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27-03-2013, 11:32 AM
DMG recommends:
GuocoLeisure: SGD0.83 BUY (TP: SGD1.25)
Due for a Re-rating
GuocoLeisure (GLL), the listed leisure and hospitality arm of the Guoco Group, is an undervalued gem sitting on a portfolio of cash-generative, hard-to-replace assets. Its key investments are: 1) the Guoman/Thistle hotels, the largest hotel operator in London with over 8000 rooms under management; 2) the Bass Straits Royalty Trust, entitling GLL to a perpetual stream of cashflow from oil and gas production in designated areas in the Bass Straits; 3) 54,000 acres of land in Molokai island, Hawaii, 4) Clermont Leisure, a casino targeted at high rollers. The stock is under-covered and we are the only broker with a rating on the stock.
Hidden value in hotel real estate. GLL’s crown jewel is its Guoman/Thistle hotel chain, the leading hotel operator in London. Guoman/Thistle owns some 5,200 rooms across 16 hotels in London, sitting on prime locations in the heart of London City. We estimate this portfolio is conservatively worth USD1.68 billion, against a historical book cost of USD1.2 billion. This implies a surplus of USD466m, or SGD0.43/share. An upcoming valuation exercise for GLL’s hotels, currently underway, as a result of a privatization offer for its parent Guoco Group by major shareholder Quek Leng Chan, should shed more light on the market value of its hotels and the embedded surplus of the related real estate value.
Bass Straits oil royalty - the well that keeps giving. GLL owns a 55% stake in the Weeks Royalty, which entitled it to a 2.5% royalty granted by BHP/EssoMobil on the gross value of all hydrocarbons produced and recovered in designated areas within the Bass Straits of Australia. Bass Straits is one of the most prolific oil and gas producing region in the world, having yielded more than 4 billion bbl of crude oil and more than 7 Tcf of natural gas since 1969. Drilling activities continued to be high, centered on the AUD4.4 billion Kipper Tuna Turrum project with an estimated 1.6 Tcf of gas and 140m bbl of oil and gas liquid. GLL’s royalty to this lucrative asset has been providing it with annual cash flow of USD40-50m, with potential upside on additional discoveries.
Trading at massive 53% discount to our SOTP valuation. We value GLL using a sum-of-parts methodology to best capture the disparate nature of its various investments. We value its Guoman/Thistle hotel portfolio at EUR250,000 per key for its London hotels, a 21% discount to the average transaction of EUR316,000 per key in 2012. We use net present value to value the cash flow stream from Bass Straits Royalty Trust, without factoring in upside from future reserve growth. Our valuation yields a SOTP of SGD1.78. We apply a 30% holding company discount to derive a TP of SGD1.25. In our view, GLL offers a compelling asset play with imminent catalysts from restructuring within the group and greater transparency on its hotel assets. Reiterate BUY.
Goh Han Peng
+65 6232 3893
Edison Chen
+65 6232 3892
Other Recent Summaries:
Counter has been experiencing pretty positive share price momentum the last few days. See
our recent reposts on the counter the last few wks, aparts from today's OSK DMG Rpt, for more info on the
counter.
- Guocoleisure: (The Edge) SCB was engaged as the independent financial advise and is due to publish a
report on Guoco’s asset valuation nxt mth. Market watchers note that Guocoleisure could be unlikely to
offload its main hotel assets, but it could divest off some of its non-tel assets. In particular, its pty
development units Molokai Properties and Tabua Investments could be up for a sale / spin-off. Molokai
properties owns a 54,677 acre property on the island of Molokai in Hawaii, where according to DMG, several
parcels of land have been transacted at prices above book value. Tabua Investments is Guocoleisure’s pty
investment arm and the Co. has ben actively looking for buyers for its Fiji assets. Meanwhile,
GuocoLeisure is receiving a steady stream of cash froman O&G investment, where it essentially earns
royalties from BHP and Esso. While the valuation report for Gucco Grp might not necessarily spark a
re-rating for Guocoleisure, it is worth noting that the former offered to take Guocoleisure private at
$1.25/share in 2005.
- GuocoLeisure: Technical Buy Call by OCBC. Note that GuocoLeisure is likely to see further recovery after
rebounding off its 4-month uptrend support recently; this was followed by a strong bullish break above the
$0.80 key resistance on heavy volume yesterday. The MACD has just initiated a sharp bullish crossover;
this suggests that the upside momentum is accelerating. Next resistance at $0.90. The counter could head
higher towards the next key obstacle at around $0.90 (key peak) in the weeks ahead.
