Month: December 2016

ThumbTack Investor’s Random Musings – Selling Property, Hand Foot Mouth Disease, Gold, New Blog Links, Advice For Beginners. Yes, It’s Random.

There hasn’t been any updates on SG TTI for almost 2 weeks, and for good reason. Tons of stuff has been happening that’s keeping me occupied.

129) construction-1210677__180

PROPERTY – I am in the midst of selling a property. Well, not in the midst. More like just started. For privacy reasons, I’m not going to go into specifics, but it is an investment property that I’ve previously stayed in for a few years, then rented out for another few years.

On the surface of it, everyone knows the SG property market is undergoing a slump of sorts, isn’t this a bad time to sell? Particularly so since I still have a tenant that’s staying put and the rent hasn’t been cut even after renewal just recently. The property has been fully paid for, so the rent = a very nice monthly FCF for me. So why sell now?

Well, based on the latest similar transactions, I estimate I’d pocket a gain of approximately $170k. If I include rent over the years, the gain shoots up to well over $250k. Considering that I’ve held it for 7 years, that’s not too shabby a return. Not eye-popping great like the stories you read in TheEdge, but I’m not grumbling.

Perspective huh. My rationale is that at some point, probably between late 2017 – 2018, I’d like to get another larger place near to my kids’ future school. (Yes, their future schooling is settled even though both are <4yrs old. I’m a tiger dad when it comes to education.) And everything I’ve seen that I fancy right now, is NOT exactly stroll-in-the-park affordable.

So if SG property market continues on it’s downward trend, as I hope it will, selling now and pocketing that gain would go a long way to supporting the next purchase. I probably wouldn’t even have to come up with a single cent and can fund it with this sale as well as from CPF.

396) URA property price index 2016Q3.jpg

Probably anyone in SG who’s thinking of buying/selling any property is starting at this chart. Some are willing it to stop dropping, some are clamoring for the property restrictions to be lifted, others are quietly praying it’ll drop more quickly.

In my experience, it’s never wise to go against government policies. Already, the restrictions are in place way longer than most commentors had expected, and in the environment, I don’t think the drop is over. We’re in this secular trend for the long haul.

I’ve never considered myself to be an expert on the SG property market. I just think that there are so many agents, commentors, speculators and genuine buyers who are staring at all these listings, the figures, harping on every related news, that it’s very difficult to find inefficiencies in the market.

More importantly, property moves really slowly. Even if I find a buyer, it’d take another 6 months to go through all the paperwork and legal framework and finally close it.

So my personal thoughts and rules dictating how I’d act in the property market are very simple.

I’ll restrict myself to only the CCR – Districts 9,10 & 11, and only the ones that have FH tenure. Nothing else.

That’s a principle that’s applied to my investing as well.

Reduce scope since I cannot compete with the massive amount of talented geniuses out there looking at the same things as me, but focus on quality and go in depth.

Also, (and this one is just a very simple, logical way of thinking), since I’d actually have to have a place for my family and myself to stay, I figured that any supposed property investment, would mean that one has to have at least 2 properties before you can consider yourself a property investor right?

Afterall, if you sell at a market high, you’d have to buy at a market high. Yes, there will be proponents who say you can rent while waiting for markets to come down etc but that’s just not my game. Not with 2 kids in tow.

So I’ll always hold on to 2 or more properties, either local or foreign.

Any expert reader with strong, substantiated views on this, please feel free to share with me via the comments section, or privately via email. Or if you have absolutely great buys that you’d forgo yourself currently due to the quantum or CF, but would like to share with me, please let me know too. No agents though please.


HAND-FOOT-MOUTH DISEASE

And this is the reason for the relative inactivity at SG TTI for the past 2 weeks.

My son picked up this god-awful virus in preschool, and subsequently came home and infected my daughter and myself via a shared ice cream.

I’d post up some pictures but I’ve decided that’s just too gory for most people reading this. Being a healthcare professional, I knew how to identify the symptoms, and the subsequent management. I can imagine how panicky other parents may get though. It’s just an absolutely terrible thing to have.

