SINGAPORE (Jan 8): CGS-CIMB Research is initiating coverage on Centurion Corporation, the provider of purpose-built worker accommodation (PBWA) and purpose-built student accommodation (PBSA), with an “add” recommendation and a target price of 61 cents.

As of 3Q19, the group has over 32 properties in six countries, which translates to around 64,956 beds. In FY18, PBWA contributed 67.1% of revenue and PBSA formed 31.4%.

CGS-CIMB likes this stock because it has consistently grown its bed capacity via developments and acquisitions.

In a Tuesday report, lead analyst Ervin Seow says, “We think the under-supply in PBWA and PBSA segments could continue due to tighter regulations and enforcement in PBWA and growth in university enrolment.”

The group is expected to achieve PATMI growth of 7.7-13.8% for FY20-21 due to a 15.2% growth in capacity. This includes the addition of 3,600 beds at Tampoi II and 177 beds at Archer House in FY20 as well as 6,100 beds at Juru in FY21.

“Going forward, we think there is strong potential for further growth of PBWA in Malaysia due to regulations relating to a minimum standard of housing for workers that reduce non-PBWA accommodation supply, as well as strong construction and manufacturing activity growth that should translate into stronger tenant demand,” says Seow.

Meanwhile, Centurion’s asset-light fund management platforms provide a good opportunity for the group to scale up quickly and recycle capital. The analyst believes that the option of seeding existing assets into the funds could alleviate its high gearing of about 127% as of end-FY18.

The group now has two PBSA funds with about $200 million in commitments and seven assets. Although the group’s $450 million portfolio size precludes it from listing a REIT now, the analyst is hopeful that in the long term, the group could continue building its portfolio and work towards a REIT spin-off of its PBSA assets due to strong investor interest in the asset class.

“At its current price, we estimate CENT offers 39% upside potential with a FY20F dividend yield of 5.4%,” says Seow.

As at 3.40pm, shares in Centurion are trading 3.41% higher at 46 cents.