Centurion Corporation Ltd Has Deferred Its Plans For A REIT: What’s Next For The Company?

Since Centurion Corporation Ltd’s (SGX: OU8) successful reverse takeover back in 2011, the company has seen explosive growth.

Its revenue has doubled in 2 years from S$64 million in 2012 to S$130 million in 2014. Over the same period, its operating profit did even better, flying from S$16 million to S$77 million.

Growth at a cost

However, Centurion’s growth has come at the expense of the health of its balance sheet; in order to generate higher revenue and earnings, the company, which now runs workers’ dormitories, had been increasing its borrowings at a rapid clip. You can see this in the table below:

Centurion's balance sheet

Source: S&P Capital IQ

In January this year, the company had proposed to set up a real estate investment trust by spinning off some of the properties it owns. The move was, in the company’s words, “to recycle capital to pursue its growth strategies across its growing accommodation business.”

But when Centurion’s plans for the REIT was first announced, I commented:

“Perhaps, the REIT proposal is more than just a way for the company to “recycle its capital” – it could be a financial lifeline for the company as well.”

My comment was made on the back of Centurion’s high leverage (which you can observe in the table above) and inability to generate free cash flow.

The road ahead for Centurion

On 20 March 2015, Centurion announced that it would be deferring its plan to set up a REIT due to an issue with the listing requirements that stock exchange operator Singapore Exchange has put in place.

With the door to a REIT-listing shut for now, Centurion has one less avenue to find the capital needed to strengthen its balance sheet.

The improvement of Centurion’s balance sheet is likely to be an important thing for the company. Although the firm has no immediate liquidity risks (its interest coverage ratio – measured by dividing EBIT with interest – is still a healthy 9.7), its high level of borrowings may act as a deterrent when it’s thinking of making more investments to expand its business.

Fortunately, there are other avenues that Centurion can explore when it comes to raising capital.

For instance, it could conduct a Rights issue and/or a private placement to increase its equity base (it should be noted though that such acts could dilute existing shareholders’ stakes in the firm). If those aren’t feasible, Centurion could even slow down its expansion for the time being and use its operating cash flow to pay down its borrowings.

Intact prospects

After its RTO in 2011, Centurion had focused on developing and running workers’ dormitories in Singapore and Malaysia with a stronger emphasis on Singapore.

But over time, the firm had started to diversify its business both operationally and geographically; it is now managing student accommodations in Australia and the United Kingdom as well as running even more workers’ dormitories in Malaysia.

From these, it can be seen that Centurion has a number of areas in which to grow.

Moreover, as my colleague James Yeo mentioned, Lian Beng Group Ltd (SGX: L03) had emerged as a substantial shareholder of Centurion last year. According to James:

“A strategic investment by Lian Beng marks new confidence that Centurion Corporation is heading in the right direction with its focus on dormitories. That’s important as the company’s optical disc business is facing dwindling sales based on its latest financial results.”

It would be interesting to see where Centurion is heading over the next few years. The company has room to grow, but its highly-geared balance sheet may be acting as a brake on its future growth.

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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 Writer Stanley Lim doesn’t own shares in any companies mentioned.