Anyway, I was pretty upset at the preschool. A virus gets picked up through their lax efforts at hygiene, and for the past 2 weeks, the entire house is in a constant flux, not to mention the extreme suffering everyone goes through. Particularly myself as the virus has a way of extracting the worst revenge on adults. Christmas was pretty much spoilt too.

And what penalty did the school suffer? Absolutely nothing. I still had to pay the same school fees despite my son not attending it for almost the entire month.

The preschool business is an example of an excellent business to invest in though, at least in Singapore. The CFs are iron clad, regardless of what happens, you’d have to pay school fees, even if the school decides to close on their own accord!

I’m switching schools for my kids next year, but the new school fees are close to $1.2k/mth. No wonder so many parents cite costs for the reluctance to have kids in Singapore.

Let’s have a hypothetical scenario whereby both parents are working, earning $5k each a month, with 2 kids in preschool. That works out to be a household income of $10k, while the school fees alone would cost $2.4k. That’s 24% of the total month income spent on the school fees alone!

I’ve been blessed to have done well in my career, and having a high income means that all these figures are something I can afford fairly easily. But I cannot imagine how 2 parents earning $5k each (which is considered above the median in Singapore I believe), can afford to spend more than a fifth of their total income on school fees alone. That doesn’t leave much for everything else.

The respected late LKY publicly said that he thinks $$$ is not a solution to solving Singapore’s low birth rate.

$$$ does solve a lot of problems in this world. But the question is, to what extent? I’m sure as the gov doles out more $$$, the law of diminishing returns sets in and you get a weaker effect. It’s just not proportional.

The other question that’s not raised because it’s not politically viable to talk about this, is what segment of the population does the gov wants to have kids. Yes, we want kids, but we also want responsible parents that put in resources into raising up quality kids with abilities. Simply throwing $$$ may result in more kids for segments of the population which simply do not put in that much effort raising them.

To the government’s credit, they have set up a series of PCF schools that are low cost, catered to parents in the heartlands. The problem is, somehow the government thinks that in certain estates (like mine!), where the housing is mainly private, there is no demand for such government sponsored preschools and hence there are no PCF centres near my place. Maybe they’re right. I don’t profess to be an expert in this arena.

Obviously after this episode, my emphasis on hygiene in the school is heightened. The new school seems much better in its curriculum too. Teachers are relatively highly educated, and I’m happy to pay that sorta fees if there’s a discernible difference between the previous school and this new one.


GOLD

No, this is not an in depth discussion about gold. I am no expert on gold, and my knowledge of how gold relates to economic conditions is rudimentary at best. But Robert Elway from Rosland Capital contacted me to talk about gold, and since he seems like a polite, nice guy, I’d just be generous and include Rosland Capital into this post.

https://www.roslandcapital.com/

Plus he sent me a very cool chart he did himself:

397) Rosland_gold_timeline_v03.jpg

I’m not getting any remuneration or benefits of any sort from Rosland Capital, and this is not an advert.

I just thought that this chart is really interesting and maps out the major events, as well as some not-too-major ones.


BLOG LINKS

Keen eyed readers may notice 2 new blog links on the right. ———–>

Off-Piste Investing (http://offpisteinvesting.com/) focuses more on the Asia region, not particularly so for SGX listed companies. He has some interesting ideas, presented in a simple, easy to read manner. Those who want to have some exposure to regional markets may find some ideas there.

Kevin from Turtle Investor (http://www.turtleinvestor.net/) has been a great help, answering some of my questions about how to privatize and monetize his blog. That’s been useful for a non-IT guy like myself.

The thing is, SG TTI is currently on a free plan in WordPress. But that comes with limitations. There’s no way to monetize the site on this plan, and more importantly, there is a cap on the storage space available.

So as there are more posts in future, I may soon hit this cap. This means either I NOT share images and tables in future company analyses, or I’ll have to upgrade to a paid plan. Obviously it’s hard to analyse companies without figures in tables and charts, so at some point, I’ll have to migrate SG TTI. And if it’s a paid plan, I’d at least like for the ads to cover the cost of maintaining the site.

