Centurion Corporation Investing Thesis Part I

Christmas present for readers of SG TTI: I’m sharing my work on Centurion. :)

372) Centurion Corporation Logo.png

This is a company I’ve researched on for the past 8 mths, and although I’m optimistic about the longer term prospects of Centurion Corp, I currently do not own any position in the company.

Background

The business model of Centurion is easy to understand: It is primarily a foreign worker dormitory operator (the industry lingo is “Purpose Built Workers’ Accommodation or PBWA), and in recent years, has expanded to manage student accommodations. It also owns as yet, un-utilised plots of land in Malaysia, Australia & Indonesia, which will eventually be developed into “short stay accommodation” if they could get the rezoning approved (Australia) & more workers’ dorm (Indonesia & Malaysia)

PBWA doesn’t just include dormitories. It can include factories or industrial properties that have been modified to accommodate workers quarters, and even on-site temporary workers’ quarters, although, increasingly, the government is placing regulations to discourage this.

They also have a puny optical disc business. Yes, it’s totally unrelated, it’s there because Centurion’s dorm business was formed via a RTO of a listed business, which happens to be in the dying optical disc trade.

We won’t spend too much time any time on this as it’s contribution to NP is negligible.

History

Centurion is one of the 1st movers in the industry. They moved quickly to build and manage dormitory assets some years ago, when there was a severe shortage of such accommodation to house the massive population of foreign workers.

Following public discontent with the presence of foreign workers living amongst locals, the government has been trying to place legislation to shift these foreign workers into such PBWA, mostly dormitories.

Currently, Centurion is the 2nd largest dormitory operator in Singapore (behind Vobis) and is the only listed pure dormitory operator on SGX. (Many construction players own dorms as a sideline but are not pure operators.)

Accordingly, as the 1st mover, Centurion enjoyed a massive moat when they got the timing right a few years ago, and the share price shot up:

373) Centurion Corp share price 08122016.jpg

The share price rose from just under $0.2 to over $0.75 in the span of just over a year. That’s a huge >3 fold rise in a very short span of time.

Shows how the markets can react when you’re lucky and/or have foresight and become the 1st mover.

Ah well, all good things must come to an end though, as other competitors caught on to this lucrative market and started moving into Centurion’s space. Furthermore, the demand from foreign workers’ employers dropped drastically in recent years, as the government moved to limit their numbers. It didn’t help that the major industries that employ the most of such workers, eg Shipping , Construction, is currently in a slump of sorts.

The share price has since dropped substantially from it’s highs about a year ago.


General Nature Of Business (Singapore)

Since the bulk of Centurion’s revenue comes from worker’s accommodation, that’s where I’d start with. Centurion manages PBWA assets in Singapore and Malaysia.

374) Centurion dorm image.jpg

In Singapore, dorms are leased by “units”, similar to renting out private apartments. Size of the unit and the corresponding number of beds in each unit varies. Employer can adjust the number of people staying in a single unit (up to a certain cap), by removing some beds to provide the workers with more room, better quality etc.

Size of the room determines max number of beds allowed. The occupancy rate is measured according to the number of beds, but in reality, leasing is done via number of units.

I found this out because I got confused whilst tabulating some figures in their FS, and the figures didn’t tally. Their IR explained that the occupancy rate figures are based on the total number of beds for clarity of presentation.

Employers who lease are subject to a tenancy agreement which is typically for 1-2 years. They have to pay a deposit too, similar to renting a private apartment

Centurion Corp sometimes gives leeway to employers, esp those with a long term history of working with Centurion, when they have to send their workers home/break leasing contract. This depends on the working relationship that Centurion has with the employer.

Employers take care of the transportation of the workers to the work site. Worksite location for the workers changes quite regularly. Hence employers may not necessarily mind different dormitories, as long as they are situated near good transport links (eg. Expressways)

This is an important point to note, as I’ll explain later.

Currently, Centurion manages 35,500 beds in Singapore

375) Workers' accommodation in Singapore.jpg

With the exception of Westlite Tuas, the other dorms have long term leases. The 3 older dorms enjoy close to full capacity while the company is trying to ramp up occupancy for the 2 newer dorms: Westlite Woodlands and Westlite Papan.

Historically, the new dorms take about 6-9 months to ramp up to close to full occupancy. Centurion IR has said that their Woodlands dorm will likely take much longer, as it targets the marine and O&G sectors.

Now, my thoughts are that the occupancy of dormitory assets has an exponential effect on profitability. This is because there is always a baseline cost to maintain the operations of the dorms. As the dormitory occupancy increases, the profitability accrued to the operator increases exponentially.

