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.

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.

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.

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.

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 £.

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

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