- Guocoleisure: UOB Kay Hian note that GLL’s properties are held at deep discount to book value. GLL
carries its hotels and property, plant and equipment at historical cost less accumulated depreciation.
According to mgt, the last revaluation date was in 2005. With an independent valuation report of GLL’s
assets likely to be issued in the near term (due to privatisation of Guoco Group, the ultimate holding
company of GLL), believe it will shed light on the highly undervalued property portfolio. GLL is trading
at an attractive valuation at 0.69x FY12 P/B. Add that steady income stream from oil and gas royalty and
its market leader position in London’s hotel operation also make GLL an attractive investment to value
investors. Believe the current depressed valuation is due to the lack of market exposure by GLL. With
recent news about the privatisation of GLL’s parent Guoco Group and plans to set up a hotel in SG and
house believe there will be an increase in investor interest in the stock.
- Guocoleisure: NextInsight note that as Mr Quek Leng Chan has offered to take Guoco Group Limited,
private. Such an exercise will involve an independent financial adviser which has to evaluate whether the
offer by Mr Quek is fair. Expect the financial adviser would have to do a valuation of Guoco Group’s
assets in order to be able to assess the attractiveness of the offer by Mr Quek. If this were the case, it
is likely that Guocoleisure, being part of Guoco Group, may have to do a revaluation of its assets. Given
current market conditions and the nature of GLL’s assets, the revaluation exercise is likely to be
positive for GLL. GLL operates under two hotel brands namely Guoman and Thistle brands. These hotels are
valued at US$1.2b in GLL books as of 31 Dec12. With their portfolio of assets (refer to the 2012 annual
report), there is a likelihood that the assets may be worth more than what are recognized in the books.
Another interesting asset which they have is the 55.1% entitlement to the Weeks Royalty. The Wks Royalty
refers to a 2.5% overriding royalty relating to all hydrocarbons produced by BHP Billiton from designated
areas in the Bass Strait, Australia, granted by BHP. According to Esso’s estimates, the estimated reserves
for these designated areas are likely to last approximately another three decades. For the last 5 yrs, GLL
has been receiving a steady stream of cashflows of around US$39-54m p.a. This asset is recognized on GLL’s
books with a figure of US$122.4m as of 30 Jun 12, which is likely to be undervalued. nNote that GLL trades
at 0.68x P/BV (NAV / share: $1.075) with a historical div yield of 2.7%.
GuocoLeisure: SGD0.83 BUY (TP: SGD1.25)
Due for a Re-rating
GuocoLeisure (GLL), the listed leisure and hospitality arm of the Guoco Group, is an undervalued gem sitting on a portfolio of cash-generative, hard-to-replace assets. Its key investments are: 1) the Guoman/Thistle hotels, the largest hotel operator in London with over 8000 rooms under management; 2) the Bass Straits Royalty Trust, entitling GLL to a perpetual stream of cashflow from oil and gas production in designated areas in the Bass Straits; 3) 54,000 acres of land in Molokai island, Hawaii, 4) Clermont Leisure, a casino targeted at high rollers. The stock is under-covered and we are the only broker with a rating on the stock.
Hidden value in hotel real estate. GLL’s crown jewel is its Guoman/Thistle hotel chain, the leading hotel operator in London. Guoman/Thistle owns some 5,200 rooms across 16 hotels in London, sitting on prime locations in the heart of London City. We estimate this portfolio is conservatively worth USD1.68 billion, against a historical book cost of USD1.2 billion. This implies a surplus of USD466m, or SGD0.43/share. An upcoming valuation exercise for GLL’s hotels, currently underway, as a result of a privatization offer for its parent Guoco Group by major shareholder Quek Leng Chan, should shed more light on the market value of its hotels and the embedded surplus of the related real estate value.
Bass Straits oil royalty - the well that keeps giving. GLL owns a 55% stake in the Weeks Royalty, which entitled it to a 2.5% royalty granted by BHP/EssoMobil on the gross value of all hydrocarbons produced and recovered in designated areas within the Bass Straits of Australia. Bass Straits is one of the most prolific oil and gas producing region in the world, having yielded more than 4 billion bbl of crude oil and more than 7 Tcf of natural gas since 1969. Drilling activities continued to be high, centered on the AUD4.4 billion Kipper Tuna Turrum project with an estimated 1.6 Tcf of gas and 140m bbl of oil and gas liquid. GLL’s royalty to this lucrative asset has been providing it with annual cash flow of USD40-50m, with potential upside on additional discoveries.
