The Positives
+ Singapore workers’ accommodation business continue to be supported by favourable supply demand dynamics and improving economic sentiments. Population of foreign workers remains stable owing to modest economic performance and sustained demand from public sector construction. There is no new supply of worker accommodation beds. Worker accommodation island wide are experiencing higher occupancy rate at an average of 80% and are no longer focused on cutting bed rate prices. The QoQ revenue growth was due to higher occupancy ASPRI-Westlite Papan (c.99% in 2Q17 vs. 89% in 1Q17) offset by decline in occupancy to 80% at Westlite Tuas because the short term lease extension could not retain customers who require longer commitment.
+ Better gross margin on reduced amortisation costs relating to intangible assets on favourable lease in Westlite Tuas. We estimate the quarterly amortisation expense in 2016 was S$1.2mn. Following the extension of the lease on Tuas the remaining S$1.8mn intangible assets will be amortised from January 2017 to January 2018 so the quarterly amortisation costs will be lowered to S$0.4mn per quarter. Therefore we expect FY17e gross margins to improve to c.70% compared to 2Q16’s 66%.
+ Expect some positive rental reversions for amid high occupancy for Westlite Papan. Westlite Papan had started on a poorer footing in 3Q16 owing to poor economic sentiments. By 3Q17, the rental lease by Westlite Papan occupants will be up for renewal and we can expect a positive rental reversion.
+ Improving occupancy at Westlite Malaysia. Occupancy rate at the Malaysian Westlite portfolio has improved from c.74% in 1Q17 to c.82% in 2Q17. This is due to higher legal enforcement on illegal worker dormitories that shifted more foreign workers into purpose built accommodation.
The Negatives
– Centurion’s foreign operations are subjected to higher corporate tax rates than Singapore. National corporate tax rate for US, Australia and UK are 35%, 30% and 20% respectively. Higher corporate tax rate could crimp dividends. Secondly, the withholding tax structure is more complex in US for non-US shareholders to receive their full tax exempted dividends. Australia has franking system to address the “double taxation” on corporate profit and dividend income received by shareholders. UK does not have taxation on dividends.
Outlook
Though Westlite Tuas lease is expected to expire in January 2018, we are optimistic of a renewal by authorities because we believe that Centurion’s value proposition to engage the workers and provide comprehensive amenities is well recognised by government bodies. But our financials forecast assumes that Westlite Tuas will expire by January 2018.
Our financials forecast have not included the SEHK IPO proceeds due to insufficient details. Excluding the IPO proceeds, we revise our FY17e net debt to equity to 171% from 130%. The increase in net debt to equity is due to the capital investment in 30% stake in the US student accommodation assets. However, with an expected October 2017 IPO on SEHK, net debt to equity should tapper down from present 171%.
Investment Actions
Maintain Accumulate rating with higher target price of S$0.59, previously S$0.48 based on DCF model.
Our higher target price is based on stronger operating cash flow starting in 1Q19 as dwell Adelaide and the AEP for RMIT village will begin operationa. A bonus from an extension of Westlite Tuas land lease after January 2018 could drive up the share price further. On the cost side, we expect FY17e COS, distribution and administration expenses to improve to c.47% of total revenue because of high operating leverage as revenue increases are due improving performance at existing operating assets – improving occupancy and bed rates at Papan and improving occupancy at Malaysia Westlite portfolio.
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Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.
He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.
