Saturday, October 29, 2016

"One With Dormitory Business"

As per my previous post, I will be writing about "One with the dormitory business".

I am not sure if your guess is correct. But the stock that I will be writing about is - Centurion Corporation Limited.

Do note that this is not part of my dividend series.

Profile In Short (Directly taken from AR2015)
Centurion Corporation Limited is one of Singapore’s largest workers and student accommodation owner-operators. It owns, develops and manages quality workers  accommodation assets in Singapore and Malaysia, as well as student accommodation assets in Singapore, Australia and the United Kingdom.

Established in 1981 as an audio cassette tape manufacturing business in Singapore, it became one of the market leaders in the optical storage media industry and was listed on the mainboard of the Singapore Exchange in 1995. Following a reverse acquisition exercise in 2011, the Group successfully diversified into the accommodation business to capture growth opportunities in this niche market.

Within a short span of time, Centurion has developed a strong portfolio of 16 operational accommodation assets totalling 50,072 beds, as at 31 December 2015. By 2018, upon completion of the development of one more workers accommodation asset in Singapore and three assets in Malaysia, the Group’s accommodation portfolio is expected to grow to over 74,500 beds.

In the workers accommodation space, Centurion has 27,600 beds across four workers accommodation assets in Singapore and 19,800 beds across six workers accommodation assets in Johor, Malaysia as at 31 December 2015, which are managed under the Group’s “Westlite” brand.

In 2014, leveraging its expertise in workers accommodation, the Group expanded into the student accommodation business with the acquisition of RMIT Village in Melbourne, Australia and four student accommodation assets in Liverpool and Manchester, United Kingdom, totalling 2,357 beds.

In 2015, the Group also won a bid to operate a 315-bed student hostel in Singapore. Besides exploring the potential to enhance these assets, the Group plans to grow its student accommodation portfolio in key educational hubs around the world.

I am attracted by this stock because after investing in Hock Lian Seng Holdings Ltd and TTJ Holdings Ltd, I realise how much revenue and net profit the dormitory business is providing for their respective companies. However, it was only now that I found Centurion Corporation Limited! Why have I been missing out on this stock all this while?

Based on Enhanced Triple S Scorecard with Dividend Scorecard Portion (Present Price of $0.340 as of 29 Oct 2016):

Yes, as per the pictures above, this stock fails the Enhanced Triple S Scorecard with Dividend Scorecard Portion. 

Then why am I still talking about it? What is so good about it?

TTJ Holdings Ltd and Hock Lian Seng Holdings Ltd are unable to renew their lease for their dormitory business - TTJ had a 5000 bed dormitory, while Hock Lian Seng had a 3000 bed dormitory previously. Both of their lease are not renewed. Thus, currently there will added demand for dormitory services and this can at least help to guarantee their occupancy rate in the near future. 

Economic Moat - One of the main positive point of this stock is the economic moat it has. In my opinion, it is the only listed firm in SGX and Singapore being so focus on foreign worker and student accommodation. It is not a "sexy" business, but being one of the main company that is fully focus on this industry puts it on top of people's mind when companies are looking for accommodation their foreign worker.

Number of Foreign Worker in Singapore - Apparently there are over 300,000 foreign worker (construction related) in Singapore. With the construction business booming (all the infrastructure projects that Singapore Government are throwing out), there is very little possibility that Singapore Government will reduce the number of foreign workers in Singapore. In this way, occupancy rate for Centurion Corporation Limited's Singapore dormitories and those nearby Johor Bahru dormitories will be guaranteed. Do note that Singapore business provided up to 65% of the 2015's Revenue.

High Net Profit Margin - This business is a high net profit margin business. In the notes on the segmented business revenue and net profit in 2014 and 2015, the dormitory business has been providing about 40 cents to 50 cents net profit for every $1 earned. That's how profitable this business is.

90% occupancy rate for Singapore Dormitories - The occupancy rate for Singapore dormitories is significantly high. Once a company places its workers in their dormitories, it will not unnecessary remove them. Thus, this will form recurring income for Centurion Corporation Limited.

Focus on Accommodation Business - Centurion Corporation Limited still have some businesses in providing optic disc. Nevertheless, from its latest report, it seems to be slowly stopping that business and totally focusing on the accommodation business. This should bring about better coordination and synergy within the company, most probably resulting in higher revenue and net profit.

Warrants with Exercise Price at 50 cents - It is important to note that Centurion Corporation Limited has warrants with exercise price of 50 cents that will expire in October 2017. This meant that the management team will probably push the share price to at least 40+ cents prior to the expiry of the warrants in October next year.

Paid off $100 Million of Notes - Base on the recent announcement, the company has actually paid off its $100 Million of Notes. This will have reduced its leverage significantly.

But why am I still hesitating?

Highly Leverage - From the scorecard, you can see that this stock is very highly leverage. Despite its ability to generate huge amount of free cash flow, Centurion Corporation Limited is still taking on huge amount of debt. This is due to its extreme growth strategy in expanding its accommodation business. It is developing a few dormitories, which will only be operational in 2018. Thus, during the next year, the stock will most probably continue to take on more debt.

