GL Limited - CIMB Research 2016-10-25: 1Q affected by adverse FX and one-off expense

GL Limited - CIMB Research 2016-10-25: 1Q affected by adverse FX and one-off expense GUOCOLEISURE LIMITED B16.SI

GL Limited - 1Q affected by adverse FX and one-off expense

  • 1QFY17 group core net profit was in line, at 43% of our FY6/17 forecast.
  • Reported net profit fell 67% yoy due mainly to a one-off legal provision and adverse FX translation for its UK hotel operations.
  • Hotel core net profit fell 13% yoy purely due to adverse FX translation from weaker £; oil & gas royalty income improved on higher gas production at Bass Strait.
  • Keep our FY17-19F EPS, while rolling our valuation basis to end-CY17. Maintain Hold and target price of S$0.86, based on 40% discount to end-CY17 RNAV.

1QFY17 core net profit in line, reported profit fell due to one-offs 

  • 1QFY17 core net profit was in line with our expectations, at 43% of our full-year forecast (1Q is seasonally strong). 
  • Reported net profit fell 67% yoy to US$11m in 1QFY17 (1QFY16: US$31.4m), due to a one-off legal provision expense of US$8.5m recognised in 1QFY17, while 1QFY16 was boosted by a one-off compensation of US$13.1m for the cessation of management contracts of 19 UK hotels. 
  • Revenue fell 15% yoy in 1QFY17 to US$97.8m (1QFY16: US$115.1m) due to adverse FX translation for UK businesses.

Hotel performance marred by adverse FX translation 

  • Excluding the US$8.5m one-off legal provision, core net profit of hotel division declined 13% yoy to US$17.8m in 1QFY17 (1QFY16: US$20.6m) purely due to the adverse FX translation from the weakened £. 
  • Despite the weaker yoy performance, 1QFY17 hotel core net profit showed substantial improvement qoq (4Q16: US$7.9m). 
  • Management attributed qoq improvement to bolstering effect of weaker £ on inbound tourism to UK.

Improved oil & gas (O&G) royalty income on higher gas production 

  • Net profit related to the oil & gas royalty income improved 23% yoy from US$3.5m in 1QFY16 to US$4.3m in 1QFY17 due to higher gas production at Bass Strait, and helped by stabilising crude oil price (c.US$52/barrel today). 
  • Management believes that oil prices will not return to the previous high any time soon, and expects fluctuations in oil price to continue to cause volatility in the group’s oil & gas royalty income.

Exploring options for gaming business to unlock value 

  • Net losses of the gaming business widened to US$1.2m in 1QFY17 from US$0.4m in 1QFY16. 
  • We understand the yoy higher loss was due mainly to the group’s repositioning of the Clermont Club (the only casino under GL’s gaming business) to focus on the midend market (previously focused on high-end players). This should help to reduce volatility of casino performance in future. 
  • Management said it is also exploring options to unlock value from the casino via part or full disposal of its stake in the casino.

Continued business development amid cautious outlook 

  • Management guided for a cautious outlook in the next twelve months. 
  • Although the weakened £ could bolster inbound tourism to the UK, the resulting positive impact may not be sufficient to fully mitigate the negative impact from adverse FX translation on the group’s hotel earnings. This is reflected in our forecast of 5% yoy dip in the group’s FY17F core net profit. 
  • Management expects to launch three refurbished hotels (c.100 rooms each) towards the end of FY17F.

Maintain Hold with unchanged target price of S$0.86 

  • While we think that GL’s current 45% discount to CY17 RNAV implies that there is limited downside to valuation, the significant uncertainties related to Brexit are likely to continue weighing on the hotel business outlook. 
  • Possible monetisation 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

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-10-25
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.86 Same 0.860