What is in the news?
Centurion Corporation Limited has been offered by the Ministry of National Development to extend the lease of Westlite Tuas for 9 months from 29 April 2017, being the expiration date of the existing lease.
How do we view this?
The 9 months short term extension will expire on 29 January 2018 with no certainty of a renewal. We estimate the Westlite Tuas generates a quarterly gross revenue of c.SGD6mn per quarter so we have revised our FY17F revenue from SGD113mn to SGD131mn to reflect the additional three quarters of contribution by Westlite Tuas. Previously we had assumed that the lease of Westlite Tuas will not be renewed so an extension of lease is a bonus to Centurion. Therefore we do not rule out a special dividend this year as we estimate the 9 months lease extension for Westlite Tuas would add c.SGD7mn to net profit.
However, Centurion has a high Net Debt to Equity of 145% as of 4Q16 (4Q14 Net Debt to Equity was 94%) which would make its earnings vulnerable to higher interest rates. We estimate that c.70% of its borrowings are in Singapore Dollars. But the low SIBOR and SOR rates, despite pressure from rising Fed Fund rates, could help Centurion keep its cost of debt stable at c.3% and interest coverage ratio c.3x in FY17F. We assume that Centurion will not be making big ticket investments in FY17 and would focus on repaying debt and improve dividends.
Maintain “Accumulate” rating with an unchanged price of SGD0.420. Owing to the short extension of 9 months for Westlite Tuas, we do not see a meaningful impact to our DCF model hence the share price remains unchanged.