Act 446 to cover foreign workers' accommodation standards in the country covering all sectors after initially covering only the plantation sector in the country. It is the equivalent of FEDA in Singapore but applies to all domestic workers.

Corporate More Wellfate Focused for Migrant Workers

Companies are increasingly focused on the welfare of workers, which suggests a significant upside to purpose-built accommodation in Malaysia. The majority of such existing assets are currently concentrated in Selangor, Johor, Penang, and Pahang, where there are large industrial parks and manufacturing facilities.

PBSA Demand Is Rising Fatser Than Student Numbers

Number of students attending universities and colleges globally continues to increase, so does the demand for high-quality student accommodation. Students have traditionally turned to university halls, the private rented market or student digs to live while studying but in recent years a new trend has emerged for purpose-built student accommodation (PBSA).

Giving Students Peace of Mind

PBSA is designed and built with students in mind, with facilities and amenities that cater to their needs. PBWA are typically located close to universities and colleges, making them convenient for students. Given the rapid increase in international student numbers in education centres such as the UK, Australia, and the US. there has also been an increase in purposebuilt student accommodation.

Building Communities

These developments provide a more holistic community experience with access to pastoral care and other facilities as part of the overall rental cost, without being isolated in a normal rental property when moving to a foreign country. The accommodation allows students from multiple cultures to mix in a safe and secure environment with a wide range of sporting and otherwise facilities.

Low Rates of Penetration

According to CBRE, in the UK there is one bed for every two to three students but in Australia there is only one purp[ose built bed for every 16 students, suggesting that the Australian market can quadruple to broadly match the UK number. Median rents for student accommodation studios in Australia grew at a 5.5% CAGR 5.5% from A$406 per week to A$530 per week over 2018-2023 across Brisbane, Melbourne and Sydney markets, which reflects the tight supply.

There is still room for significant upside to PBSA in major academic destinations

UK Has Been a Focal Point Investors in PBSA

In the past few years in the UK, there has been increasing demand for PBSA, driven by the increase in students in the country, whether UK nationals or from overseas, with the market growing by about 3% - 4% per year and with increasing demand for studio type accommodation. PBSA has seen strong levels of investment in recent years, as it has moved from an alternative asset to a growth area of investment for many institutional funds.PBSA is seen by investors as being aligned with the highly stable higher education sector and the growing student populations. The market is underpinned by the structural undersupply of accommodation which is not keeping pace with the growth in student numbers.

Centurion Corp is a leading light in purpose built accomodation

Centurion Corp (CENT SP) is a significant player in both the PBWA and PBSA segments with a total of 67,377 operational beds across 34 operational properties globally in Singapore and Malaysia for PBWA and Australia, the U.K. and the US for PBSA, bringing total assets under management to US$2bn.

Westlite a leading brand

Centurion Corp (CENT SP) has established a leading position and a wellrecognised brand in PBWA under the Westlite brand. It has been professionally managing workers' accommodation for MNCs and corporates since 2011. Westlite has a long track record and experience in dealing with the regulatory environment for PBWA, addressing issues such as security, hygiene, and community integration, as well as complying with corporate requirements for workers' accommodation. It helps to maintain the physical and mental health of residents, helping to improve well-being and productivity. It has a well-diversified customer base of 1,710 customers across Singapore and Malaysia.

Centurion Corp (CENT SP) has a well-diversified customer base

Occupancies High and Rents Up

In Singapore, the company saw stable finacial occupancy along with healthy rental reversions in FY2023, with the average finacial occupancy for its nine Singapore PBWAs at 98% for FY2023 versus 97% in FY2022. Given that tenant leases are 1-year on average, the company should continue to see healthy rental; reversions going into FY2024. This will be supported by the ongoing increases in work permits in the construction, marine, and process (CMP) sectors as employer bring in more workers to drive projects forward.

Strong Pipeline of Future Projects

The company has an active pipeline of new projects to drive portfolio growth in 2024 and beyond. This currently consists of extensions to quick-build dorms including Westlite Kraji Way and Tuas Avenue 2 for one year in mid-2023. Westlite Ubi will be completed in December 2024, adding 1,650 beds. The redevelopment of Westlite Toh Garden will add 1,764 beds in 2026 and Westlite Mandai redevelopment scheduled to be completed in 2026 will add 3,396 beds but the latter is still pending permission.

Malaysia Ramping Up Occupancy Rates

The demand for good quality PBWA in Malaysia has also heightened, enabling healthy rential reversions there as well with the financial occupancy across Centurion's eight PBWAs there at 93% for FY2023 versus 80% in FY2022. The growth has been partly driven by tightening regulations with Act 446, with growing concerns around the need for improved migrant worker welfare.

Making Enhancements to Well-located Assets

The group's assets are located around Johor, Penang, and Selangor which are the top three states for manufacturing activity in Malaysia and the manufacturing sector makes up around 35% of Malaysia circa 2 million migrant workers. Centurion Corp (CENT SP) continued to grow its PBWA portfolio in Malaysia through AEIs, with two ongoing at Westlite Johor Tech Park and Westlite Senai 2, which will add 1,740 beds and 920 beds respectively in 4Q2024. Additional enhancements at Pasir Gudnag will add circa 950 beds expected to be completed in 1Q2025.The company is also evaluating the development of a new PBWA in Nusajaya, Johor with a planned 7,000 beds.

Leading Footprint in Singapoe and Malaysia

The company managed a total of 62,159 beds as of the end of FY2023 across 17 PBWA assets in Singapore and Malaysia. Nine of those assets are fully owned and managed, with two assets owned through joint ventures and managed by the group. these include 45%-owned Westlite Mandai and 51%- owned Westlite Papan. It also has six assets that are master-leased, including four quick-build dorms in Singapore on a 3+1 years master lease from JTC, one asset in Singapore on a 10+5 master lease, and one asset in Selangor Malaysia on a 21+9 master lease from PKNS.

