The new target price also reflects the value of Centurion’s assets in the REIT, which will be floated and pegged to market value, says Yeo. As such, the analyst has updated his valuation methodology to sum-of-the-parts (SOTP) from a P/E based formula, which comprises the company’s remaining core business and the estimated value of the REIT assets to be listed. Yeo’s new target price marks a 34% increase.
On Jan 7, Centurion announced that it intended to spin off a REIT to be listed on the Singapore Exchange’s (SGX) Mainboard.
On July 14, the company said its spin-off REIT will be named Centurion Accommodation REIT and that the new REIT will initially include 14 assets. These assets comprise five purpose-built worker accommodation (PBWA) in Singapore, eight purpose-built student accommodation (PBSA) assets in the UK and one PBSA in Adelaide, Australia. Centurion’s latest PBSA, Epiisod Macquarie Park, located in Sydney, will be included after the REIT is listed. These assets are valued at around $2 billion by independent property valuers.
Following the listing of its REIT, Centurion will have 19 assets remaining in Singapore, the UK, Malaysia, Hong Kong and China, Yeo notes.
See also: OCBC's Lim cuts fair value for SingPost to 49.5 cents
The company said it intended to declare a dividend in specie of some of the REIT units to its shareholders. It also intends to hold 35% to 40% of units in the REIT thereafter.
In Yeo’s view, the listing will help unlock value for Centurion’s shareholders by floating the assets within the REIT.
“It allows Centurion to be asset-light and concentrate on growing its fund management brand, and being the REIT and property manager. Spinning-off assets into the REIT helps lower Centurion’s debt and strengthen its balance sheet as well,” he writes in his July 23 report.
See also: CGSI's Ong raises target price for BRC Asia to $4.30 on healthy industry fundamentals
While Yeo’s valuation methodology has changed, his earnings estimates remain the same given that the assets have not been spun off yet.
At this point, the analyst’s new target price separates the value of assets that are earmarked for the REIT from the remaining assets in Centurion.
He puts the net profit of Centurion’s remaining assets at 41 cents per share, priced at an unchanged forward P/E of 10 times.
“Based on our projected earnings of the REIT, dividend distribution, and an assumed yield of 7.5% based off small cap REITs’ average yield, we estimate the value of the assets to be injected into the REIT at $1.64 per share,” he adds. “Hence, the sum of its core business and the value of assets going into the REIT totals SGD2.05 per share before factoring a further 2% environmental, social and governance (ESG) discount to derive our target price.”
Yeo has maintained his “buy” call on Centurion.
As at 10.10am, shares in Centurion are trading 3 cents higher or 1.77% up at $1.73.
