GL Limited - CIMB Research 2016-08-31: Extended period of volatility ahead

GL Limited - CIMB Research 2016-08-31: Extended period of volatility ahead GUOCOLEISURE LIMITED B16.SI

GL Limited - Extended period of volatility ahead

  • 4QFY16/ FY16 core net profit below expectations, at 17%/91% of our FY16 forecast. Core net profit fell 30% yoy in 4QFY16 on weaker hotel core profit.
  • Management expects an extended period of volatility for its UK hotel business as businesses in UK adjust to the new reality post Brexit referendum.
  • Our FY17-18F EPS cut by 16-21% to reflect adverse FX translation from weakened GBP, and the mixed but largely negative impact of Brexit on overall tourism volume.
  • Downgrade from Add to Hold, with a lower target price of S$0.86.

4QFY16 and FY6/16 core net profit below expectations 

  • Group core net profit fell 30% yoy to US$7.9m in 4QFY16 (4QFY15: US$11.2m) due mainly to lower hotel contribution, although reported net profit was 6% higher yoy at US$12.8m (4QFY15: S$12.1m), helped by a significant tax benefit. 
  • GL declared its first and final DPS of 2.2 Scts for FY16, the same as in FY15.

Hotel profit marred by adverse FX and weak tourism sentiment 

  • Hotel core EBIT declined 31% yoy to US$11.7m in 4QFY16 from US$16.9m in 4QFY15 (full-year hotel core EBIT fell 10% yoy to US$56m in FY16 from US$62m in FY15), due to both adverse FX translation from the weakened GBP and weaker tourism sentiment from the several terror attacks in Europe over the financial year.

Subdued oil & gas royalty profit 

  • Although higher than in 4QFY15 (which was adversely hit by a strike at Bass Strait), the O&G royalty EBIT of US$3.6m in 4QFY16 was much lower compared with the over US$10m quarterly EBIT that the division used to yield in FY13-14. 
  • We are hopeful of a moderate pick-up in O&G profit in FY17 over FY16, in view of the recent gain in oil price, currently at c.US$50 per barrel vs. FY16’s average of US$44.

Management expects extended period of volatility for hotel 

  • While the weakened GBP could potentially boost leisure travel to the UK, we think it may take 3-6 months for the impact to really kick in. 
  • Also, we believe that the potential positive impact from higher leisure travel is unlikely to neutralise the negative impact from adverse FX translation (GL reports in US$) and the potential decrease in business travel (management believes the uncertainty related to Brexit to be generally negative for business travel outlook). This results in the 16-21% cuts in our FY17-18F EPS.

Departure of Group CEO 

  • Mike DeNoma relinquished his role as Group and GLH (hotel division) CEO in June. Neil Gallagher, the ex-CFO of GLH who had held senior roles at large hotel chains (IHG and Marriott), succeeded DeNoma as the new CEO of GLH. 
  • We understand that while the refurbishment-rebranding programme previously driven by DeNoma will continue, it is up to Gallagher to unveil his future plans for the hotel business. We think he should review DeNoma's articulated ambition of European expansion, given the uncertain time ahead.

Downgrade to Hold, with lower target price of S$0.86 

  • In anticipation of the significant volatility for the group’s core hotel business ahead, we downgrade GL from Add to Hold. 
  • Our target price is cut to S$0.86, based on a heavier 40% discount to CY16F RNAV (previously 25%). 
  • Possible asset monetisation is a key potential re-rating catalyst, while further weakness of GBP is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-31
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.86 Down 1.180