In the meantime, please go over to Turtle Investors site and read his posts, click on some ads there. There’s absolutely no cost to you, and next to zero effort, but it helps to keep good content online that’d help you in your investing journey. (No, don’t click on my ads here right now, it doesn’t help SG TTI at all)

Good, informative content takes a lot of effort. Content and data that helps readers spot gems is by definition, not going to be easily available. If it is readily available without any analytical effort, the price-intrinsic value gap narrows and the opportunity ceases to exist.

So please support any efforts at maintaining good content. And please subscribe to SG TTI too. That’s how you can help.


ADVICE FOR BEGINNERS

I get very encouraged and flattered when I receive emails from young investors who are just starting out, asking for advice. Many of the questions are pretty much similar actually.

So, I know for a fact that there are many serious investors here, many are spending a lot of time and effort to perfect this art. Kudos to you guys.

Not too long ago, my fellow bloggers, Kyith and Brian (their blog links are on the right) conducted a sharing session. I read the post just 1 day after it was posted, and guess what, the slots were fully subscribed.

Getting rich is serious business.

And there are many people who are serious about getting ahead. Good for you guys! You could’ve spent the 3 hours after work watching tv or lazing around, but instead you added to your knowledge base. That cannot be a bad thing.

On this note, I’d end this post by sharing a couple of absolutely fantastic videos on investing that I’ve seen recently.

The first one is posted on NextInsight. Tom Gayner is one of those under rated, little known investors who’s actually done fantastically well. I think most people would do well to watch this video:

https://www.youtube.com/watch?v=2sG91e1Wh4I

The NextInsight article is here:

https://www.nextinsight.net/story-archive-mainmenu-60/938-2016/11215-investor-guru-thinking-differently-from-when-i-first-started-out

But don’t just read the article. Go watch the video.

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Alright, now that you’ve watched the video, what are the 4 points that Tom Gayner mentioned in the video?

If you can’t answer that, go watch it again and write them down and memorize them this time.

I think that’s the issue for most people. Everyone likes to read and watch things casually, but investing in this manner will give you the exact results congruent to your attitude: Casual results.

I think it’s necessary to take it seriously, no different from how you’d study for an exam.

But the reality is, people like to read easy things that don’t need much thinking, and certainly no memorizing. People like to click on blog posts with large colorful pictures, talking about frivolous stuff, because it takes less brain cells to comprehend. Good for reading on the MRT.

I can assure you that you can read 1,000 of such articles, and it wouldn’t give you an iota more investing prowess. It’d be much better to take all that effort, sit down seriously and watch and learn just 1 more technical, harder to digest and understand video/post/article, and try to incorporate that into your thinking.

Anyway, the 4 take home points from Tom Gayner for finding gems:

  1. Companies have to demonstrate a record of profitability, with good ROIC and achieve all this with minimal debt.
  2. Management – Integrity and Ability
  3. Price relative to intrinsic value
  4. Scalability – Power of compounding

Yay. I typed all that out without having to refer to anything. It means I’ve internalized them. You might find me giving more discussion to these points in future analyses.

Point 4 in particular, is something new that I’d admit I haven’t considered much. It is probably the biggest take home message for me.

This is another excellent lesson for beginners that I came across some time ago:

Martin Shkreli is painted as a villain by the media, but I don’t think anyone doubts that he’s a really smart guy.

I’d recommend paying attention to the front of the video, in which he talks about more general stuff.

Go listen and take down notes for the entire video if you have to, do whatever you need to do to internalize the key points.

I’d point out something important that he said. You have to be serious about this, there are many professionals doing the same thing. What makes you think you can beat them?

If you can’t, or don’t find it fun to try, then don’t. Park your money in index funds, or give them to the professionals who do this for a living. (Find a good, honest money manager!)

Then use the time to focus on your career instead.

Although SG TTI thus far, only discusses investing methodology, ideas and specific companies, in terms of actual financials, I’d earned a lot more by focusing on my career and specific skill sets that’s valued by society.