Going Asset Light Where It Makes Sense

Centurion Corp has started to recycle and redeploy capital through sale & leaseback transactions. It has already entered into a sale and leaseback agreement with KWAP for Westlite Bukit Minyak and Westlite Tampol. On completion of the purchase agreements, the company will lease back and operate the two properties for a period of 15 years.

Growing and Enhancing Its Portfolio

The company continues to grow its portfolio and enhance existing assets. In January 2023, it was awarded a JTC land tender in Singapore to develop and operate a purpose-built dorm with 1,650 beds on a 30-year lease, to be completed in December 2024 (. In March 2024, it saw JTC approve uplifts to Westlite Tuas Avenue 2 and Westlite Jalan Tukang quick-build dorms which adds 888 beds.

Adding to Malaysia

In Malaysia, in March 2023 it added 290 beds to Westlte Tampol after JTKSM certification, while in November 2023, an asset enhancement initiative was completed at Westlite Senai, adding 770 beds. In December 2023, it entered into the sales & leaseback agreement with KWAP, as previously mentioned.

Well Placed Student Accomodation

For its PBSA, Centurion Corp (CENT SP) has a total of 17 student accommodation assets for 5,218 beds all across Australia, the UK, and the US. 11 of these assets are fully owned and managed, with six properties owned through private funds owned but managed by the group. the include five assets in the US which are 28.74% owned and one asset in Nottingham in the UK, which is 14.29%-owned.

Good Relationships With Universities and Students

The company has close relationships with the universities it serves as well as student agent partners and a diversified customer base of domestic and international students from a wide array of countries inclusing China, Southeast Asia, Europe, and the Americas. The company continues to enhance its existing student accommodation assets, which include some conversion of cluster apartments to en-suite apartments. The group's skill lies in managing shared accommodation, which also yields better returns than single occupancy.

Growth Enhanced by Higher Rentals

Looking at Centurion Corp (CENT SP) performance for FY2023, the company booked +15% YoY growth in total revenue to S$207.3m versus S$180.5m in FY2022. This was driven by strong occupancies and improved rental rates across both PBWA and PBSA assets. This was offset by the cessation of two onboard centres in Singapore.

Improving Profitability

Profitability improved in FY2023, given higher revenues with higher occupancies and positive rental reversions in FY2023, with PBWA leading the charge. The headline number was largely driven by a revaluation gain from investment properties but stripping this out, the company booked a corte net profit of S$78.3m, or a +20% increase YoY versus a core net profit in FY2022 of S$63.5m.

Centurion Corp (CENT SP) booked a strong core performance in 2023

Stronger Growth for Worker Accomodation

In terms of 2H2023 performance by segment Centurion Corp (CENT SP) booked +23% YoY revenue growth and +32% growth in segment profit for PBWA as the segment margin increased +5 ppt to 63% in 2H2023. For PBSA, the company booked +18% YoY growth in revenues and segment profit as 2H2023 margins remained steady for the segment.

Centurion Corp saw strong profit growth from PBWA due to strong rental reversions

Occupancies Higher for PBSA

For the company's PBSA, the company saw occupancy rates remain robust at 93% for 2023 versus 90% in FY2022 but if excluding beds unavailable due to AEIs the financial occupancy was 98% in FY2023. Management continues to see a continued shortage of PBSA-enabled strong rental reversion rates in FY2023. This cushioned the impact of higher operating costs and increased finance expenses.

Increasing Numbers of Students in UK

Management underlined that demand for higher education and PBWA continues to grow in the UK with higher education providers exceeding targets under 2023 commitments. The UK government's recent scrutiny of visa integrity has resulted in a more genuine and committed student tenant base, which will benefit PBSA providers.

Australia Playing Catch Up

In Australia, the company saw strong performance with with average occupancies surging in 2023 to 88% versus 73% in FY2022. This meant that rental reversion rates have been positive reflecting continued bed shortages. Occupancies are expected to remain at healthy levels reflecting the strong demand. Pending development approval, the company plans to redevelop an existing car park at Dwell Village Melbourne City to add 600 new beds.

Potential Sales in the US

In the US, the Centurion Student Accommodation Fund will come to a conclusion in November 2024, with the fund currently evaluating the potential divestment of assets. The portfolio of assets has had healthy occupancy for the 2023/2024 period with pre-leasing taking place for the 2024/2025 period.

Centurion Corp's asset mix is skewed towards workers' accommodation  

Front and Centre of a Secular Growth Story

Centurion Corp (CENT SP) sits front and centre of the highly regulated PBWA space in Singapore and Malaysia, with a long track record of managing those types of assets. The company has a strong pipeline of new beds with 6,400 expected to be added by 2026. The company will also explore further sales & leaseback type arrangements after the successes of 2023. The demand supply dynamics for PBWA for the next two years would help to sup[port further rental reversions.

Risks Are More Than Offset Demand Supply Imbalance

There are risked with inflationary pressure and higher rates but the company has very little debt and rental reversions will more than offset any cost pressures. There may be some moderation of rental reversion growth rates but reversions will continue to be positive. The prospects for the company for the next two years look positive and not fully reflected in analyst forecast.

Management also indicated that it was actively looking at strategic acquisitions in existing an new markets, which could provide an additional catalyst. The company trades at a 56% discount to its NAV of 0.983 per share and on a forward PER of 4.8x, with estimated EPS growth of +9.3% YoY and a forecast dividend yield of 4.6%, both of which look conservative.