Centurion (SGX:OU8) – investors are missing the strength of its workers dorm business

Value stocks are shunned nowadays and more are flocking to high-flying growth stocks.

Indeed, one doesn’t know how long value stocks would stay underperformed. It is therefore important to be picky which value stocks to include in your portfolio should one continue to pursue this strategy.

One way is to pick a value stock with a possible catalyst happening in the future. An obvious play would involve a bet on the recovery brought about by the vaccine.

While some of you would think of travel-related stocks, I want to share about a different opportunity in a worker dormitory operator – Centurion (SGX:OU8).

The majority of the Covid-19 cases in Singapore happened in the workers dormitory and Centurion, being the largest operator in Singapore, was at the heart of the national issue. We covered the story here, and how profitable the workers dorm business is.

Workers dormitory is a critical infrastructure to house foreign workers

No, worker dorms are not going away. The response from the government was very telling – the authorities are stepping in to ensure a better living environment for the workers by tightening regulations such as minimum living and social space. They are also setting aside more sites to build new dorms to lower the density of workers in staying in the dorms. Some of these new dorms would be developed by JTC but the government is not going to operate these dorms, instead they have tendered the projects to private operators.

There are about 293,000 foreign workers in the construction industry and most of them are staying in these dorms. We need them to build our infrastructure (including their own dorms) and we need to house them too. Hence, the workers dorm operators still have a key role to play. In fact, it is even more important after the numerous cases in the dorms.

On 2 Sep 2020, Centurion announced that it has won the tender to operate 4 additional worker dorms consisting of 6,400 beds. This increased Centurion’s portfolio in Singapore by 22.9%.

On 18 Nov 2020, Centurion announced that it has secured a lease to operate a 5,000-bed workers dorm in Petaling Jaya, Selangor for 21 years.

Hence, I see the business doing better than expected and not affected much by Covid-19.

Encouraging 1H2020 results

Centurion managed to grow its revenue and profits by 4% and 16% respectively.

But Centurion explained that the company recorded lower revenue in 2Q2020 due to Covid-19:

• additional operating expense, particularly in Singapore worker dorms, by S$1.3m
• revenue reduction due to early termination policy extended to UK student accommodation
• reduced occupancy in Australia PBSA, with a reduction in revenue of S$0.7m
• provision for doubtful debts of S$1.2m, due to increase in debt delinquencies

These numbers aren’t large and moreover, they were mitigated by

• S$1.6m from various government support schemes in various jurisdictions
• S$1.5m reduction in finance expenses due to reduced interest rate environment

The catalyst could be better financial results in the second half of the year and investors start to see that the business quality does not warrant the cheap share price it is trading at.

Super low P/E

Centurion is trading at a historical low P/E of 3, the lowest level in the past 5 years. Below is the chart from our Dr Wealth app. The earnings has increased by 16% in 1H2020 and hence the trailing twelve months P/E ratio would even be lower than 3.

Lowest P/B Ratio

The underlying assets are predominantly real estate and hence Price/Book Value ratio is a relevant metric to use.

Centurion is currently trading at P/B of 0.5, the lowest level in the past 5 years. P/B chart here.

Dividends may be maintained

The management has decided not to distribute any interim dividend for this financial year.

Kong Chee Min, CEO of Centurion said, “we seek our shareholders’ understanding and continued support during these challenging times, as we act prudently to manage cash flow in view of the near to medium-term uncertainties resulting from the COVID-19 pandemic. In the long term, we remain confident in the fundamentals of our business and the resilience of our strategic asset classes.“

But I think Centurion is more than ok given the amount of cash in its balance sheet – S$65m cash, an increase of 34% from S$49m 6 months ago.

There is a possibility that a higher dividend payout can happen when the financial year ends and if the management becomes more optimistic about the outlook.

If so, the dividend yield can go back up to the 5% range – Centurion dividend yield has been attractive historically.

Risk #1: High debt

The gearing for REITs was capped at 45% and is now temporarily raised to 50%. Centurion is right at the highest end with 50% gearing. That can make some investors uncomfortable.

Moreover it has $88m liabilities due within a year. Likely the $32m borrowings would be rolled over with new debts – borrow more and retire the old debts.

The advantage is that the interest rate is currently very low and Centurion has the real estate to secure these borrowings. A rise in interest rate is possible but not likely, given that central banks around the world are still more interested in boosting the economy and keep businesses afloat.

Another possibility is that Centurion may not be able to generate enough cash flow from its dorms and a lower valuation of its properties may happen. It may trigger debt covenants and force Centurion to repay the debt prematurely. Foreclosure is unlikely as these workers dorm need to continue functioning for the interest of our nation. Maybe a forced sale to another operator is more likely.

Risk #2: Student accommodation may suffer

Centurion doesn’t just have the workers dorm business – it provides student accommodation in UK, Australia, Singapore, US and South Korea. Covid-19 affected all these countries (some more than the others) and students are largely studying remotely. They may not even return to the universities at the end of the day and the student accommodation could see more termination and bad debts.

The saving grace is that Centurion derived most of its revenue from workers dorm (68%). The student accommodation contributed about a third of Centurion’s revenue. Losing half of the revenue in this segment is not going to be end of the world for Centurion but it is painful enough to feel the decline in revenue, profits and valuation.

Conclusion

Centurion was embroiled in the Covid-19 outbreak in the worker dorms. But it didn’t affect its business as much as it has delivered higher revenue and profits in its 1H2020 results. On the other hand, the share price has been punished and has yet to recover by far. It is trading at PE 3 and PB 0.5, very low compare to its historical ranges.

However, it is not without risks. The first risk is its high debt levels – it would be fine as long as the business continues to generate the cash flow required to repay the loans and to maintain the valuation of the properties. Otherwise a default may occur. The second risk is its student accommodation which would be hit worse than the worker dorms – foreign students may not return for studies and may see more termination in the future.

I believe Centurion is undervalued and there’s a possible catalyst in the near future – investors realize the Covid-19 situation is not as impactful to Centurion’s business and a vaccine could bring some attention to these beaten down stocks. Centurion is suffering from a negative impression but the underlying business remained strong.

Disclosure: I have a position in Centurion. This is not a solicitation to trade but to share with you my thoughts about this stock.