And since my monthly income (which comes from multiple sources btw), although variable, usually way exceeds the expenses (for the whole family) every month, it means that if I think of myself as a business entity, I’m extremely FCF generative and that provides a lot of ammunition. In short, I’m a Boustead or a Dutech. :)

Many people talk about “Achieving financial freedom” via investing, and indeed, it’s taken as a gold standard by everyone I know. Everyone’s trying to build some pot of gold and then retire from their jobs, as though their jobs are some poison and they hate it so much.

Good for you if you’ve achieved it.

But thinking like that is kinda like sending a battalion of troops to the battlefield without any backup supplies, hoping that they’d pick up ammunition, food and medical supplies along the way while they wipe out enemies.

Possible, but very difficult and tiring. Wouldn’t it be better if there’s a constant monthly supply of ammunition, food and medical supplies for your troops? And you actually like the process of supplying this ammunition and am focused on providing more every month. Anything that they pick up is a bonus.

So if you hate to fight the battle, or simply suck at it, at least focus on sending more and more ammunition for your troops every month, while you hire military experts to strategize and move your troops around.

Alright, that’s the end of this post.

I sincerely wish all readers of SG TTI a great Christmas, and an absolutely fantastic 2017 ahead!

Centurion Corporation Investing Thesis Part III

This is a continuation of:

Centurion Corporation Investing Thesis Part I

Centurion Corporation Investing Thesis Part II

372) Centurion Corporation Logo.png

In the comments section of part II, a reader commented that he isn’t so sure about Centurion, and if anything, it’ll be a small punt rather than a core position in a portfolio. That, in a nutshell, describes how I feel too. Currently, at least.

Centurion has several things going for it, but as I described in part II, the debt is certainly a concern. Furthermore, as I judge that Centurion doesn’t have a moat around it’s business, it’s therefore difficult to project with certainty, the currently good CFs.

57) Dutech competitive moat

In the dormitory business, it is very difficult to get an enduring moat around your business as the main criterion for your clients, is the price they’re paying for their staff’s accommodation. I can see where Centurion’s management is moving with this though; they have tried to build a sense of reliability and efficiency around their business via the “Westlite” brand.

That helps, although I don’t think you’d get much traction in this business. Centurion’s management also has an entrepreneurial bent, they have shown several times that they’re not afraid to be the 1st mover, which can be a good or a bad thing depending on whether they’re right.

They’ve also shown that they have foresight to move into new markets early, without waiting for the business to deteriorate and  market forces (aka declining earnings and/or a share price) to force their hand.

Overall, I think Centurion’s management deserves high marks for how the business is being run currently, despite my earlier comments about the debt levels.


So what’s in store for Centurion going forward?

My guess is that for FY16, the company’s earnings will not be very different from that of FY15. Probably just slightly below that of FY15.

On one hand, the company will be recognizing a one off write down of it’s dorm at Toh Guan from the URA’s decision. So that’s going to be negative for earnings.

On the other hand, FY15 had an extraordinary write down of $4.8mil from the carrying value of their dorm with Lian Beng (Lian Beng-Centurion (Mandai) Pte Ltd), which would not be present for FY16. I guess the abscence of a comparative negative makes a positive.

Dorm rates on a per bed basis has dropped from FY16 compared to FY15, but the company has had new revenue streams from their acquisitions in the student accommodation space.

As of 9M16, the earnings are just slightly lower than 9M15.

So on the balance of everything, there’re some pluses and some minuses, but it’s safe to project a FY16 earnings that’s somewhat similar to FY15, probably slightly lower.

I don’t think the markets are going to be very excited by that. And since in the short term, the share price will basically reflect the market sentiment of all these participants, I don’t think the share price will be very exciting either in the short term.

Oh yes, back to the $4.8mil write down in FY15. Yes, of course I investigated about why there’s this write down. Afterall, it’s very important that we know the reason for it. If it’s recurring, we may end up getting hit by more write downs in future for other dorms!

But I’ve verified with Centurion’s IR who has explained that it’s mainly accounting related.

