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Added Centurion Corporation Limited to my portfolio.

Thursday, February 23, 2017

I was introduced to Centurion Corporation Limited by a friend some time ago. He went in early, made his money, a lot of money, and scooted. Clever fellow.

AK is more of a plodder when it comes to investments. Investments which pay dividends consistently and meaningfully get his attention. A judicious amount of leverage is acceptable but too much leverage is scary especially now that interest rates are more likely to go up than not.

Anyway, sorting through piles of notes and cuttings in the last few days, I came across some scribbles I made about Centurion many moons ago. 

I took a quick look at the chart and it got me interested enough to do something more.


Centurion's share price was declining. It was clearly in a downtrend. 

Now, it looks like it has bottomed.

I always say that when there is blood on the street, I want to take a look. 

This time, I think that I am a little late since the share price broke resistance provided by the 200d moving average (MA) at 35c, came down a bit, not quite testing the 200d MA and moved back up.

The blood might have begun coagulating by now but, still, blood is blood.

For those who don't know, Centurion is in the business of running dormitories for workers and students. They are landlords. 

It is a business that is easy enough to understand, especially for those of us who like investing in REITs.

A taste of life in a dorm for workers.



So, what prevented me from investing in Centurion until now? A very high debt level and a weakening business environment.


There are many ways of looking at debt. I just look at their properties' valuations and what they owe to get a quick idea of the gearing level. 

They had about $700 million worth of debt against investment properties valued at about $940 million. 

Without taking anything else into consideration, that was a gearing level of about 74.5%.

I read that they have repaid $100 million since my scribbles and, so, their gearing level should be reduced to 64% or so. Still pretty high.

Having said this, some might remember that I said before (and most recently in a blog post on Croesus Retail Trust) that if a high debt level is matched by an ability to service the debt, it becomes less of a concern. So, interest expense must remain manageable.

In Centurion's case, there is a legitimate worry that a slow down in the economies in Singapore and Malaysia where its dormitories for workers are located would affect its business negatively.





Of course, Centurion has dormitories for students in Singapore, Australia and the UK too but the bulk of its business is still in dormitories for workers.

During bad times, highly leveraged businesses with reduced cash flow would find themselves in a pinch, to put it mildly. If interest expense goes up and cash flow goes down, the ship could be in danger of sinking.

Centurion has pretty strong cash flow and they have been able to cope with a high level of debt. Its operating cash flow is about 3.4x its interest expense. It isn't a fantastic interest cover ratio but it shows that interest expense is manageable.

However, if interest rate goes up, interest cover ratio will reduce if we do not see an improvement in cash flow, just like for REITs.

Assuming that cash flow and debt level stayed the same, in Centurion's case, based on $600 million worth of debt, a 1% increase in interest rate would mean $6 million more in interest expense. This would increase interest expense by 33% and reduce interest cover ratio to about 2.55x.

Of course, it would also put a dent in earnings. As investors for income, this is of interest to us because Centurion is not a REIT and it doesn't have to pay out 90% of its cash flow since it has no incentive to do so. However, Centurion does pay a percentage of its earnings as dividends to shareholders. Reduced earnings could mean reduced dividends.

Assuming an earnings per share (EPS) of 4.5c and number of issued shares at 740 million, a $6 million increase in interest expense would knock about 0.8c off EPS. This brings EPS to 3.7c.















Based on a possibly reduced EPS of 3.7c a year in future, paying a dividend per share (DPS) of 1.5c per year is still undemanding. This is assuming that business does not take a turn for the worse.

Paying 38c a share, I decided that a dividend yield of 3.95% is acceptable to me based on the above assumptions and a 40% payout ratio.

Centurion's share price seems to have bottomed although a retracement to the 200d MA which has started rising wouldn't surprise me. Prices climb a wall of worries.


Presentation (January 2017): HERE.
Factsheet: HERE.

22 comments:

merxantia said...

I remember this counter was mentioned before in one of your AK and friend sessions. I can only marvel at the timing of your purchase and influence of your post, as the share price has climbed after your post.

In any case, glad to see you still posting now and then. ;P

AK71 said...

Hi merxantia,

From a TA perspective, I feel that I am somewhat late in terms of timing. I should have bought when the share price did a retracement after breaking resistance provided by the 200d MA. That would have been at 36c or so.

Anyway, not complaining because, from a FA perspective, I think 38c is still a fairly good price. If the share price should retrace to form a higher low, I would probably buy more, all else being equal.

betta man said...

