• We see Centurion Corp (SGX:OU8) as a potential beneficiary of higher demand for workers’ housing from Malaysia’s movement control order, with 5-8% estimated FY20F EPS accretion.
• Its PBSA assets in the UK and Australia could face wider disruption from the Covid-19 spread and more travel restrictions.
• We reiterate ADD on long-term structural growth with S$0.58 target price. Current valuations of 7.6x FY21F P/E and 0.5x FY20F P/BV are not demanding.

A Rush to House Malaysian Workers

• Malaysia’s movement control order (MCO) takes effect from today till 31 Mar, impacting the 415,000 travellers who use the causeway daily. It is estimated that more than 100,000 Malaysians who work in Singapore have no living arrangements, according to press reports.
• We think these tight market conditions will lead to a temporary rise in demand for purpose-built workers accommodation (PBWA) in Singapore, potentially benefiting Centurion Corp.
• Centurion Corp is the largest PBWA provider with five dormitories and 28,000 beds in Singapore, which are operating at financial occupancy rate of more than 95%. We understand from management that it is currently working with the Ministry of Manpower (MOM) to relax existing dormitory requirements and convert some common spaces to living units, possibly expanding capacity by up to 20%.
• As of yesterday, the group has received enquiries for approximately 700 beds, mainly from government agencies, existing partners in the construction and engineering sectors. It is also actively liaising with existing customers to give up unused beds (paid for but not physically occupied) in exchange for some rebates.
• If Centurion Corp could install and sell out all the additional capacity for at least six months this year, we estimate this would uplift their FY20F earnings by S$2m-3m (or 5-8%).

Some Near-term Headwinds Facing PBSA

• Apart from Australia’s travel ban on foreign nationals from China which had been highlighted earlier, we expect widening disruption to Centurion Corp’s purpose-built student accommodation (PBSA) business from Covid-19 and more travel restrictions. It was reported in the news that most UK universities are planning for new students from China to delay entry until Jan 2021, while some Chinese and other international students are asking to suspend their studies and return home due to growing dissatisfaction with the way the British government is handling the outbreak.
• The UK PBSA formed 20% of Centurion Corp’s FY19 revenue while Australia PBSA accounted for 12%. In terms of student mix, foreign students from China formed 28% of Centurion Corp’s FY19 Australian PBSA occupancy, while we estimate domestic students make up 70% of Centurion Corp’s UK PBSA with 10-15% from North Asia.
• We think a protracted outbreak may weigh on Centurion Corp’s PBSA contribution (27% of FY19 operating profit), possibly mitigated by
  1. diversifying student pool to other markets or source more locally, and
  2. capitalising on the chance to do more AEI work.

Cash-flow Generative, But High Net Gearing

• Centurion Corp has an estimated net gearing of 1.1x at end-FY20F; 92% of its debt is long-term with average debt maturity profile of 7 years. In the worst case scenario of a severe decline in student occupancy and profitability, we believe the group is able to service its financing cost (c.S$29m p.a.) with its S$60m-70m yearly operating cash flow.

Reiterate ADD With a S$0.58 Target Price

• We think Centurion Corp’s diversified presence across Singapore, the UK, Australia, Malaysia and South Korea could help buffer against the macro challenges. Centurion Corp stays an ADD with a DCF-based Target Price of S$0.58 (WACC: 4.9%) and 6% dividend yield.
• Downside risks: worsening Covid-19 situation, as well as significant slowdown in O&G and construction sector.

Source: CGS-CIMB Research - 18 Mar 2020