REIT Listing - My initial thoughts of reducing the amount leverage in its financials, Centurion Corporation Limited can put up a REIT listing in SGX. However, further research shows that the stock wanted to propose a REIT listing in 2015. But it eventually pull out. It seems that there could be some road block ahead that prevents the stock from putting up a REIT listing. (Is there anyone who understands and can explain about "Chain Listing" in the announcement?)  

Tuas South Ave 9 Dormitory Expiring Soon - The stock actually will have a dormitory at Tuas South Ave 9 that will expire soon. From the looks of the recent progress in this industry, this lease may not be renewed. This will definitely impacted the revenue and net profit adversely.

Significant Additional Investment Properties - Although the scorecard indicates that the company produces high Free Cash Flow, but it does not take into account of the additional investment properties it invest in. If the additional investment properties is taken into account, the stock will produce negative free cash flow on an annual basis. Thus, Price to Free Cash Flow will become negative instead.

Unclear in Occupancy Rate in Overseas Business - Despite understanding that the Singapore Business has a high occupancy rate, I have been unable to find out the occupancy rate in the overseas businesses. 

In Short

Despite failing both scorecards, I was prepared to invest in this stock mainly due to its economic moat and business model. However, its extreme growth strategy and significant leverage has been deterring me to invest in it. After all, it is not like Fraser Centrepoint Ltd that has means to reduce the leverage significantly. Furthermore, Centurion Corporation Limited will definitely require to leverage more in the next 1 or 2 years. A REIT listing may still be possible in future but more understanding will be required, 

To answer my initial question, I have most probably ignored this stock up to 2 months ago, due to its high leverage.

Thus, my view is that at the current price and economy situation, I am unwilling to take on the risk involved. Furthermore, the opportunity cost is high now as the money can be put to better use by averaging down some of the good solid stocks in my portfolio or purchase other blue chips.

Do note that if the share price continue to drop I may still purchase this stock. But that will be for the future.

For those who are interested to understand and find out more about the Enhanced Triple S Scorecard with the Dividend Scorecard Portion, you can come for the 4th Sharing Session with T.U.B! If you are interested to attend, do not hesitate to contact me directly.

For those who intend to try the Enhanced Triple S Scorecard first before attending the sharing session, you can contact me directly as well

Oh... and do remember, please like our Facebook page - T.U.B Investing.

19 comments:

  1. Oh, just 1 more point I'd like to comment on.
    I'd have to disagree with your point about it having an "economic moat". Being listed by itself, can't be an economic moat.
    For sure, the company has certain branding (Westlite), but it is unclear how important that is for the dormitory business vs the consumer products/retail type of business.
    In fact, Centurion isn't even the biggest dorm operator (it's a close 2nd), the biggest is Vobis Enterprise, which is only a subsidiary of Aik Chuan Construction. They are under the radar as they are unlisted, but this fact alone showed that there's not much economic moat by being listed. The groundwork that I did, also confirms that.
    Centurion does have certain competitive advantages going for them, which I won't discuss here, but I wouldn't call that a moat either. It's kinda hard to get a real moat in this business.
    Cheers
    TTI

    ReplyDelete
    Replies
    1. Hi TTI,

      Thanks on your input who is the biggest dorm operator. It really helps.

      However, I believe a close 2nd is still able gives it some kind of economic moat or maybe as per stated by you, some competitive advantage.

      Haha... maybe I am less strict on the definition of economic moat here.

      Regards,
      TUB

      Delete
  2. My comment here is that how likely that the REIT will be well received.thrybwiukd have to own part if the REIT and they will lose the recurring income.personally I really hope the manager will be good else this is a nightmare considering how short the land leases are for these dormitory and it plays on the demand and supply of foreign workers.just my 2 cents

    ReplyDelete
    Replies
    1. Hi Kyith,

      I understand your point of view of "losing control" and "losing the recurring income".

      However, prior to having a REIT listed, I believe they need to have more dormitories or student accommodation to be in their care.

      Furthermore, I think the REIT should only have the more mature assets. So that Centurion Corp can focus on expanding their accommodation business without the need to take on so much debt.

      Thanks for commenting!

      Regards,
      TUB

      Delete
    2. it probably recycle their capital but i struggle to see how i would invest in something like this reit on a sustainable basis.

      Delete
    3. Hmm.. you don't think this business is sustainable?

      TUB

      Delete
    4. @ TUB:
      It seems Kyith and myself are "vandalizing" your comment section here.
      :)
      @ Kyith:
      I actually get what you mean. I think hiving off into a REIT is great for the company. Not so good for those who actually BUY the REIT.
      But I can tell you the REIT's financials are much better than most of the other REITs on SGX. I've done the comparison a couple of months back, but have yet to do a write up. (partly because I may accumulate. heh)

      Delete
    5. No worries. I am just glad there are so many comments.

