Broker's take: CGS-CIMB says 'don't sleep on' dorm developer Centurion, initiates coverage with 'add'

CGS-CIMB has initiated coverage on student and worker dormitory operator Centurion Corp with an "add" call and a target price of S$0.61.

Shares of mainboard-listed Centurion were up S$0.005 or 1.1 per cent to S$0.46 as at 10.02 am on Thursday.

CGS-CIMB analysts cited the company's consistent growth in bed capacity via developments and acquisitions, and potential undersupply in worker and student accommodation as pluses for the stock.

Regulations in Malaysia relating to a minimum standard of housing for workers could reduce non-purpose-built worker accommodation supply, and strong construction and manufacturing activity growth creates more potential for further growth of Centurion's purpose-built worker accommodation segment, the analysts said.

Centurion's worker accommodation portfolio consists of properties in Malaysia and Singapore.

CGS-CIMB said growth in university enrolment could contribute to undersupply in the purpose-built student accommodation (PBSA) segment. Centurion's student accommodation portfolio consists of properties mainly in the UK, the US and Australia. It also has one property in South Korea and a leased unit in Singapore.

Centurion's chief executive officer Kong Chee Min previously said in a BT interview he expects the UK, Australia and the US to remain key destinations for students and will continue to scour for opportunities to scale up in these three quality, higher-education markets.

The analysts forecast Patmi (profit after tax and minority interests) growth of 7.7 per cent to 13.8 per cent for Centurion for FY2020/21 driven by a 15.2 per cent growth in bed capacity and gross margin expansion from high operating leverage.

They also noted Centurion's shift to an asset-light model offers opportunity to scale up quickly, unlock value and recycle capital towards a possible Reit (real estate investment trust) spin-off in the long term.

A portfolio size of about S$450 million precludes Centurion from listing a Reit for now. But in the long term, "the firm could continue building up its portfolio via its funds and work towards a Reit spin-off of its PBSA assets due to strong investor interest in the asset class".

Potential rerating catalysts include major acquisitions, capital recycling via its fund management platforms and greater trading liquidity, while downside risks include a significant slowdown in construction and oil and gas sectors, said the analysts.

Centurion had posted a 21 per cent rise in net profit to S$8.8 million for its third quarter ended Sept 30, 2019.

DBS Equity Research had also initiated coverage of Centurion in October. It made a "buy" call with a target price of S$0.52.