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To invest or not to invest in Centurion Corporation?

Tuesday, August 22, 2017

I only became a shareholder of Centurion Corporation Limited in February this year and, since then, its share price has gone up by quite a bit. 

A question I have been asked more than a few times recently was whether Centurion was still good to buy?





















Of course, regular readers know that, for a long time now, I don't answer such questions. 

Even if I do answer, it is usually cryptic which could be quite valuable an answer looking at the trend in cryptocurrencies now.

What? Not funny? Alamak.

The thing to do is always ask what do we want out of something, see if that something does the job and we will know if that something is suitable for us.




What I do in my blog is only to share my thoughts and how they guide my decisions. Think of my blogs as simply sharing an approach and not the answer.

I don't know if there is any value in this but I like to think that there is some value from learning someone's approach, good or bad.

Ultimately, your decision should be guided by your own thoughts and not someone else's.







With that out of the way, I am going to talk to myself a bit about Centurion.

Almost all my investment decisions have investing for income as a consideration. 

When I looked at Centurion earlier this year, this was also an important consideration as I was looking for reliable income generators to replace certain income stocks which I voluntarily or involuntarily sold in the recent past.




I am prone to repeating myself as I grow older. 

So, if you are interested in my initial analysis on Centurion, please see related post #1 at the end of this blog.

Of course, what I did not know was that Centurion was planning a dual listing on the HKSE which was approved earlier this month. 

I see this as a good thing. See related post #2 at the end of this blog for some speculative flavor.





Centurion is heavily in debt but it is good debt because they are using borrowed funds to generate more earnings from their investments. 

However, debt fueled growth can be dangerous as my misadventure with a certain locally listed O&G related company constantly reminds me.

So, raising funds from a secondary listing to help fuel their growth in the student hostel business in Australia instead of borrowing more money is a good idea. 





Of course, there were other reasons given for the decision to have a secondary listing in Hong Kong but I zoomed in on what I thought was more important to me as a shareholder, as an investor for income.

A larger equity base without any increase in borrowings would mean a lower gearing level. 

A stronger balance sheet is a good thing especially for an entity as highly geared as Centurion.

However, when there are more shares issued, something must give. 

We cannot have our cake and eat it too, after all.







Centurion is preparing to offer another 36,000,000 shares in Hong Kong. This will lead to some dilution for existing shareholders. 

On a per share basis, earnings would be impacted, everything else remaining equal.

So, is my original thesis to invest in Centurion for income still valid?

If we look at related post #1, back then, I assumed an EPS of 3.7c a year. I also assumed a payout ratio of 40%. 

I decided that a dividend yield of about 4% from a growth company was attractive enough.




Centurion has about 737.4 million shares in issue. Now, with the offer of 36,000,000 new shares in Hong Kong, we would see EPS diluted to 3.5c a year.

If the almost 74.8 million warrants (with an exercise price of 50c per warrant) expiring on 27 October 2017 should be exercised as well, we would see EPS diluted further to 3.2c a year.

OK, math was not a strong subject of mine. 

So, I hope my calculations are up to scratch.




Anyway, if we go with the numbers above, a 40% pay out ratio would mean a DPS of 1.28c. 

Based on my entry price, that is a dividend yield of 3.37% and based on 54c a share, it is 2.37%. 

If you have read my blogs on Guocoland and Tuan Sing, a dividend yield of 2.37% is still relatively decent.







However, things have progressed quite a bit since February and Centurion reported an EPS of 3.5c for 1H 2017. 

Could we see a full year EPS of 7c?

In such an instance, after listing in Hong Kong and with all the outstanding warrants exercised, Centurion's fully diluted EPS could be 6c. A 40% payout ratio would give a DPS of 2.4c. 




Based on 54c a share, it would give a dividend yield of 4.44%.

Centurion is still in growth mode and it is very likely that the management will deploy funds from the warrants, if exercised, into new projects as well. 

So, debt is likely to remain high. 




It would be prudent to retain the assumption that I made in February that we could see 0.8c knocked off from its EPS from a future 1% increase in interest rate.

In such an instance, fully diluted EPS could be 5.3c and a 40% payout ratio would give a DPS of 2.1c. 

Based on 54c a share, dividend yield would be 3.88%.

What? 

Should you buy or not?




Alamak, how to buy 4D? 3.88. Only 3 numbers lah.

What? Wrong answer?

Aiyoh. I blur.

Related posts:
1. Invested in Centurion
2. Centurion to double?
3. Centurion's earnings sky rocketing.

15 comments:

jojo said...

AK,

Wrong title for this post.
Subject heading should have read "AK's numbers gymnastics for Centurion".

:) ;)

AK71 said...

Hi jojo,

Hahaha. Too many numbers.

For a person like me who dislikes math, this blog was a minefield. I had to check and check again to make sure I got it right but even with a calculator, I could be wrong. Boom! ;p

Kevin said...

Hi AK,

Judging from the daily trading volume, the buy volume clearly outpaces the sell volume. :P

AK71 said...

Hi Kevin,

The uptrend is very much intact. :)

cheryl2010 said...

Hi AK, can I ask a silly question. As a centurion shareholder, they should have received a prospectus for the Hong Kong listing. Is there a need for shareholder to select any option? or it is just an FYI?

AK71 said...

Hi cheryl,

I received a circular from Centurion. If you are a shareholder, you should have received it too. The EGM is on 6 September 2017 at 10am.

Kevin said...

Centurion records 43% Net Profit Growth To S$10.2 Million In 3Q 2017

http://centurion.listedcompany.com/newsroom/20171108_220337_OU8_K2U38WNA0VUFFM0X.2.pdf

AK71 said...

Hi Kevin,

As Centurion is one of the bigger investments in my portfolio, this puts a smile on my face.

Good to see that my confidence is not misplaced. :)

Laurence said...

Looks like AK will be laughing all the way to the bank..... yet again, as always.

Dual listing of Centurion Corp in HK to be on or around Dec 12

AK71 said...

Hi Laurence,

With some luck, Centurion could receive a higher valuation once it is listed in the HKSE.

Laurence said...

It' s ridiculous that LHN Ltd did a dual listing in HKSE today at HKD1.90 with only 5.9 times oversubscribed but managed to close the first trading day at a whopping HKD3.25.
Compared to Centurion which closed it' s first trading day marginally up and has been going downhill below listing price since.

AK71 said...

Hi Laurence,

The beauty of buying a good business that pays a meaningful dividend is that I am not really concerned if the stock price does not move up. ;)

AK71 said...

The latest 4Q set of results brings Centurion’s earnings for the full year to $31.7 million, up 11% from $28.7 million in FY16.

A final dividend of 1 cent as well as a special dividend of 0.5 cent has been proposed, while shareholders in Hong Kong will receive a dividend of HKD8.92 cents per share.

“With a resilient performance, our accommodation portfolios stand well-positioned in the near term to continue benefiting from the undersupply of high-quality accommodation assets across the five countries in which we operate. Underpinned by our established accommodation business, we are poised to capitalise on new engines of growth and remain cautiously optimistic for the future,” says Kong Chee Min, CEO of Centurion Corp.

Source:
The EDGE, 27 Feb 18.

K said...

Hi AK,

Centurion price has fallen. Do you feel that price of Centurion is "better" now than 6 months ago or has the situation for this company changed?

Thanks.

AK71 said...

Hi K,

Although the lease on one asset in Singapore has ended,

1. I like the fact that insiders have been constantly buying.

2. I think that a 2c DPS is still relatively undemanding.

It was an easy decision to buy more at closer to 40c a share and that was what I did. ;)

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