Centurion Corp Ltd (SGX: OU8), or Centurion, owns, develops, operates, and manages specialised accommodation assets such as workers’ dormitories and student accommodation. The group owns assets in Singapore, Malaysia, Australia, South Korea, the United Kingdom (UK), and the United States (US). Centurion’s portfolio consists of 31 accommodation assets totaling approximately 62,656 beds in 2019.
Centurion has been on an acquisition spree over the last 18 months, and the concern here is whether the group may be taking on more debt than it can reasonably service. Here is a quick review and analysis of Centurion’s acquisitions, followed by a case made for the opinion that the group may be borrowing too much.
Centurion’s student accommodation acquisitions
Centurion announced three significant acquisitions in 2018:
- 17 September 2018: The acquisition of Castle Gate Haus in Nottingham, UK, a freehold 133-bed student accommodation comprising 69 studios and 64 en-suite rooms. The consideration was around S$18.25 million.
- 10 September 2018: The acquisition of Benikea Hotel KP in South Korea at around S$16.55 million along with project capital expenditure of S$4.55 million, to develop a 208-bed student accommodation with potential to increase to up to 234 beds.
- 1 June 2018: The acquisition of a student accommodation asset for S$33.66 million in Manchester, UK. The property will is a 127-bed, 6 story, mixed-use building.
Note that the above three announced acquisitions amount to a total consideration of around S$73.01 million.
Debt load and finance costs
As of 31 March 2019, Centurion had a cash balance of S$102.6 million, while total gross debt stood at S$772.2 million. I used two methods to assess if debt levels seem high: One is the debt-to-equity ratio, and the other is the finance costs as a proportion of revenue.
Centurion had a debt-to-equity ratio of 1.49 times as of 31 March 2019, which is considered high as it means there is almost $1.50 of debt for every dollar of equity in the group. Finance costs took up 23.7% of revenue for the first quarter of 2019 (Q1 2019), compared to 20% for FY 2018. This proportion is high in itself and also seems to be rising over time, which seems to imply that the group is taking on more debt without a corresponding increase in revenue.
Source: Centurion Corporation’s Presentation Slides March 2019
Centurion has clearly outlined its plans for growing its bed capacity in the graph above. For the year 2020, the intention is for the group to increase its number of beds by around 9.7%. This may entail taking on additional debt to fund more acquisitions, or for organic growth through asset enhancement programs.
Investors need to be wary
Based on the above, investors need to be wary as the group may be taking on a tad too much debt. While student and worker accommodation assets are specialised assets that normally enjoy high occupancy rates, a severe downturn could crimp demand for workers and possibly cause fewer students to enroll as parents cut back on spending on university education. If demand falls, the group would still be saddled with a significant debt load but have less cash-generation ability.
A mitigating factor is the group’s cash-flow-generation ability, which remains very healthy — Centurion generated S$57.5 million of operating cash flow in fiscal year 2018. Another mitigating factor is that the company’s student accommodation assets should see sustained demand as the education industry is relatively immune to economic shocks.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in Centurion Corporation Ltd.