Centurion Corporation (SGX: OU8): Strategic Expansion in the Build-to-Rent (BTR) Sector

Overview:

Centurion Corporation Limited (Centurion Corp) is a leading provider of accommodation solutions, particularly focusing on workers’ and students’ accommodation. With a diversified portfolio across Singapore, Malaysia, the UK, Australia, and the US, the company has consistently delivered value through its high-quality accommodation assets. Recently, Centurion has announced its expansion into the Build-to-Rent (BTR) sector in China, marking a significant strategic development in its growth trajectory.

Recommendation and Target Price:

Recommendation: ACCUMULATE
Target Price: S$0.83
Current Price: S$0.70
Potential Upside: +19%
Broker: Lim & Tan Securities
Date of Recommendation: September 10, 2024

Key Investment Highlights:

1. Build-to-Rent (BTR) Expansion in China

Centurion’s latest foray into the Build-to-Rent (BTR) market in Xiamen, China, positions the company to capitalize on the growing demand for residential accommodation tailored to working professionals and young graduates. This venture is being undertaken through its indirect subsidiary, Centurion China Investments Pte. Ltd. (CCIPL), in partnership with Xiamen City Home Apartment Management Co., Ltd. (City Home). The partnership involves the establishment of two joint venture companies to retrofit and manage BTR accommodations in Xiamen.

Two Initial Projects Identified:
- The first project comprises five blocks of newly constructed residential buildings, which will be converted into 1,000 high-quality apartments under a 20-year master lease.
- The second project consists of one block, which will be converted into 500 apartments.

These projects target working professionals and fresh graduates in Xiamen and represent Centurion’s first major move into the Chinese residential market. This marks a significant milestone in the company’s strategy to expand its global footprint through an asset-light model.

2. Strategic Partnership with City Home

City Home, Centurion’s partner in this venture, specializes in operating housing leases and property management services across Fujian province. With more than 14,000 BTR apartments under its management, City Home brings extensive experience and local expertise, which will be critical to the success of Centurion’s BTR expansion. The joint venture will leverage both parties’ resources and market insights to tap into the high-demand housing market for professionals in Xiamen.

3. Strong Financial Position

Centurion Corp is financially sound with a robust balance sheet that enables it to pursue growth opportunities without over-leveraging its operations. At a share price of S$0.70, the company is valued at:

6.4x forward P/E
0.63x Price-to-Book ratio (P/B)
Dividend yield: 4.3%

This valuation is particularly attractive given the company’s strong cash flows, its strategic expansion efforts, and the positive rental reversions across its accommodation portfolio. The stock has already seen a 70% increase year-to-date (YTD), driven by positive market sentiment and strong underlying performance.

4. Asset-Light Strategy

Centurion’s focus on an asset-light model allows the company to expand its footprint without significant capital outlays. This strategy is well-aligned with the company’s long-term goal of reallocating capital from mature assets to high-growth opportunities, such as the BTR market in China. The shift towards managing and operating accommodation under long-term leases also reduces the company’s exposure to fluctuations in property values, thus providing more predictable revenue streams.

5. Positive Rental Reversions Across Portfolio

Despite its recent expansion into China, Centurion continues to see strong demand for its accommodation assets in other regions. Rental reversions have remained positive across all its markets, including student and workers’ accommodation in Singapore, Malaysia, the UK, and Australia. The company has been able to command higher rents due to strong demand and the premium quality of its properties.

6. Expanding Footprint Beyond China

The recent expansion into China follows Centurion’s earlier venture into Hong Kong’s student and workers’ accommodation market. This geographical diversification reduces Centurion’s reliance on any single market and positions it for growth across multiple regions. As demand for high-quality accommodation rises globally, Centurion is well-placed to capture this growth through its strategic expansions and joint ventures.

Valuation and Financial Metrics:

Centurion’s attractive valuation metrics highlight the stock’s potential upside:

Price-to-Earnings (P/E) Ratio: At 6.4x, Centurion trades at a discount compared to peers in the accommodation sector.
Price-to-Book (P/B) Ratio: The 0.63x P/B ratio suggests that the stock is undervalued relative to its book value, providing a margin of safety for investors.
Dividend Yield: With a 4.3% dividend yield, Centurion offers an attractive income component, supported by its strong cash flows and recurring rental income.
Potential Upside: The target price of S$0.83 implies a 19% upside, making the stock an appealing accumulation opportunity for investors looking for exposure to the growing accommodation market.

Revenue Projections (FY24E – FY25E):

FY24E Revenue: S$170 million, driven by positive rental reversions and the expansion of its BTR portfolio in China.
FY25E Revenue: Expected to grow by 8-10% YoY, with contributions from new joint ventures and higher occupancy rates across existing properties.

Risks to Consider:

Execution Risks in China: While the BTR market in China presents significant growth opportunities, there are potential risks related to execution, regulatory hurdles, and market competition. Centurion’s success in the region will depend on its ability to navigate these challenges effectively.
Regulatory Risks: Changes in property management regulations in any of the markets where Centurion operates could impact the company’s profitability.
Foreign Exchange Risks: Given its international operations, Centurion is exposed to foreign exchange fluctuations, which could affect its earnings in SGD terms.

Conclusion:

Centurion Corp’s strategic expansion into China’s Build-to-Rent market represents a significant growth opportunity for the company, building on its success in the student and workers’ accommodation sectors. The partnership with City Home is expected to provide a foothold in the fast-growing Chinese residential market for working professionals. With an attractive valuation, a strong financial position, and a well-executed asset-light strategy, Centurion offers a compelling investment case with a potential 19% upside.

Investors looking for a combination of growth and income should consider accumulating Centurion shares, particularly given its expanding global footprint and positive rental dynamics across its accommodation portfolio.

Thank you