Hi AK,

any concern to you ?

http://www.straitstimes.com/business/companies-markets/centurion-q4-net-profit-falls-61-on-fair-value-loss

AK71 said...

Hi betta man,

Fair value loss (or gain) is a non-cash item. I am more interested in its cash flow. :)

keng said...

http://infopub.sgx.com/Apps?A=COW_CorpAnnouncement_Content&B=AnnouncementToday&F=ZGBK8O5A43RZ17H5&H=1e4ac03886225a6bf1ce67156ec66040a35338eb1e6a4f7d6ac406f3c682032a&fileId=CCL-Update%20on%20Ext%20of%20Lease%20of%20Westlite%20Tuas-20170314.pdf

I wonder why Westlite Tuas was granted only 9 months extension.

AK71 said...

Hi Keng,

Thanks for sharing this. 9 months is better than nothing, I guess. ;)

Kevin said...

Centurion to build student housing in Adelaide for A$45.5m ;) ;) ;)

http://www.straitstimes.com/business/companies-markets/centurion-to-build-student-housing-in-adelaide-for-a455m

AK71 said...

Hi Kevin,

Since becoming an investor in Centurion, I have done more research and everything tells me that the majority shareholders and management are very business savvy people.

Centurion is now almost as substantial an investment as QAF in my portfolio.

I hope my confidence is not misplaced. :)

AK71 said...

Centurion announced that it has entered into an agreement to acquire a development site in Adelaide, Australia for A$3.5 mln. The total cost is expected to be approximately A$45.5 mln (S$48.7 mln).

The freehold development site is strategically located off Rundle Street on the eastern side of Adelaide City Centre, within walking distance to University of Adelaide and University of South Australia and in close proximity to the main Rundle Mall shopping strip.

The development of dwell Adelaide is expected to be completed in 4Q 2018, catering to the student intake for the 2019 academic year.

According to a Savills report published in August 2016, there are approximately 60,100 full-time students in Adelaide’s universities, with approximately 2,300 and 3,000 PBSA beds provided by the universities and the private sector respectively.

Even with a pipeline of slightly over 1,100 beds, the expected supply of PBSA beds is anticipated to only cater to 11% of the student population in the city.

Source:
Lim & Tan

AK71 said...

Reader:
Centurion seeking HK dual listing. AK, 神机妙算? or really excellent due dilligence? 🙂

AK:
Alamak. I lucky lah.

http://centurion.listedcompany.com/newsroom/20170412_193356_OU8_T2R62RHFP5EJXKST.1.pdf

wanchai30 said...

Hi AK,

Having followed your blog for a couple of months, I realised you dont give advice and always prefer to talk to yourself. Supposed this has happened at the beginning of your financial literacy journey, what will you say to yourself if a company that you have invested in decided on a dual listing? Will there be any concerns that you will remind yourself?

Thanks for talking to yourself!

Pat

AK71 said...

Hi Pat,

Dual listing is a good thing especially if a good business is not well understood or appreciated here in Singapore. It will expose the stock to more investors and improve liquidity. It might even allow the stock to trade at higher valuations. ;)

Kevin said...

Hi AK,

GIC and Mapletree are also in the game. :) :) :)

http://i.imgur.com/xUpehST.jpg

AK71 said...

Hi Kevin,

Let's hope it doesn't get too crowded. ;p

Teckheng Lee said...

http://infopub.sgx.com/FileOpen/CCL-1Q2017%20Results-Press%20Release-20170509.ashx?App=Announcement&FileID=452827

Results are gd!

AK71 said...

Hi Teckheng,

More good years! How come that sounds familiar? ;p

yh said...

Hi AK

I just get introduced to your blog. Very interesting self-talks!
A noob question though: which platform of info do you use for your analysis? Google brought me to yahoo finance but it didnt show as much info as your blog (such as the 940 million of investment properties etc).

Thanks.

AK71 said...

Hi yh,

I usually go to companies' websites.

Best way to get information about a company is from the company. ;)

Teckheng Lee said...

https://www.theedgesingapore.com/centurion-posts-72-rise-2q-earnings-145-mil

Another fantastic result this quarter!

AK71 said...

Hi Teckheng,

What I really like is the increase in gross profit margin (+7%) together with an increase in gross profit (+36%). Very competent management. Two thumbs up. :)

Teckheng Lee said...

Hi AK,

The chart is very nice uptrend :)

AK71 said...

Hi Teckheng,

I hope the trend holds up. ;)

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