Centurion steady start boosted by one-off gain

1Q14 results in line. Centurion posted 1Q14 topline of S$19m (+21% y-o-y), largely attributable to higher contribution from the accommodation segment, which grew to S$15m vs S$4m in 1Q13. This was mitigated by the decline in the optical disk segment. Net profit of S$23m was boosted by one-off gains from the sale of Mandai industrial property amounting to S$17m, translating to core underlying profit of S$5m (+40% y-o-y), forming 16% of our FY14F. In addition, Centurion has also announced a special DPS of 0.5Scts/share.

Our View 1Q14 core earnings were a tad below forecast but we expect earnings to catch up in the subsequent quarters from capacity ramp up. Centurion’s slightly slower start to FY14 is understandable given that the acquisition of RMIT Village was completed in February, and Phase II of Toh Guan opened in January. As some time is required for the newly completed dormitory to ramp up occupancy, income contribution was correspondingly lower. The coming quarters should see sequential improvement in
earnings on the back of
(a) full-quarter contribution from RMIT Village and
(b) higher occupancies at Toh Guan Phase II.

Centurion prepared to take on challenges in Singapore’s dormitory space. There were 8 new dormitory land launches last year, translating to additional bed count of c.84k that will be coming online in the next 6 to 18 months. This presents two challenges to Centurion:
(a) slower bed rate growth as a result of more supply, and
(b) a steady erosion of its market share in the Singapore purpose-built dormitory space.

However, we do not think that these are insurmountable challenges – Centurion’s bed rates have historically trailed market rates (e.g. Westlite Mandai’s S$285 per bed/mth was 5-10% behind asking rates of S$300- 320), leaving some room for rate growth as the group plays catch up. Furthermore, we are positive on the group’s geographical and segmental diversification of operations, as this reduces its exposure to risks from Singapore regulatory shifts. Having entered the market early, Centurion generates solid profit margins on its existing Singapore operations, and we do not think that pursuit of market share at the expense of profitability would be prudent in any case.

Recommendation Maintain BUY, TP S$0.86. We have adjusted our FY14F and FY15F earnings by +2% and -7%, respectively, to account for the divestment of the group’s accommodation business, as well as later completion of the Woodlands dormitory in 2015. Our other assumptions regarding the group’s core operations remain unchanged. Maintain BUY, TP S$0.86.