Basically, the purchase consideration for the joint venture was satisfied by an issue of new shares at 10 cents per share at that time. However, in accounting, the share price, which had risen beyond 10 cents on completion of the acquisition, was used to record as the purchase consideration. As a result of the difference between the share price and issue price of 10 cents, a goodwill of $4.8 million was recorded.

So yes, it’ll likely be extraordinary and not recurring.


Alright. Now I’m really moving on to the specifics. Let me try to project what lies ahead for Centurion.

390) Path ahead.JPG

(The guy standing there way ahead… yea that’s me!)

I deliberately left this part to the last, as it is very technical, and I don’t think anyone reading this without reading all the background given in Parts I and II, would understand what I’m saying.

Now, why am I monitoring Centurion? Thus far, from the facts I’ve put forth in my analysis, it doesn’t look like the company has a lot going for it. It almost looks like something that I should take a quick look at, and chuck it aside for eternity.

The reason why I’m still looking at Centurion in such great detail after 8 months, is because I think that at some point, if the share price continues to decline, Centurion would be one hell of a great investment opportunity. 

Well, yes I don’t know exactly when this point will be reached, I don’t think it’s right now though.

Let me substantiate.

I’ve already described how I think the management is pretty good, I’ve also shown how I’m optimistic about the company’s foray into student accommodation. I’ve substantiated my thoughts, and now we’ve seen how GIC is also competing on that front. So we shan’t talk about that again.

In FY15, Centurion explored hiving off it’s dormitory assets into a REIT listing. Now, this is novel for sure, there are no REITs, and there never was ever any REIT, that holds PBWA assets. That’d really be a first of it’s kind.

See what I mean about the management being entrepreneurial?

Unfortunately, after consultation with SGX, they realised that they couldn’t as SGX considers it a “chain listing”. What exactly is a chain listing? SGX considers it a chain listing if the business of the hived off REIT, (or any listed entitiy for that matter), is a “significant” portion of the original parent.

Which makes sense actually. Since the dormitory assets are pretty much the bulk of Centurion’s business. It’s now a smaller proportion, but still the main bulk, because of the expanded student accommodation arm.

That’s a real pity for the company, because if they could successfully hive it off into a REIT, it’d be a major game changer for Centurion. It’d be the best thing they did since the RTO.

Why’d I say that?

Well, firstly, as I’ve illustrated, debt is a major concern for Centurion. With 1 move like this, the debt gets completely eradicated.

Tax savings would be another obvious positive. In FY15, $8.27mil of tax was paid, mostly related to the dormitories; in a REIT structure, most of this tax would’ve been saved.

Some of the dormitories have also reached full occupancy, and as such, they’re “fully valued” mostly. Obviously, this would be the best time to monetize the asset, free up CF, and recycle cash into other opportunities. Something that the management has shown that they’re very capable of digging up.

It all makes perfect sense. Centurion has avenue to deploy cash, but has high debt and is constrained (by market demands) by funds. They’re going to find it difficult to balloon their debt much futher from these levels. So if they can monetize mature assets, the timing would be great.

So it’s really too bad that they’re not allowed to. The company has indicated that they’re still keeping these thoughts for possible future listing into a REIT when the dormitory assets are no longer considered “substantial” enough for it to be considered a “chain listing”

Centurion’s IR has confirmed to me that there is no set guidance or percentage figures on revenue or earnings, below which the assets would not be considered as a chain listing. I didn’t really like this; so who decides if it’s a “chain listing”? It’s arbitrary? Some guy at SGX calls it a chain listing or not depending on his mood?

“The SGX definition for ‘Chain Listing’: A subsidiary or parent company of an existing listed issuer will not normally be considered suitable for listing if the assets and operations of the applicant are substantially the same as those of the existing issuer. In arriving at a decision, the Exchange will consider the applicant’s business or commercial reasons for listing. SGX did not disclose the % which they deemed as substantial for issuers to cross.”

I’m not disputing that in this instance, it shouldn’t be allowed. I’m saying that there should be some clear guideline given, a target that the company can hit, something that a deep value investor can use to gauge.

