- Impact of COVID-19 showed in 2Q20, hitting Purpose-Built Student Accommodation (PBSA) segment the hardest.
- Centurion’s (CENSP) balance sheet remains healthy with adequate buffers and gearing stable at 54.1% from 54.5% in 4Q19.
- EBIT margins fell to 51.4% from 54.9% in 1H19 from higher expenses and provisions for rent receivables.
- The CENSP 22NC21 bond is an interesting short tenor play. We are Neutral on the bond given headwinds from lower PBSA occupancies and strained receivables from Purpose-Built Workers Accommodation (PBWA) customers expected to weigh on cash flows. But with the 2.5% step up on 1 Feb 2021 if not called, we think there is incentive for Centurion to call, translating to a yield to worst of 4.8%.
The Positives
+ Gearing and liquidity still adequate. Gearing remained stable at 54.1% from 54.5% in 4Q19, while OCF grew 11.4% YoY to S$32.2mn aided by government support scheme of S$1.5mn. According to Centurion’s MTN financial covenants, the group has a 23% asset loss buffer of S$347mn keeping debt constant, and 33% debt headroom of S$248mn keeping assets constant, before the covenants are breached. Liquidity is also healthy with cash to short-term borrowings at 1.67x and credit facilities of S$102mn compared to short-term borrowings of S$32mn. The group secured loan moratoriums with banks to extend loan repayments, and have halted all ongoing and new developments to conserve cash.
+ New JTC management contract to support cash flows. Under the contract, Centurion will manage 4,200 beds across 3 sites starting 3Q20 for 6 months, with the option by JTC to extend for another 6 months. Centurion’s current PBWA portfolio has 28,000 beds.
The Negatives
– Higher provisions and rental delinquencies from PBWA customers. There were pre-terminations of leases from PBWA customers due to financial strain. Provisions for receivables increased in 1H20 to S$1.5mn from S$52k in 1H19, likely due to the PBWA segment’s significant 48% exposure to the construction sector, which faces business restrictions. The group will continue to monitor rental receivables. On a positive note, PBWA occupancies were stable at 88.5%.
– PBSA occupancies fell across the board. The segment was the hardest hit by COVID-19 travel restrictions and uncertainty over university courses. Average occupancies were 74.2% in UK, 62.5% in Melbourne, 81.4% in Adelaide, and 25.4% in South Korea. The impact will be lasting given uncertainty of details on university courses and lasting travel restrictions. Despite this, EBIT from PBWA was enough to cover all interest expenses in 1H20.
Outlook
We see little catalysts for short-term credit profile uplift as headwinds weigh on PBSA occupancies and concerns on rent receivables, coupled with halting of developments limiting growth. The PBWA segment will support the group for the time being. Completion of dorm worker testing and resumption of construction projects may help alleviate concerns on PBWA rent receivables. Cash conservation will be a priority to tide through COVID-19.
Bond Recommendations
We are Neutral on the CENSP 22NC21 as we continue to monitor the impact of COVID-19 on the group. We think the bond is an interesting short tenor play with a call date on 1 Feb 2021 and will step-up 2.5% if not called. It matures on 1 Feb 2022, with a yield to worst of 4.80% and yield to maturity of 7.09%. We think there is incentive for Centurion to call the bond given the high step-up, and note that they have adequate short-term liquidity to do so. However, there is uncertainty on when bank moratoriums expire, which could strain liquidity in the future.
