Centurion Corporation

Centurion is the largest listed worker dormitories company in Singapore. Prior to a reverse takeover, Centurion was known as SM Summit, a manufacturer of optical disks. After the RTO, the company was renamed centurion, with a core business in workers dormitories. 

The company trades at a 50x adjusted P/E ratio and 1.5x book value.

There is a good reason why the company is trading at such rich valuations. Singapore is a country which heavily relies on foreign workers, especially in the construction, oil & gas and manufacturing industries. There are over 1 million foreign workers (excl. domestic workers) in Singapore, but only 41 commercially run workers' dormitories, which holds between 1,500 to 12,000 beds per dormitory. Given the circumstances, workers dormitories companies would benefit as rental rates and occupancy levels remain high. However, in spite of these favorable macroeconomic factors, I believe that Centurion remains grossly overvalued.

Centurion operates in an industry which is commoditized and capital intensive. Such industries tend to have very low margins and return on incremental capital. This is reflected in the financial ratios which shows that the company is trading at 35x EV/EBIT and a 3.24% ROC.

Considering such slim margins, it is hard to imagine how it is possible that the company can grow into its valuations.

In fact, growing into its valuation seems to be an impossibility. The company has a 5.25% cost of senior secured debt, which is above the company's return on capital. If you have a company which is capital intensive, and has a ROC which is below even the lowest cost of debt, and is already heavily levered with a Debt/EBITDA of 9.5x, it is highly unlikely that it will grow into its 50x PE ratio.

In addition, the company's accounting policies on investment properties uses a L3 mark-to-model method. This basically means that the company did a discounted cash flow on its investment properties and marked that as the value of the investment properties. The problem with this is that it is possible that the company had used too aggressive an assumption in its valuation. However, since data is not fully transparent, I would give the benefit of the doubt to Centurion and assume valuation is accurate.
However, if valuation is accurate, what that basically means is that the company did the valuation work for us, and one should at most, pay 1.0x book value for a company that actually destroy value in growth.

The closest comparable to Centurion Corporation would be the LSE listed Unite-group. Unite-group operates students dormitories in the UK and trades a ~1.1x book value, with a much lower cost of capital and higher return on incremental capital. On the other hand, Centurion is trading at a ~1.5x book value. This does not make sense to me.

In conclusion, I do not think Centurion's valuation is reasonable. At best, the company is worth 1.0x book value, or $0.42 per share, or a 33% downside to current prices . At worst, the company is destroying value in growth, and the company should be valued at a significant discount to book.