Anyway, as an academic exercise, I proceeded to stress test Centurion’s dorm assets vs other assets in existing REITs, just to simulate a scenario whereby Centurion is eventually allowed to list it’s dorm assets.

What I’m trying to understand is that, if Centurion were to list their assets in a REIT, would there be market demand for it? How attractive would such a REIT be, compared to other REITs?

This is what I came up with:

392) Centurion vs REITs.jpg

This means that at current valuations, if Centurion is an actual REIT, it is much more attractive (from a valuation perspective) than other existing REITs.

(well it’s actually become even more attractive cos the share price is lower than the $0.35 when I did this analysis)

The cap rate for Centurion’s dorm assets are calculated by taking the net income from the assets (before tax) divided by the NAV for the assets.

The cap rate, which I believe would be the key metric for most REIT investors, pretty much trashes the competition, and this is derived on the back of lower PEs.

Do note that the dividend yield seems lower, but that’s for Centurion corp as a whole, which is not reflective of how the REIT would look like. Obviously the yields would be much higher after accounting for the tax savings, the savings on interest expenses, and without the need to set aside cash for other business operations.

So there. This basically illustrates why Centurion’s management explored the hiving of their treasured dormitories into a REIT. The assets would likely garner better valuations, and be worth much more in a REIT than in a company structure. All this while recycling Centurion’s cash to higher growth, newer opportunities.

Too bad it can’t be done now. Looking at the market conditions, it sure looks like it can’t be done anytime soon either.


Since I mentioned about the cap rate, let me move on to talk about the cap rate for Centurion’s debt. (Debt is a recurring theme in this investing thesis cos it’s really the elephant in the room)

A bit of accounting 101 here:

Borrowings can be specific or general in nature.

The specific borrowings are done in relation to the acquisition of a qualifying asset, and no other reasons. It is easy to calculate the cap rate in this type of instances, as we just have to capitalize the actual interest costs incurred, less any income etc earned from the borrowing.

The borrowings that are general in nature though, are more difficult to capitalize as we have to determine how much of the loan is used for the specific asset. So for example, a business may take out a $1mil loan, but use only $700k the build the dorm, while the $300k is used for other purposes.

The cap rate would then be calculated as the weighted average of the borrowing costs applicable to general pool.

To find out the specific interest costs, we then have to multiply this cap rate by the portion of the borrowings that relate specifically to the dorm ($700k).

Let me illustrate with an example:

If Centurion borrowed $600k at 5%, and another $400k at 7%,

This $1mil loan is used for general working capital purposes, as well as to build a dorm.

To build the dorm, Centurion used $400k from the 1st loan, and another $200k from the 2nd loan. (Total of $600k)

What is the cap rate?

The cap rate is the weighted average of the borrowing costs…. so it is calculated as such:

[5% x $600,000/($600,000 + $400,000)] + [7% x $400,000/($600,000 + $400,000)]

=3% + 2.8%

= 5.8%

The actual borrowing costs is thus calculated as (5.8% x $400,000) + (5.8% x $200,000) = $34,800

Assuming that amount used to build the dorm was used for 1 yr exactly. If it’s more or less, then simply time weight the borrowing costs.


Alright, so why the trouble going through the above accounting 101 lesson above?

Well, because Centurion’s borrowing costs on general financing are capitalised at a decreasing rate over the years.

FY12: 1.19%

FY13: 0.87%

FY14: 0.6%

FY15: 0.53%

From AR15:

387-centurion-finance-expenses

What can we conclude from this?

This means that the total borrowing costs, as a proportion of the total debt, has been decreasing.

Since the total debt has been increasing, we can then conclude that the more recent debt have lower interest costs compared to the earlier debt. Alternatively, it could also mean that the interest rates applied to the total debt are floating and has been dropping as a whole.

Either way it’s definitely a good thing for the company as it indicates that the interest cost per dollar of debt has dropped.

The quantum of the total interest costs has increased dramatically, but as a function of the total debt, it has actually dropped.

Certainly something important to assess and understand, seeing that debt is the major concern for Centurion currently.


