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Centurion eyes further growth with capacity expansion

Douglas Toh
Douglas Toh • 9 min read
Centurion eyes further growth with capacity expansion
CEO Kong Chee Min attributes Centurion’s FY2023 results to strong occupancies and rental rate revisions across the markets it operates in. Photo: Albert Chua/ The Edge Singapore
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Centurion Corporation is seeing a surge in demand for worker dormitories as construction activity strongly resumes, now that the pandemic is a distant memory.

In FY2023 ended Dec 31, 2023, Centurion reported earnings of $153.1 million from $71.4 million in FY2022, led by higher net fair value gains of $84.8 million from its assets. FY2023 core earnings also rose 21% y-o-y to $69.2 million, excluding fair value adjustments and one-off items.

At Centurion’s results briefing on Feb 29, CEO Kong Chee Min attributed the results to “very strong occupancies” and “very strong rental rate revisions across all the markets where we operate”. “We’ve done very well. I would say it was a solid performance for FY2023. And that starts from efforts we’ve made throughout the year to enhance our portfolio,” says Kong.

Centurion gets twice the revenue from worker dormitories compared to student dorms.

In FY2023, profit from the workers’ accommodation segment rose 27% y-o-y to $98.5 million while revenue rose 16% y-o-y to $156.7 million, thanks to stronger demand and tight supply dynamics, which drove healthy rental reversions. The occupancy of Centurion’s nine purpose-built worker dorms in Singapore rose 1 percentage point y-o-y to 98% due to renewed higher rental rates from the expiry of one-year tenant leases. According to Kong, Centurion plans to expand its capacity for worker accommodation in Singapore and Malaysia as demand continues to be high.

In January 2023, Centurion won a tender from Jurong Town Corporation (JTC) to develop and operate a purpose-built dormitory (PBD) with around 1,650 beds at Ubi Avenue 3, where there were limited accommodation options. The tender was secured by its 51%-owned joint venture with construction firm Lian Beng and is slated for completion by December, ahead of schedule. Additionally, following JTC’s approval, the company will add 888 beds to its Westlite Tuas Avenue 2 and Westlite Jalan Tukang quick-build dormitories (QBD). “We anticipate that in the short-to-mid-term, there will still be strong demand, so we have an active pipeline and plans for continual growth to meet this demand,” says Kong.

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Centurion is also redeveloping Westlite Toh Guan, which was designated an isolation area during the pandemic.

According to Kong, foundation work has started and the redevelopment is scheduled for completion by 2026. Westlite Toh Guan will add 1,764 beds while Westlite Mandai will add 3,696 beds. In Malaysia, Centurion added 290 beds to Westlite Tampoi last year after receiving approval from the country’s manpower department, Jabatan Tenaga Kerja Semenanjung Malaysia (JTKSM).

In the same year, the company completed asset enhancement initiatives (AEIs) at Westlite Senai, adding about 770 beds. Centurion also entered into sale and leaseback agreements of two properties with Kumpulan Wang Persaraan (KWAP), the governing body in charge of Malaysia’s public sector pension fund. Similarly, demand in Malaysia for workers also remains high for Centurion’s assets located in Johor, Penang, and Selangor.

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The three states have the highest number of foreign workers in the country’s manufacturing sector, making up about 35% of the estimated 2 million-strong for- eign workforce. AEIs carried out at Centurion’s Johor Tech Park and Westlite Senai II assets, expected to be completed in 4QFY2024, will add about 1,740 beds and 920 beds respectively.

The company also plans to enhance its dorm at Pasir Gudang, which will add some 950 beds by 2025.

Better living conditions for migrant workers

Singapore’s Ministry of Manpower (MOM) has drawn up new requirements for dormitories in the wake of the pandemic. MOM announced it aims to improve the interim standards for some 1,000 existing PBDs and factory-converted dormitories (FCDs) by 2030 under the dormitory transition scheme (DTS).

Kong says this gives ample time for operators to adapt. In an interview with The Edge Singapore in October 2023, Kong said: “If the DTS starts [in 2024], it will create even more disruption to the market in terms of supply.

[With] the transition [commencing] in 2027, this should allow more newly developed beds to come into the market.” Of Centurion’s nine PBWAs, four of them are QBDs that meet the higher new dormitory standards. These include having a living space of at least 4.2 sqm per resident, excluding shared living facilities. Some of the dormitories already have living spaces of about 6 sqm per resident, said Kong in the interview. For the rest of its properties, Kong says it was “fortunate” that some of them have already met the minimum requirements with en suite toilets, showers and kitchens.

However, Centurion will still have to reconfigure the remaining rooms to meet the interim standards of at least 3.6 sqm of living space per resident, amenity spaces and more stringent isolation facilities. The changes will cost about $150 million. Even as Kong welcomes the changes, he recognises that companies will either have to manage their margins or pass the additional costs to consumers. However, as most companies have yet to set aside a budget for the additional capital expenditure (capex), the renovation costs should not fall on dormitories and operators alone.

