We were screening for some value investing opportunity when we came across Centurion Corporation Limited. It’s interesting to see a low price-to-earnings (P/E) of less than 3 and return on equity (ROE) of more than 15%.
However, we know that a low P/E ratio may not necessarily mean that the stock is undervalued. It could mean that the business is in distress, and projected to experience decline in earnings in the near future. Or perhaps it could be that the market has beaten down its stock price due to poor earnings reported recently.
So we decided to dig in deeper to see if indeed its a value investment or something we should avoid. Let’s take a look!
Centurion Corporation Business Overview
Source: Centurion Corporation Limited 3Q 2020 Business Updates Performance Highlights
The chart provides a good overview of Centurion Corporation’s business in purpose-built workers accommodation (PBWA) and purpose-built student accommodation (PBSA).
The company owns, develops and manages these specialized accommodation assets globally. 1% of revenue is derived mainly from the manufacturing and sale of optical discs and related data storage products. This comes from Centurion’s origin as an optical disc manufacturer. Due to its small contribution to the bottomline, we will ignore this for the purpose of our evaluation.
Source: Centurion Corporation Limited 1H 2020 Financial Results Presentation
The above diagram gives a clearer breakdown of the revenue contribution from respective accommodation assets. You can also observe that the PBWA segment in Singapore is a key contributor.
The company’s PBWA is concentrated mainly in Singapore and Malaysia, with Singapore contributing the majority of its revenue. On the other hand, the PBSA arm is spread across the UK, Australia, Singapore, US and South Korea, with the UK being the key contributor in this segment.
Thus, the company operates a business very similar to REITs. They acquire real estate assets and collect rental income as its main revenue.
Source: Centurion Corporation Limited 1H 2020 PBWA Segmentation By Industry
Specific to its PBWA business segment, we can see that Centurion Corporation is managing and diversifying its tenant base across various industries. This will reduce the impact of any economic fluctuations or government policies affecting any one industry.
Centurion Corporation Earnings And Valuation
Source: Centurion Corporation Limited Annual Report 2019 Consolidated Income Statement
In the beginning we mentioned that Centurion Corporation’s low P/E and high ROE caught our attention. From its income statement, you can see that a net fair value gains of S$66.266 million was registered in FY2019. This is mainly attributed to the appreciation of its investment properties.
The fair value gains does not translate to actual earnings for the company. For simplicity, we will deduct this off to arrive at the total profit of S$37.5 million instead of S$103.8 million. Given the number of shares outstanding to be about 870.78 million, earnings per share (EPS) will translate to be S$0.043. This is a more accurate figure compared to the reported EPS of S$0.1189 for FY2019. For its current share price of about S$0.350, the P/E will translate to about 8.1 instead of 2.9 reported on Yahoo Finance.
Centurion Corporation Asset Value And Valuation
Source: Centurion Corporation Limited 1H 2020 Balance Sheet Highlights
Prior to the outbreak of Covid-19, the stock price was hovering at an average of about S$0.42 a share. Indeed, travel restrictions affected the student accommodations segment. However, worker accommodations are still in high demand.
While the company’s operating costs have increased due to stepping up safety measures, it is not material. Especially with the start in vaccine production, PBWA and PBSA should ramp up back to its normal capacity pretty soon. Hence, we may be able to realize the potential 20% upside in terms of capital gain sooner than expected.
We know that the company’s core business is in specialized real estate assets. Therefore, a good metric to look at is the net asset value (NAV) which works out to be S$619 million. Consequently NAV per share translates to about S$0.707 as of 1H 2020. This means that the Price/NAV ratio will equate to about 0.50. At a 50% discount to its book value, we are potentially buying these assets at good bargains.
Not forgetting that the company has been distributing dividends of around S$0.015 – S$0.02 for the past few years. Thus, dividend yield works out to be about 4.2% – 5.7% based on a share price of S$0.350.
Centurion Corporation Growth And Expansions
Source: Centurion Corporation Limited 1H 2020 Accommodation Growth Profile
Centurion Corporation has been trying to grow the bed capacities across its PBWA and PBSA business segments over the past few years. There remains substantial demand for these accommodations in the coming years. Moreover, the company has been trying to diversify its revenue base to prevent concentration risk on PBWA.
Source: Centurion Corporation Limited 1H 2020 Financial Growth of Accommodation Business
Consequently, the company’s revenue and net profit has increased over the past decade as well. Nothing much has changed, other than the temporary impact of Covid19. Other than the additional expenses in managing the safety measures and potentially slightly lower capacity to accommodate the residents, the company should be able to continue to acquire valuable assets, whether in Singapore or other countries.
Source: Centurion Corporation Limited 1H 2020 Financial Overview
While Centurion Corporation’s business is not exciting per se, we think that the market has overly beaten its share price at the moment. Other sectors’ businesses already saw recoveries in their stock prices, but not for Centurion.
While the barrier to entry for potential competitors is not very strong per se, the company is a leading PBWA operator in Singapore and Malaysia. This can give them substantial pricing power and economies of scale. This can probably explain why Centurion continues to enjoy a good net profit margin of 36% in 1H 2020 even during the pandemic situation.
Comparatively, some of the REITs have already seen its share prices recover. In fact, a handful of them are doing even better than pre-Covid levels. As such, we feel that Centurion Corporation represents a potential investment opportunity. Even after discounting the fair value gains from its properties, current share price still provides a low P/E and Price/NAV.
The current depressed price of its share kind of limits any downside risk. The company’s strong business fundamentals still remain intact. Yet, there is still a good substantial upside for investors. So do keep a look out for such “unexciting” business, as they could be your next investment opportunity.
Keep learning and happy investing!
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