GL Limited - Cautious outlook
- 2Q/1H17 core net profit in line at 35%/78% of FY17F; 2H seasonally weaker.
- Impact of adverse FX translation on hotel profit largely offset by better cost control.
- Improving O&G royalty income on higher gas production and stronger A$.
- Gaming and property businesses continued adding volatility to group profit.
- Management remained cautious on outlook.
- We maintain our Hold call, with a slightly lower target price of S$0.84, still based on 40% discount to end-CY17 RNAV.
2Q/1H17 core net profit in line
- At 35%/78% of our full-year forecast, we deem 2Q/1H17 core net profit in line with our expectations as 2H is seasonally weaker.
- The 52% yoy lower reported net profit, at US$24.6m in 1H17 (1H16: US$51.3m), was mainly due to non-recurring items, as 1H17 was impacted by the settlement of a legal claim of c.US$11m, while 1H16 was boosted by a compensation of US$13m for the cessation of management contracts of 19 UK hotels.
- Excluding all one-off items, group core net profit declined 7%.
Adverse FX impact on hotel profit mitigated better cost control
- Hotel revenue fell 18% yoy to US$168m in 1H17 only due to the adverse FX translation from the significantly yoy weaker £ (on the same currency basis, hotel RevPar rose 3% yoy in 1H17).
- Nevertheless, operating expenses for hotel business declined at a faster pace of 23% yoy, thanks to management’s more stringent cost control. As a result, the group managed a largely flat hotel core profit, at US$30.4m in 1H17 (1H16: US$31m).
Improving O&G income on higher gas production and stronger A$
- Oil & gas (O&G) royalty income from the Bass Strait rose 11% yoy to US$13.5m in 1H16, due to higher gas production and the appreciation of A$ against US$ by 4% during the period.
- With the crude oil price having recovered from the lows (below US$40 per barrel in 2HFY16 and currently range-bounding at US$50-60 per barrel), we continue to expect yoy improving O&G royalty profit in 2H17.
Non-core businesses continued adding volatility
- The group’s non-core business segments, including gaming and property development, continued adding volatility to group profitability in 1H17.
- Net loss of gaming business widened to US$2.3m in 1H17 from US$0.2m in 1H16 due to lower business volume at the Clermont Club (GL’s only casino, located in London) and profit of property development returned to the negative territory, with US$0.4m loss in 1H17 (1H16: US$3.6m gain) due to the slow business activities on the Molokai island.
- Management continued to guide for a cautious outlook in the near term. Although the weakened £ should bolster leisure travels to UK, benefiting GL’s hotel business, the reported hotel profit (in US$ terms) is likely to remain subdued by the adverse FX translation.
- Management expects to launch three refurbished hotels in the next twelve months, but we expect their impact on group profit to be limited, given their relatively small size (c.100 rooms each vs. group total room inventory of c.5k).
Maintain Hold, with slightly lower target price of S$0.84
- We cut our FY17-19F revenue by 11-13% to reflect the adverse FX translation while keeping our core profit forecasts due to the improved cost control. Our target price is adjusted lower to S$0.84 (still based on 40% discount to end-CY17 RNAV) on weaker £.
- Successful disposal of non-core assets is a potential re-rating catalyst. Possible decline in future business travel to the UK post-Brexit is a key risk.