Are Student Hostels The Next Big Thing For Fast-Growing Centurion Corp Ltd?

Workers accommodations provider Centurion Corp Ltd (SGX: OU8) announced earlier this week that it has won a tender to operate a student hostel in Singapore. Is this the sign of the next growth engine for the company?

The tender’s for a 10-storey building located at 1A Short Street. Centurion would be responsible for renovating the property, which has an eight year lease, to turn it into a student hostel that can accommodate 400 students and also house food & beverage retail outlets.

With 23,500 beds across three workers accommodation assets in Singapore at the moment, the student hostel project can be said to be relatively small in size for Centurion. However, it does signal to investors that the company may be intensifying its efforts into expanding its student accommodations business.

Centurion had entered the student hostel market in Australia and the United Kingdom back in February 2014 and November 2014 respectively. Together with the new hostel in Singapore, Centurion would have a total of six student accommodation assets in those three countries; the company currently has 465 beds in Australia and 1,960 beds in the UK.

These developments might mean two things.

The next engine for growth

If Centurion is indeed putting in more energy into growing its portfolio of student hostels going forward, investors might be able to enjoy a whole new driver of growth for the company.

To that point, Centurion had accomplished a very impressive 44% year over year jump in revenue to S$25.3 million in the first-quarter of 2015; the firm’s entry into the student accommodations business in Australia and UK had accounted for 64% of that revenue growth.

A possible slowdown in the core business

On the other hand, the company’s foray into student hostels may be an indication that growth in its core workers’ dormitories business might be stalling.

Fortunately, that should not be a major concern for investors at the current moment. The company currently has nine operating assets in the workers’ dormitories space and five projects which are under development. Once the new projects are fully developed, it will increase Centurion’s bed-count by 80%.

Foolish Takeaway

Given what we’ve seen, there are reasons to believe that Centurion’s future is bright.

But, there’s one area of concern with the firm and that is the strength of its balance sheet. At the end of 2014, Centurion already had a high gearing ratio (total debt to total assets) of 49.5%; the company ended 31 March 2015 with an even higher gearing of 57%.

With projects planned up to 2017, it will be interesting to see how the company plans to finance them. Investors might also want to keep a close eye on how Centurion’s balance sheet changes just in case the firm starts biting off more than it can chew.

Investors interested in the firm would have to weigh both the pros and cons before any investing decision can be made.

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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 does not own any companies mentioned above.