      TUB

      Delete
  3. Hmmm it seems that my earlier comment (which was probably too long) got deleted or got sent to the spam folder.
    So I'd have to cut it real short and summarize:
    1) Debt looks high when viewed from the traditional gearing ratio. Not all debt are equal though, the debt is mainly used for dorm development, not working capital. The company also pays down both the finance interests and the loan quantum, much like mortgage loans. Based on total debt MRQ, and a FCF of $50mil, it'd take 14.2 yrs to pay off fully.
    2) Foreign properties occupancy:
    the malaysian dorms are about 65%, the UK ones are mature assets, varies, but mostly around 85%

    ReplyDelete
    Replies
    1. Hi TTI,

      Haha... Thanks for stopping by. I shall reply your comment via parts since its so long.

      I do note that the debt looks high due to its expansion plan. But I am just uncomfortable right now as its seems too leverage.

      I also believe the share price vs the risk to take on is still too high.

      If the price fall another 10%, I will have launch my purchases.

      Oh... and thanks for clearing my doubt on their overseas occupany rate. Hmmm...Malaysia dorm seems to be under utilized.

      Regards,
      TUB

      Delete
  4. 3) The company didn't back out of the REIT listing. IR confirmed with me that SGX advised that it's a no go because it's a chain listing. SGX does not give a figure above which, the subsidiary's revenue contribution to the parent company's total revenue would be considered "substantial" and hence considered a "chain listing". My own logical thoughts are that you can't have a situation whereby the listed REIT accounts for >50% of the revenue and NAV of the parent company.
    4) I didn't quite understand the part about " If the additional investment properties is taken into account, the stock will produce negative free cash flow on an annual basis. Thus, Price to Free Cash Flow will become negative instead."
    Do you mean that if we back out the "Additions to investment properties" from the operating CF, it'd be -ve?
    For sure, as the FCF measures what's left for shareholders after the cash needed to maintain operations, excluding expansion costs. If expansion costs are included, FCF would always be -ve. The CF for each expansion should be evaluated on it's own merit.

    ReplyDelete
    Replies
    1. Hi TTI,

      Thanks for clarifying on the situation on the REIT listing. I understand better now.

      For point 4, my FCF calcuation is net cash from operating minus addition to PPE equates to FCF. But for Centurion report, their dormitories, which I deem as their main business, is not listed within PPE but investment properties. Thus, it gives a view that the company is able to provide a very high FCF, which is not the case if investment properties are taken into account.

      Hope this clarifies.

      Regards,
      TUB

      Delete
    2. Hi TUB,
      Yes, the dorms are under investment properties.
      "...which is not the case if investment properties are taken into account."
      How do you take into account the investment properties? The running cost of maintaining the existing dorms are already in the operating CF, minus the PPE. Which is FCF. Which is $48mil or so in the last FY.
      If you are adding in the "additions to investment properties", that's wrong because that's the cost of building/acquiring new dorms, WITHOUT the CF from these new dorms taken into account yet.
      Of course, the calculation in this way would be very much -ve.
      Cheers
      TTI

      Delete
    3. Hmm... thanks for the clarification. What you said gave me some assurances that my initial belief that the stock is a FCF generator stands true.

      Thanks!

      TUB

      Delete
  5. 5) To answer Kyith's comment:
    The leases for the dorms are not very short actually. There are 5 local dorms, of which only 1 is expiring very soon (2017)
    The others expire in: 2057, 2043, 2038 and 1 is freehold. The Malaysian ones are mostly FH, with 4 leaseholds expiring in 2060, 2112, 2085 and 2117.
    I think the REIT, if it got through, would've been great for the company. Debt gets eliminated, tax savings based on my initial rough calculations would amount to almost $8mil/annum.
    I think it'd be well received too, my substantiation for this is based on the cap rates and the ROI figures for the dorm vs REITs. (The dorm figures beat all the locally listed REITs)

    I have looked at the company for the past several months now, but like TUB, have held back. My concern is more towards some of the accounting data, like the capitalization of finance interest costs. CFO confirmed to me that it's capitalized in "Investment properties", but declined to break it down. I am also concerned about the macro headwinds the company faces, something which management cannot control.

    Anyway, great post. I was really looking forward to this. Always nice to read another analysis in something that I'm familiar with.
    Thanks for this!

    ReplyDelete
    Replies
    1. hey TTI, honestly i was surprise the lease is that long. i have to admit the last time i lok at this was even before the price surge.back then it is short.

      my view of cap rates is that it is as if the industrial reit buys a 15 years land lease property. your cap rate is going to look awesome, but some of the return is a return of capital.

      Delete
    2. Hi TTI and Kyith,

      Thanks for stopping by and commenting!

      Regards,
      TUB

      Delete
  6. Hi,
    I'm new to your blog and not familiar with Enhanced Triple S Scorecard. But I noticed your use NAV as $0.122 in your scorecard. I cross checked Centurion's latest quarterly report and found their NAV is $0.5297. Do you have a different definition for NAV in your scorecard or is it a typo ? If it indeed a typo, does it change the results of your scorecard ? Hope to hear your reply soon :)

    ReplyDelete
    Replies
    1. Hi Anonymous,

      For My NAV, I use a different calculation.

      I take a discount off the non-current asset and the full amount of current asset.

      Do come for the last sharing session with T.U.B this year on 18 Nov to understand further!

      Thanks for stopping by!

      Regards,
      TUB

      Delete