Trading at massive 53% discount to our SOTP valuation. We value GLL using a sum-of-parts methodology to best capture the disparate nature of its various investments. We value its Guoman/Thistle hotel portfolio at EUR250,000 per key for its London hotels, a 21% discount to the average transaction of EUR316,000 per key in 2012. We use net present value to value the cash flow stream from Bass Straits Royalty Trust, without factoring in upside from future reserve growth. Our valuation yields a SOTP of SGD1.78. We apply a 30% holding company discount to derive a TP of SGD1.25. In our view, GLL offers a compelling asset play with imminent catalysts from restructuring within the group and greater transparency on its hotel assets. Reiterate BUY.
Goh Han Peng
+65 6232 3893
Edison Chen
+65 6232 3892
Other Recent Summaries:
Counter has been experiencing pretty positive share price momentum the last few days. See
our recent reposts on the counter the last few wks, aparts from today's OSK DMG Rpt, for more info on the
counter.
- Guocoleisure: (The Edge) SCB was engaged as the independent financial advise and is due to publish a
report on Guoco’s asset valuation nxt mth. Market watchers note that Guocoleisure could be unlikely to
offload its main hotel assets, but it could divest off some of its non-tel assets. In particular, its pty
development units Molokai Properties and Tabua Investments could be up for a sale / spin-off. Molokai
properties owns a 54,677 acre property on the island of Molokai in Hawaii, where according to DMG, several
parcels of land have been transacted at prices above book value. Tabua Investments is Guocoleisure’s pty
investment arm and the Co. has ben actively looking for buyers for its Fiji assets. Meanwhile,
GuocoLeisure is receiving a steady stream of cash froman O&G investment, where it essentially earns
royalties from BHP and Esso. While the valuation report for Gucco Grp might not necessarily spark a
re-rating for Guocoleisure, it is worth noting that the former offered to take Guocoleisure private at
$1.25/share in 2005.
- GuocoLeisure: Technical Buy Call by OCBC. Note that GuocoLeisure is likely to see further recovery after
rebounding off its 4-month uptrend support recently; this was followed by a strong bullish break above the
$0.80 key resistance on heavy volume yesterday. The MACD has just initiated a sharp bullish crossover;
this suggests that the upside momentum is accelerating. Next resistance at $0.90. The counter could head
higher towards the next key obstacle at around $0.90 (key peak) in the weeks ahead.
- Guocoleisure: UOB Kay Hian note that GLL’s properties are held at deep discount to book value. GLL
carries its hotels and property, plant and equipment at historical cost less accumulated depreciation.
According to mgt, the last revaluation date was in 2005. With an independent valuation report of GLL’s
assets likely to be issued in the near term (due to privatisation of Guoco Group, the ultimate holding
company of GLL), believe it will shed light on the highly undervalued property portfolio. GLL is trading
at an attractive valuation at 0.69x FY12 P/B. Add that steady income stream from oil and gas royalty and
its market leader position in London’s hotel operation also make GLL an attractive investment to value
investors. Believe the current depressed valuation is due to the lack of market exposure by GLL. With
recent news about the privatisation of GLL’s parent Guoco Group and plans to set up a hotel in SG and
house believe there will be an increase in investor interest in the stock.
- Guocoleisure: NextInsight note that as Mr Quek Leng Chan has offered to take Guoco Group Limited,
private. Such an exercise will involve an independent financial adviser which has to evaluate whether the
offer by Mr Quek is fair. Expect the financial adviser would have to do a valuation of Guoco Group’s
assets in order to be able to assess the attractiveness of the offer by Mr Quek. If this were the case, it
is likely that Guocoleisure, being part of Guoco Group, may have to do a revaluation of its assets. Given
current market conditions and the nature of GLL’s assets, the revaluation exercise is likely to be
positive for GLL. GLL operates under two hotel brands namely Guoman and Thistle brands. These hotels are
valued at US$1.2b in GLL books as of 31 Dec12. With their portfolio of assets (refer to the 2012 annual
report), there is a likelihood that the assets may be worth more than what are recognized in the books.
Another interesting asset which they have is the 55.1% entitlement to the Weeks Royalty. The Wks Royalty
refers to a 2.5% overriding royalty relating to all hydrocarbons produced by BHP Billiton from designated
areas in the Bass Strait, Australia, granted by BHP. According to Esso’s estimates, the estimated reserves
for these designated areas are likely to last approximately another three decades. For the last 5 yrs, GLL
has been receiving a steady stream of cashflows of around US$39-54m p.a. This asset is recognized on GLL’s
books with a figure of US$122.4m as of 30 Jun 12, which is likely to be undervalued. nNote that GLL trades
at 0.68x P/BV (NAV / share: $1.075) with a historical div yield of 2.7%.