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Change In Centurion Corporation’s Strategy Pays Off

Centurion Corporation Limited (SGX: OU8), formerly known as SM Summit Holdings Limited, is the only listed dormitory operator in Singapore via a RTO (reverse take-over) in 2011. It now manages dormitories under the Weslite brand in addition to have a storage disc manufacturing business.

The company released its results for the financial year ending 31 Dec 2013 on Friday and found itself achieving a strong financial performance for the year after its transformation into a dormitory operator.

As of the end of 2013, Centurion owns a total of 8 operational dormitories in Singapore and Malaysia. In Singapore, the company has three such assets in operation – one of which is a 45-55 joint venture with civil engineering outfit Lian Beng Group (SGX: L03) – with a total capacity of 19,700 beds. In Malaysia, it has five operational dormitories with have a total capacity of 13,500 beds.

There are four more dormitories in the planning stage by the company with one each in Singapore, and Australia, and two in Malaysia. Once these four dormitories are up and running, the company expects to grow its bed-capacity to more than 50,000 by 2015 after factoring in the completion of upgrading works on existing operational dormitories as well.

Some basic numbers

For the 12 months ended 31 Dec 2013, Centurion’s total revenue increased a slight 2%  from S$65.2 million in 2012 to S$66.4 million in 2013. The meager increase is not actually a sign of the limitations in the company’s ability to increase revenue from its dormitory operations, however.

In fact, sales from the accommodation business  surged 26% to S$47.3 million in 2013, propelled by the continued expansion of its accommodation assets in Malaysia as well as rental rate improvements in Singapore. Unfortunately, the strong growth from the lodging business was mitigated by the 31% fall in optical disc sales, stemming from weakening demand for optical media.

On a brighter note, the Group’s net profit skyrocketed 476% from S$15.99 million to a new high of S$92.2 million, mainly driven by fair value gains of S$77.2 million (i.e. an increase in the valuation of the company’s properties) derived from its investment properties. This more than offset a one-off impairment charge of S$3.9 million on hard assets related to its optical disc operations. Even without the fair value gains, profits from its accommodation business alone had advanced by a healthy annual growth rate of 43% to reach S$19.6 million.

In contrast, the strong performance from the accommodation business was dragged down by the optical disc segment which chalked up net losses of S$0.78 million as compared to a net profit of S$1.54 million in the previous year..

A growing top- and bottom-line is not the only thing that’s improving at Centurion Group; it is also seeing very healthy profit margins that’s improving. For instance, the company’s gross profit margin had gone up from 48% in 2012 to 52% in 2013 while its net profit margins had strengthened from 23.5% to 28.3%. This was mainly due to increased revenue contribution from the accommodation business which carries higher margins in general.

Financial Position

Centurion’s net assets rose 39% from S$211 million to S$292 million on a year-to-year basis. The increase was primarily attributable to the 68% surge in non-current assets. There were three primary reasons why that happened: 1) There was an acquisition of a plot of land in Woodlands, Singapore for S$81 million; 2) Upgrading works made on dormitories based in Malaysia and Toh Guan, Singapore, had increased the value of those properties by S$30 million, and; 3) the company’s investment properties had been revalued upwards by S$43 million.

However, any increase in the company’s assets was largely offset by a 152% jump in non-current liabilities to S$173 million.

Those liabilities had increased due to the issue of S$100 million worth of notes (i.e. debt) in Oct 2013 under Centurion Group’s Medium Term Note programme. In addition, the company had also increased its bank borrowings.

Ultimately, Centurion’s balance sheet had weakened compared to a year ago as its gearing ratio had increased from 26% at the end of 2012 to 39%.

Business Outlook

Looking ahead, Centurion is showing progress on 3 fronts.

Firstly, in the company’s accommodation business in Singapore, “rental rates are expected to remain sustainable with strong occupancy rates.” Upgrading works for its Westlite Toh Guan dormitory had been completed in Jan 2014, which saw the property add a new 18-storey block with 3,800 additional beds. Construction for the company’s Westlite Woodlands dormitory has also started and is expected to be done by 2015.

Secondly, Centurion has started building two new dormitories in Malaysia in Tampoi and Senai. The new facilities are expected to be done by 2015 and would contain 5,300 and 5,500 beds respectively.

Finally, Centurion has announced its foray into the student accommodation business through the acquisition of the RMIT Village in Melbourne, Australia. The company expects  the acquisition to “be earnings accretive from Feb 2014” onwards.

Mr Kong Chee Min, chief executive of Centurion, has this to say regarding the company’s results: “Over the year, the Group has expanded our geographical footprint and diversified into the student accommodation business. We are pleased with the Group’s performance this year, which we believe sets the stage for us to bring our expertise and capabilities in the accommodation management business further out into Asia and beyond”.

Valuation

Shares of Centurion closed at S$0.62 on Friday. The company’s valued at a low price-to-earnings (P/E)ratio of 5.2 due to the high valuation gains on its properties. Excluding the fair value gains, Centurion’s profits would come in at 2.49 cents per share instead and its shares would then carry an adjusted P/E ratio of 24.9.

The company’s Board of Directors have proposed a final dividend of 0.6 Singapore cents per ordinary share in the earnings release. As there were no additional dividends declared for the year, this brings Centurion’s annual dividend for 2013 to 0.6 Singapore cents, a drop from the dividends of 0.7 Singapore cents paid out in 2012. In any case, this also translates into a trailing dividend yield of 1% for Centurion’s shares.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.