However, one thing that I admit to having missed out is the fact that the company's current earnings potential to the asset base does not fully represent the normalized returns. This is because a huge chuck of value in the asset base is dormitories that are not yet operational, thus current return on capital does not fully represent reality. In addition, I have failed to net out taxes from the cost of debt calculation. This post is to rectify this problem.
In my opinion, when one attempts to go short a company, just as how one would identify a margin of safety for a long position, one should inverse and identify the best-case scenario and see if that gives one a margin of safety. This was what I did in my DCF calculations.
I believe that the growth rate that I employ is aggressive. While consensus estimates EBITDA margin to compress slightly towards 50%, I assume margin remains at current levels.
Next, I assume CAPEX % Revenue to be 45%. I believe this to be aggressive. This assumes that cost of lease per bed per month to be between $105 to $144 for the Singapore portfolio. This is at a 11% to 35% discount to a recent BCA tender of $161.50 per bed per month.
Following this, I would calculate the company's cost of capital with the post-UK acquisitions expected capital structure. Doing so, WACC comes up to 5.41%. Again, this is significantly below the aggressive and optimistic CIMB research report of 6.9%. To add on, I use a 2.5% terminal growth rate, instead of the 2.0% used by the CIMB analysts.
I believe this to be sufficiently aggressive.
Using these assumptions, I determine the aggressive, or bull case, intrinsic valuation comes up to be SG$0.62 per share. This represents a 17% downside, or should I say upside, to current prices.
I believe this that while the current is significantly below that of historical, shorting Centurion remains to be an attractive proposition.
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