Think about this logically: Whether there’s 50% occupany or 100% occupancy, the lights in the common walkways still have to be turned on, you’d still need to provide the usual facilities, and special events and celebrations held in the dormitory, would cost more per head. (Whether there’s 100 people or 1,000 people watching a concert for eg, the cost is similar)

So the nature of the business is characterized by high start up costs but as occupancy increases, the profitability doesn’t just increase proportionally. It increases exponentially.

The winners in this business would be those who can manage assets efficiently by keeping costs low, while stretching their operating dollars by increasing occupancy as quickly as possible, and keeping a high occupancy throughout the term of the lease.

Of course, as with similar property assets, location is a key factor.

Recently, the company found a “documentation discrepancy” (haha love the euphemism!) regarding their Westlite Toh Guan dormitory. The dorm has 8,628 beds, but in it’s URA licensing application, it’s recorded as 7,820 beds according to the architect’s plans.

The company alerted URA and appealed to have the number of beds corrected, but to no avail. The authorities have determined that the company will need to cut the number of beds to match the 7,820 as indicated in the original plans.

I queried the company regarding how this could happen. Apparantly, the Toh Guan dormitory used to have only 5,300 beds. The company saw potential in the location, and redeveloped the property in 2011, increasing the density of the then low-rise buildings to increase the number of beds.

Well, apparantly someone made a costly mistake during the application for licensing.

In any case, the company has said that they’d likely shift the excess workers to other dormitories, and their contract with the employers allows them some flexibility in doing so.

Naturally, the next thought I had was “Since the employers are taking care of the transport costs for the workers, wouldn’t shifting the accommodation potentially add to the costs for employers, and lead to more resistance?”

Hence, my point above about how the worksite for the workers change, and employers do not necessarily mind a different location. I’m guessing the IR was referring to the construction industry when he told me this. Workers do not have a fixed work site, but may have to change after a project is completed. Hence, employers do not mind if they are shifted around.

If they do mind though, the maximum reduction in net profit from the loss of workers, has been estimated to be at S$2mil.

Still, this whole saga has been a negative for the company, and even if all employers allow the change in location, the company still has to write down the value of the dormitory now that the  number of beds is reduced. (they are marked to market at the end of each FY)

We probably can guesstimate the maximum losses from this saga, by applying a straight line proportional write down in the value of the asset based on FY15’s values. I didn’t do this though, as it probably wouldn’t matter too much, since the write down may be masked by appreciation in value of other assets. (Or appreciation of the value of the remaining beds in the same asset for that matter)

I’ll also add that although I said it’s a “costly mistake”, let’s be perspective here: the company has enjoyed extra revenue from the extra beds for a couple of years before realizing this mistake. As far as I know, they have to reverse this error without any known penalties, so on the balance of things, this is actually a profitable mistake for the company.


General Nature Of Business (Malaysia)

376) Workers' accommodation in Malaysia.jpg

Similarly, in Malaysia, the group owns long term assets, with a total of 61,200 beds currently. This will be ramped up to 72,300 beds when their 2 newly developed dorms are completed in 2018.

The profit margins for Malaysian dormitories are similar to that of the Singapore dormitories, indicating that the nature of how the business operates is actually quite similar.

377) Westlite Malaysia Pasir Gudang.JPG

Current occupancy is only 65% though, as the company was affected by Malaysia’s ruling to limit the number of foreign workers at the earlier part of 2016.

This development is interesting, and I’ll spend some time discussing the background here.

Malaysia has some 4 million foreign workers, only half of whom are in the Southeast Asian country legally. The malaysian gov stopped issuing work permits for workers on 19th Feb 2016, impacting on the dormitory business in Malaysia.

This is in the hope that the illegal workers (mainly workers who have expired permits but are overstaying) currently in Malaysia will be registered and converted to having a legal status (The Rehiring Programme). There are an estimated 1.7mil illegal workers. Deadline has been brought forward to 30th June instead of 31st Dec 2016.

The scheme though, has not been successful as the fees to convert them are high. Centurion is expecting the gov to start issuing work permits and welcome foreign workers soon, due to pressure from local businesses.

Many local businesses such as the plantations and textiles, are suffering from inadequate foreign workers. As of the time of writing this, the government has relaxed it’s restrictions on 4 industries, whilst maintaining them for the other industries.

Here are some relevant readings regarding this:

http://www.straitstimes.com/asia/se-asia/malaysia-freezes-recruitment-of-all-foreign-workers-including-those-from-bangladesh

http://www.straitstimes.com/asia/se-asia/kl-walking-tightrope-on-import-of-foreign-labour

http://www.straitstimes.com/asia/se-asia/malaysia-lifts-freeze-on-hiring-of-foreign-workers-for-four-sectors

Well, as we can all see now, the flip flop policies in Malaysia ain’t helping Centurion. I cannot see how companies will be willing to commit to leases for their workers when there is so much uncertainty.

