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Centurion Corporation Limited has entered into an agreement to acquire a development site in Adelaide, Australia for A$3.5mn to be developed into a new student accommodation. The student accommodation asset will be part of a mixed-use development called Frome Central which will include a hotel, serviced apartments and car park and is owned and developed by Kyren Group. Centurion Corp will be acquiring the student accommodation asset from Kyren Group. The total development cost for the student accommodation, including land cost, will be approximately A$45.5mn. The construction and development of the site is expected to be completed in 4Q2018, catering to the student intake for 2019 academic year. The new student accommodation asset will be known as “dwell Adelaide” which will have 21 levels with a capacity of 280 beds comprising self – contained studios, 2-bedroom and 4-bedroom en-suite apartments, and with communal facilities, including lounges, TV room, games room and a rooftop terrace.
The development site is on freehold land. It is located at 12-18 Synagogue Place, Adelaide, South Australia, 5000 Australia, within walking distance to University of Adelaide and University of South Australia and in close proximity to the main Rundle Mall shopping belt.
Source: Google Maps
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Though the project is slated for completion by 4Q 2018, we expect the new accommodation to be well received by incoming students for the 2019 academic year intake. Given the high shortage of Purpose Build Student Accommodation Beds (“PBSA”) to full-time students in Adelaide of approximately 1:10, we expect occupancy to quickly move up to c.90% or above by 1Q 2019. We estimate the dwell Adelaide’s average bed rate will be c.A$350 per week which will potentially generate c.A$4.7mn in annual revenue in FY19F. Based on our model, we also estimate the annual net profit contribution in FY19F to be c.A$1.7mn (c.S$1.8mn, assuming 1 AUD : 1.07 SGD)
Our preliminary FY19F net profit estimate for Centurion Corporation is S$38.5mn, an increase from FY18F net profit estimate of S$35.3mn. Dwell Adelaide’s net profit contribution in FY19F is therefore estimated to be c.5% of FY19F total net profit.
Of the total A$45.5mn purchase price, A$40.95mn is expected to be paid upon completion of the project. We expect the funds to be disbursed by 4Q18. Owing to the lumpy cash outflow, we expect the Net Debt to Equity Ratio to be at c.120% compared to our initiation projections of c.100% by 4Q19.
Centurion’s reliance on capital expenditure to grow its business means its balance sheet will be impacted by lumpy cash outflows in the near term but the benefits of these capital expenditures will only accrue from rental over a long period of time.
Barring any changes to room rates and occupancy in its accommodation business and cost of debt, we expect a near term catalyst for its business should also come from improvements to operating margins. Figure 3 shows the total expense (Cost of Goods, Distribution and Admin) margin trend and it is projected to remain c.51%. Our model indicates that if total expense could reduce by 2.75%, the total expense margin could reduce 1 percentage point to c.50% and translate to about 3.4% improvement to operating cash flow. Based on our DCF model, if Centurion could maintain its total expense margin a c.50% on the long term, it could improve its fair value from the current S$0.42 to S$0.44.
Maintain “Accumulate” rating with an unchanged price of S$0.420. Bulk of the cash outflow for the acquisition of dwell Adelaide student accommodation will happen in 4Q18 while operations from dwell Adelaide, Westlite Juru and Weslite Minyak will only contribute by 2019. Given the long time frame, there is no significant impact to share price in the near term.