INVESTING THESIS
- Deep Asset Value, SOTP at sgd2.46 (based on recent RHB Research report). The report acknowledged that the valuation used for the London hotels may be conservative.
- Price/SOTP at 34%
- Proposed sale of one of its London hotel will provide a good guidance on the value of its London Hotel portfolio
- Portfolio of London hotels can be considered as trophy assets that major Corporate groups would desire to acquire.
- Hotel business transformation when completed will add value to its London properties. Progress so far is good with rising ratings by TripAdvisors
- Quek Leng Chan (QLC) has over the years acquired GL shares from open market. This month alone, he has been particularly aggressive (adding 3.6 million shares).
- Monetisation of non-core assets may lead to special dividend pay-outs
- RHB has included GL in its “Billion & Below”portfolio at cost of sgd 0.875.
The key issue for minority shareholders is - What is the potential end game for GL?.
I believe QLC, in his 70s and with no apparent successor to take-over his sprawling businesses, may consider the following options :-
- To privatise GL ( he currently controls 68% of GL), He failed once in 2005 with an offer of sgd1.25.
- Dispose its London Hotels (brand by brand), after completion of post refurbishments by FY17 and other assets.
- Return capital to shareholders (just like K1 Venture).
QLC would obviously prefer to privatise GL. However, given the current positive developments in the Group, he has to be bold and make an attractive offer. Otherwise, he will be rebuffed again and this will be embarrassing.
As an example, the failed privatisation of K1 Ventures at a nonsensical price of 13.5 cents in June 2012 was a clear boo boo and reflected poorly on the major shareholders. Subsequently the K1 management decided to monetise its assets (returning cash to shareholders), thereby earning huge windfall for investors.
As for me, I would prefer he chooses the latter options - dispose its “transformed” hotel assets and other assets and return capital to shareholders. This will take a longer time but the returns should be much larger.
This potential play on GL will be very interesting and I believe 2016 will be the start point for better things to come for GL.
“The Hotel portfolio of GL is calculated based on 2014-15 transactions in the London area which yielded an average of EUR374,369 per key. Using this valuation benchmark, GL’s hotel portfolio would be worth EUR1.7bn or SGD2.9bn. (1SGD:1.53EUR). It believes that this estimate is conservative as its 175 room Thistle Kensington Gardens Hotel, for instance, is marked for sale at a GBP100m guide price, translating to EUR782,778/key”.
Even if we assume a value of EUR500,000 per key for GL’s portfolio, the valuation for its portfolio would rise significantly to EUR 2.56bn or SGD 3.92bn. Revised SOTP (based on RHB’s benchmarks on other assets) would therefore increase to a staggering SGD3.22.
I consider GL’s portfolio of Central London hotels a highly prized asset for these reasons :-
- Central London location
- Tourism hotspot - Economic moat
- Positive tourism trend in UK/London
- Rising property values in key London areas
With the impending completion of its hotel refurbishments and re-Branding exercise in 2017, we should expect that its London Hotel portfolio value to increase even further.
I read the results of CDL Hospitality this morning and I note that CDL had acquired a UK hotel in Cambridge in last October – valuation of this Hotel was at EUR445k per room. Cambridge is 63 miles from London. This clearly indicates the conservative value applied by RHB on GL’s Central London hotel portfolio. Valuation used by RHB is based on the average of transacted prices and did not differentiate on the locality of the London hotels.
GL reported its 1H results last evening. Performance is still strong y-o-y as follows :-
EPS - up 22 %
FCF - up 141 %
Gearing - 24.8%
Above data does not include one off income of usd 13 million. As expected PBT for oil and gas segment fell 51%. PBT for hotel segment rose 28%, whilst gaming revenue recovered strongly. Core FCF for 1H was recorded at usd 49 million.
Core EPS for 1H if annualised will bring PE to 10.5 x (based on closing price of 86 cents on Friday).
My simple takeaway is that GL’s transforming business model is progressing well generating both stronger EPS and FCF. An alluring growth play on a deep asset value company.
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