From my correspondence with the company, it seems Centurion is confident in the prospects of it’s Malaysian assets, and have continued to go ahead with expansion in Penang.

In my DD, I too, felt the company is moving in the right direction by going further north to Penang. There are many higher value industries supported by the local government in Penang, that would require Centurion’s dorm assets. I’m not sure about the near term prospects of their JB assets though.

As per previously, Centurion has shown an entrepreneurial by not being afraid to be the 1st mover. In their current space in Malaysia, there is little to no competition.

The question is, would there be just as little demand?

It is hard to answer this question, as it is policy related. IMO, the main risk is the political uncertainty in Malaysia, and the fact that the elections have to be held by 2018. The local populace is unhappy with the massive influx of foreign workers previously, it is hard politically, for the government to open the floodgates at this juncture, regardless of whether it’s the right thing to do (for the economy).

I am actually surprised that nobody has talked about this. To me though, this is a risk that’s rather obvious, isn’t it? Elections, populace unhappiness, foreign workforce, government restrictions (puntive).

Hmmm, haven’t we seen all this play out somewhere before?


Student Accommodation

The company has sought to “diversify” somewhat, by going into the student accommodation space. This makes absolute sense. Surely managing dorms for foreign workers would be somewhat similar to dorms for students.

Centurion currently owns student dorms in Singapore, the UK and Australia.

378-centurion-student-accommodation-08122016

CSL Selegie underwent refurbishment works, which was completed in October 2015. As of 3Q16, it enjoys an occupancy of 95%, so all is good on that front.

RMIT Village in Melbourne, Australia, was acquired in 2014, underwent refurbishment works as well in Jan 2015, and operated at full capacity in FY15 and thus far in FY16, is still operating at full capacity.

Centurion recently acquired 4 more assets in the UK, and has expanded aggressively into this niche segment. Results thus far are very good, as collectively, all the assets operate at close to full capacity, despite Brexit.

I think the student accommodation space in the UK must be a very lucrative business to go into right now. Centurion has done a lot of research into this segment before throwing serious money, and although Brexit was a small hiccup, the student accommodation business is highly resilient.

In fact, the weakening pound may even be a slight positive for the business as it makes education in the UK more affordable.

379) UK student assets.jpg

It certainly is encouraging, that Centurion is not the only one seeing opportunities in this niche:

http://www.channelnewsasia.com/news/singapore/gic-acquires-uk-student-accommodation-portfolio-worth-an/3167092.html

GIC, which obviously has the capabilities to do extensive research, also moved aggressively into the space in partnership with Oaktree Capital Management, led by billionaire Howard Marks. (He writes regular letters detailing his thoughts, I’m a great fan of those letters)


Undeveloped Land

This table that I’ve compiled is pretty much self explanatory:

380) Centurion undeveloped land.jpg

The company is getting traction in developing higher end accommodation for the land in Indonesia.

As for the other 2 plots of land, currently I believe they are undeveloped, with no plans to progress in a big way as yet. Both are FH though, and the company has time on it’s side to eventually develop these.

Port Hedland for example, may not be one of the major cities of Australia, neither is it a known tourist destination.

But the port is one of the important ports used for iron ore shipping, with iron ores being supplied from the inland mines. I suspect Centurion intends to develop “short stay accommodation” to target executives involved in the shipping/commodities businesses revolving around the port.

381) Port Hedland.jpg


This concludes the 1st part of my investing thesis.

In the 2nd part, I’ll bring in the figures for discussion. It does look like there’s a lot to be talked about here if I decide to go in depth about the numbers. If need be, there’ll be a part 3 on Centurion.

Happy Holidays! And reading.

Advertisements

5 comments

  1. Hi TTI

    Nice sharing again by you. Lot of information as usual. Thanks for doing the research on behalf of us – readers.

    Anyway my concern of this business is it’s leverage and from the information above, I doubt that the company will be reducing its leverage in the near future,

    Another concern is that Westlite Tuas Lease will expire in April 2017. So I will wait till then to decide what I should do with this counter that’s in my watchlist.

    Regards,
    TUB

    Like

    1. Hi TUB
      Yes, leverage seems to be the main issue for investors I think. I will talk about that in part II where I’ll discuss the financials.
      Many reports seem to think the Westlite Tuas lease will get renewed, I’m not that optimistic. I think it won’t get renewed, and seeing that the site is one of their 3 dorms with full occupancy, that’d be a hit to their NP if that’s the case.

      Like

      1. Hi TTI,

        Yup, that’s my view too. Judging from the situation from Hock Lian Seng and TTJ, I doubt it will be renewed.

        Guess you need to wait another 8 months.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s