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Still, Kong is thankful that the government has introduced interim standards as a buffer and welcomes the change to having at least 3.6 sqm of space per resident as a “fair bit of reduction”.

“MOM mentioned that they will be supporting this partially [but] as to the quantum, we don’t know. [However], we hope that it will help the operators more in meeting the standards and to provide — social cost as well so that the migrant workers can work and live in Singapore more comfortably,” he says.

He adds that the exact amount of capex from DTS will depend on the level of government support. “Of course ... everyone can say the govern- ment can do more... But if the government can’t support more, this cost will have to be passed on to the customers,” he adds. “If they say no, obviously the cost [will be] higher. But we expect them to evaluate because their structure is on a case-by-case basis and if need be, they can grant such waivers,” he explains.

“Bear in mind that these additional beds will go towards recovering beds that we lost from DTS.”

Demand for student dorms strong and stable

Centurion similarly enjoyed better business for its student dormitory segment, which reported profits of $20.7 million for FY2023, up 18% y-o-y. Its 17 assets in Australia, the UK, and the US, saw high occupancy rates in FY2023, thanks to strong and stable demand due to their status as global educational hubs. The supply of student beds also “remains low” across these destinations, says Kong.

During the year, Centurion completed several AEIs in Australia and the UK, converting select unused apartments and rooms to single studio rooms and en suite rooms in a bid to meet higher demand. With an additional 1,521 beds in the US, Centurion will boast 67,377 operational beds in total across its two business segments and territories, equating to $2 billion worth of assets under its management.

Regarding the recent tightening of student entry requirements in Australia at the end of 2023, Kong does not see any softening on the occupancy numbers of its PBSA assets in the country.

“There’s a bit of a gap right now, as opposed to returning students. So, even with the restriction, we don’t see an impact,” he explains. “The restrictions have been introduced to reduce immigration numbers in Australia and smoothen out the demand and supply, especially in the residential sector. Hence, our vacancy rates remain very low,” continues Kong. Overall, occupancies in Centurion’s Australia assets are expected to remain healthy with continued positive rental revisions. Pre-booking numbers for its UK assets for the academic year 2024/2025 are strong while its US assets achieved good occupancy for the academic year 2023/2024 with 2025/2026 pre-leasing looking similarly bright.

Notably, its Centurion US student accommodation fund, which will conclude its term in November, is currently evaluating the potential divestment of its assets. “We are still mindful of high interest rates and when the Fed will begin to cut rates but we are confident that our portfolio assets will continue to do well,” says Kong.

“The group will continue to practise prudent financial management to mitigate these economic uncertainties and mac- roeconomic headwinds. At the same time, we will continue to look for opportunities to en- hance output as well as for synergistic growth in existing and new markets to generate higher yields for our assets,” he concludes.

Centurion also has its eyes on Asia. On April 9, the company announced it had recently entered into a master lease agreement for a property in Kowloon, Hong Kong, to be refurbished into a 66-bed student accommodation. The lease was agreed upon through Centurion’s 60%-owned JV, Centurion-Lionrock.

Word on the Street

Analysts have retained their “buy”, “add” and “accumulate” calls on Centurion with higher target prices.

Lim & Tan Securities’ Chan En Jie and Nicholas Yon, who have upped their target price to 62 cents from 58 cents, note that Centurion aims to sustain its growth trajectory by strategically reallocating capital from matured as- sets and transitioning towards an asset-light model, which “should mirror” the success of its recent sale and leaseback of its two Malaysian assets.

Meanwhile, CGS International analyst Ong Khang Chuen, who raised his target price to 63 cents from 60 cents, notes that FY2023 results beat his own and Bloomberg consensus estimates. Centurion’s optimistic revenue outlook for FY2024 comes from strong rental reversions in Singapore, where a sizeable gap between spot and average rent remains.

UOB Kay Hian’s Adrian Loh raised his target price to 57 cents from 50 cents on the back of Centurion’s FY2023 which is seen to grow further in FY2024 and FY2025, led by higher rental rates. “There is upside potential to our earnings as we have yet to include some of the company’s growth projects,” says Loh. Centurion shares have gained 4.88% year to date, in line with the better earnings, outperforming the STI’s 0.67 gain.

Loh believes this counter can maintain both its absolute and relative out- performance this current FY. At this level, Centurion’s shares are trading at 43.8% of its NAV of 98.21 cents as at Dec 31, 2023.

Lastly, RHB Bank Singapore’s Alfie Yeo likes Centurion for its encouraging outlook, thanks to its planned AEIs and the increase in bed oc- cupancy to meet demand. Yeo raised his target price to 64 cents from 62 cents, writing: “We also assume slight rate increase and better margins at the current run rate, which contributes to a better revenue and margin forecast.” — with additional reporting by Felicia Tan

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