No investing thesis can be complete without some analysis of the future prospects of the company, qualitatively. Particularly so because Centurion’s prospects will be greatly influenced by government policies as well as general economic factors.

Troubles with foreign workers in recent years made the government sit up and look into the living conditions of our foreign workers. A famous instance is the bus driver strike back in 2012:

393) Bus drivers strike.jpg

(Credit to The Guardian)

Since then, there has been rigorous debate on our foreign workers’ living conditions, particularly the dormitory sector. Check out this long discussion by the Workers’ Party in Parliament:

http://www.wp.sg/debate-on-foreign-employee-dormitory-bill-mp-pritam-singh/

The government has responded by trying to “encourage” employers to house their workers in suitable dormitories. This means clamping down on illegal dormitories that do not meet the regulatory standards.

http://www.theonlinecitizen.com/2015/04/10/68-illegal-dorms-discovered-in-geylang-only-tip-of-the-iceberg/

On top of that, there are now new rules for dorms housing >1,000 beds. My guess is that the government will slowly eliminate the smaller dorms. Why else would there be additional rules for the large dorms, while the smaller dorms <1,000 beds are not limited by these rules?

This is taken from the Foreign Employee Dormitory Act:

394) Foreign employee dormitory act.jpg

So in summary, here’s the government’s plan.

Go for scale for efficiency. Limit the smaller players, but regulate the bigger players. Make sure the living conditions provided by the bigger dormitories are acceptable – good.

But it’s not just the dormitories. As I mentioned in Part I, PBWA covers factory converted quarters as well. These have also come under scrutiny and certain rules have been put in place. Come on, everyone loves free Wi-fi:

http://www.straitstimes.com/singapore/manpower/mom-sets-new-quality-standards-for-dorms

On top of all that, foreign workers from certain sectors (that are non-Malaysians) are no longer allowed to be housed in HDB flats:

http://www.propertyguru.com.sg/property-management-news/2014/11/73198/foreign-workers-in-certain-sectors-barred-from-public-housing

So where is the industry headed to in the long run?

The smaller dormitory players will find it economically unfeasible to compete. Land sizes set aside for dormitories will be of a certain size to encourage large dormitories of 1,000 beds. Illegal dormitories will be cracked down upon. These regulations would ensure that only competent and efficient operators will survive.

All that is obviously good for Centurion.

But even amongst existing large dormitories and their operators, there’d be more requirements placed on these dormitories. The standard of the living conditions would have to improve over time, and all these would add to the operating costs of the business.

That’s not good for Centurion.

How about the demand for beds?

Here’s some data I’ve compiled:

395) Foreign worker numbers.jpg

Notes:

1. Data may not add up to the total due to rounding.

2. “Other Work Passes” includes Letter of Consent (LOC) and Training Work Permit (TWP). Training Employment Pass (TEP) was included in “Other Work Passes” from March 2014 onwards.

3. In 2014, estimated that 160,000 workers stay in PBWA (dormitories)

4. Assume that half of the WP holders are malaysians who stay in residential apartments or commute daily to Singapore. Of the other half, assume 80% stay in dormitories.

I don’t have the data for 2016, but we can already see stagnation or a slight dip starting in end 2015, I think it’s safe to assume that the demand has continued dipping in 2016.


CONCLUSION

I think Centurion is one company to watch for the future. Well run, sharp management with a good track record thus far.

Unfortunately, the industry headwinds in the near term are strong, and there’s nothing much they can do about it.

I’ll be monitoring the new growth areas: the student accommodation business here and overseas, to see if the occupancy figures hold up. It’d be difficult for Centurion to do more acquisitions for now, until they can get their debt levels down.

This is a period of consolidation, I’d be hoping the share price continues dropping while I monitor the company. There’d come a time when this becomes a fantastic opportunity to allocate capital.

Lastly, for additional reading on Centurion, I’d just link to one of my fellow bloggers’ (TUB) post here:

http://tubinvesting.blogspot.sg/2016/10/one-with-dormitory-business.html

Happy Holidays!