GL Limited - CIMB Research 2017-04-26: Cautiously Optimistic On The Hotel Outlook

GL Limited - CIMB Research 2017-04-26: Cautiously optimistic on the hotel outlook GUOCOLEISURE LIMITED B16 (X).SI

GL Limited - Cautiously optimistic on the hotel outlook

  • 9M17 core net profit above our expectations at 83% of FY6/17F full-year forecast.
  • Core net profit rose 1.3% yoy to US$34.4m in 9M17 driven by stronger hotel profit, partly offset by weaker property development and gaming businesses.
  • Management is cautiously optimistic about its hotel business outlook for 2017.
  • We raise our FY17F and FY18F EPS forecasts by 13.2% and 2.6% respectively to reflect the stronger-than-expected 9M17 core net profit and better hotel outlook.
  • We upgrade GL from Hold to Add on the improved hotel outlook, with a higher target price of S$0.87, still based on a 40% discount to our CY17F RNAV estimate.

9M17 core net profit above expectations 

  • GL’s 9M17 core net profit came in above our expectations, at 83% of our full-year forecast. Group core net profit rose 1.3% yoy to US$34.4m in 9M17 (9M16: US$33.9m) vs. our previously forecasted 2.0% yoy decline for full-year FY17F. 
  • The overall core net profit growth in 9M17 was mainly driven by the stronger-than-expected profit from the core hotel business, partly offset by weaker performance of the non-core businesses; mainly the property development in Molokai, Hawaii and the casino operation in London.

Hotel core net profit rose 11% on higher RevPar and cost control 

  • The hotel segment was the key driver of group bottomline, with its core net profit rising 11% yoy to US$33.3m in 9M17 (9M16: US$30.1m). Although seasonally weak, 3Q17 registered positive hotel core net profit of US$2.9m vs. US$0.9m core net loss in 3Q16.
  • Hotel RevPar rose 5% yoy in £ terms, despite hotel revenue falling 15% yoy due to the adverse FX translation from the weaker £ vs. US$. 
  • Hotel net margin rose 3.4% pts to 14.5% in 9M17, due to better cost discipline put in place by management.

Performance of non-core businesses remained volatile 

  • Non-core businesses continued adding volatility to group profitability in 9M17. 
  • Core net loss of property development business widened to US$0.8m in 9M17 (9M16: US$0.6m) due to the slow activities in Molokai, while core net loss of the gaming business rose to US$3m (9M16: US$1m). 
  • Management is still exploring means to unlock value for its non-performing non-core businesses. Possible options include asset disposals and forming joint ventures, in our view.

“Cautiously optimistic” hotel outlook 

  • Management guided for a more positive “cautiously optimistic” outlook for the hotel business in its 3Q17 financial statements, vs. the “cautious” outlook guided in 2Q17. This echoes PwC’s recent findings. 
  • In its report “UK hotels forecast 2017 & 2018”, PwC turned more optimistic on London hotel outlook in 2017.  PwC now forecasts London hotel occupancy to improve to 82% in 2017 (2016: 81%) and RevPar to £120 (2016: £116), driven by the stronger travel demand spurred by the weaker £.

Upgrade GL from Hold to Add, with higher target price of S$0.87 

  • We raise our FY17F core EPS by 13.2% and FY18F by 2.6%, to reflect the strong 9M17 results and the better hotel outlook. 
  • While uncertainties still surround the Brexit, we see limited downside for valuation with GL’s wide 45% discount to RNAV. Key re-rating catalysts include: 
    1. improving hotel profit from stronger tourist arrivals and higher room rate from GL’s refurbished hotels, and 
    2. possible monetisation of group non-core assets. 
  • Key risks include possible severe business disturbance from a disorderly Brexit.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-26
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 0.87 Up 0.860