• Centurion Corp's FY19 core earnings up 11.6% on lower tax expense, higher revenue and PBSA margin.
• Portfolio occupancy higher; Singapore PBWA occupancy inched up to 97.9% in FY19.
• Gearing fell to 5-year low of 1.17x.
• Maintain BUY, Target Price lifted to S$0.53 as we raise FY20F earnings by 21%.

Strong Occupancies to Continue Even Amid COVID-19 Outbreak

• The occupancy rate at Centurion Corp (SGX:OU8)’s purpose-built workers accommodation (PBWA) headed higher to 97.9% in FY19 from 96.0% in FY18. Historically, occupancy at the group’s Singapore PBWA segment has never fallen below 84%.
• Despite the current COVID-19 situation, we still see Centurion Corp maintaining the current high occupancies across its Singapore PBWA assets and growing PBWA operating profit by 4.8% y-o-y.

Centurion’s FY19 Results Beat Expectations

• Centurion Corp's FY19 revenue rose 11.1% y-o-y to S$133.4m as newly developed and acquired assets commenced operations during the year.
• Core net profit grew 11.6% y-o-y to S$38.2m led by growth in revenue, lower tax expense and PBSA margin improvement but offset slightly by fair value losses on US investment properties. Notably, tax expenses fell by S$5.0 or 42% y-o-y to S$7.2m.
• Centurion Corp announced a final dividend of 1 Sct, bringing FY19 DPS to 2 Scts, which is within expectations.

PBWA on Steady Ground

• PBWA FY19 revenue and operating profit grew by 6.8% and 4.6% y-o-y to S$86.1m and S$52.2m, respectively, buoyed by higher Singapore PBWA occupancies (FY19: 98%, FY18: 96%) and commencement of operations at Westlite Juniper in 3Q19.

PBSA Propels Forward

• FY19 revenue and operating profit for PBSA leapt 21.4% and 39.4% y-o-y to S$45.8m and S$19.0m respectively. Notably, PBSA operating margins also improved from 36.2% in FY18 to 41.6% in FY19.
• The jump was due to a recovery in occupancies at RMIT Village (FY19: 87.5%, FY18: 84.0%) post AEI that added 160 beds, positive rental growth rates, and the commencement of operations of dwell East End Adelaide which contributed for almost a full year.

S$27.0m Archer House Acquisition

• Centurion Corp announced the acquisition of Archer House in Dec-19. The UK PBSA was acquired for S$27.0m and is located near the University of Nottingham and Nottingham Trent University. Completed in Sep-18, Archer House currently enjoys full occupancy for the academic year 2019/20.
• We estimate that the property will contribute recurring earnings of S$1.0m per year with room for further upside. This is due to full occupancy achieved currently through rental discounts and shortened tenancy periods (the property was completed at a time when the academic year had already started).

Singapore Construction Stable

• Singapore construction demand for 2019 grew 9.8% y-o-y to S$33.5bn. For 2020, the Building and Construction Authority (BCA) expects construction demand to range between S$28bn – S$33bn. We note that BCA had forecast demand for 2019 to range between S$27bn – S$32bn, and the 2020 numbers represent an improvement from 2019.
• Still, the COVID-19 situation has led to labour shortages that may disrupt construction activity. Given the labour shortage, we expect demand for Singapore PBWA to be maintained and healthy occupancies sustained.

Foreign Worker Regulations Unchanged

• In the recent Budget 2020, the Singapore government indicated that foreign worker levies will remain unchanged. Foreign worker levy increases for the Marine Shipyard and Process sectors will hence be deferred for another year. Indeed, while the government’s stance of weaning off foreign workers to drive productivity gains remains unchanged, we believe that this is positive for Centurion Corp in the short term and should help sustain PBWA demand for the year.

COVID-19 to Have Slight Impact on Earnings

• We estimate that 30% and 15% of students in Centurion Corp’s Australian and UK PBSAs respectively may be from China. Australia has currently put in place travel restrictions on arrivals from China. That said, the government has recently relaxed the travel ban on high school students from China driving us to think that a window of opportunity may arise in future when travel restrictions on university students from China are relaxed.
• Still, Centurion Corp is actively marketing PBSA beds to university students outside of China including domestic students to make up the shortfall. In the UK, Centurion Corp is beginning its marketing efforts to secure new occupants. While the uncertain COVID-19 outbreak could lead to lower demand from Chinese students, we see a possibility that applicants from other nationalities could mitigate the decline.

Brexit Conclusion Paves Way for Certainty

• The United Kingdom is currently in a transition period that will end on 31 Dec 2020. During this period, treatment of EU students in the UK will remain the same and vice versa (EU students will continue to enjoy lower tuition fees). As such, PBSAs in the UK should continue to see good demand from EU students up to academic year 2021/22.
• The transition period will be used for negotiations relationship between the UK and EU that will also include the treatment of EU students in the UK.

FY20F Core Earnings Raised by 21% to Account for Lower Taxes

• Tax expenses fell 42% y-o-y to S$7.2m in FY19 partially due to correction of overprovision in FY18. As a result, we revise FY20F tax expense down by 18% to reflect more normalised tax rates. Core earnings was also boosted by the Archer House acquisition and improved margins in PBSA.
• Overall, the COVID-19 situation remains fluid and our assumptions are based on the outbreak receding and reversion to normality around mid-year.
• We maintain BUY with a higher Target Price of S$0.53 (vs S$0.52 previously).

Source: DBS Research - 28 Feb 2020