GL Ltd (GLL SP) - UOB Kay Hian 2017-10-31: Asset Disposal Unlocks Value And Privatisation Potential

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GL LIMITED B16.SI

GL Ltd (GLL SP) - Asset Disposal Unlocks Value And Privatisation Potential

• At the core of GL is its rare hotel portfolio with > 4,700 rooms in prime London. UK/London hotel performance has reached a record high in 1H17 with growth expected to continue. 
• GL is also unlocking value through non-core asset disposal with up to US$80m gains expected. We see the potential of a privatisation, noting a prior offer of S$1.25/share. 
• With steady dividends, investors can get paid to wait. Initiate coverage with BUY and a conservative SOTP-based target price of S$1.185.

INVESTMENT HIGHLIGHTS

Initiate coverage with BUY and SOTP-based target price of S$1.185, implying 30.9% upside. 

• We value GL at US$1.13b, opting to be conservative with a generous 40% discount to our SOTP valuation of US$1.89b. GL is currently trading at only 0.8x P/B. 
• We believe our valuation of GL’s hotel and casino portfolio is conservative, and note the possible upside from the hidden value in its hotel property assets.

Rare hospitality assets with over 4,700 rooms in prime central London. 

• GL’s core hotel business has a portfolio comprising 15 owned and 2 managed hotels in the UK with over 4,700 rooms sprawled over tourist hotspots in London’s prime districts and another 300+ rooms in key UK locations. It also holds royalty assets over the Bass Straits, the Clermont Casino as well as 55,000 acres of land in Hawaii. 

UK/London hotel performance at record high, growth to continue. 

• With the weakened sterling, UK/London hotel performance (room rates/occupancy) hit a record high in 1H17 with growth expected to continue. PwC is forecasting 3.3% growth for the full 2017 and GL is likewise guiding a similar figure for FY18 after a 7% yoy growth in sterling terms in FY17.

Asset disposal to unlock value with possible gains of US$80m. 

• While GL has been exploring options to sell its casino and Hawaii properties for a while, we have seen more concrete results recently. There was an offer for its casino business (according to GL’s FY17 annual report), and GL has finally posted its Molokai property for sale with strong buyer interest. If the Molokai sale is sold at its posted US$260m, this could translate to gains of around US$77m. 
• For the casino, we expect the sale to complete before end-FY18, which could provide around 10% gains (US$3m). We view successful disposals as catalysts that could reduce the discount facing the company.

New MD streamlining assets; deep discount of 0.8x P/B opens privatisation potential. 

• One possible reason why the asset disposals are finally happening could be because of GL’s new Group Managing Director, Mr Tang Hong Cheong, who came from a strong banking background. Mr Tang is also Guoco Group’s President and CEO, which leads us to beleive that the decision could be to streamline assets for a potential privatisation. 
• We further note that GL is currently trading at only 0.8x PB and that controlling shareholder and Malaysian tycoon, Mr Quek Leng Chan, had previously offered to privatise GL at S$1.25/share in 2005.

Healthy balance sheet and steady dividends mean investors get paid to wait. 

• We expect net debt to drop from US$182.2m (FY17) to net cash of US$23.4m (FY20) and net financing cost to drop to US$7.7m in FY20. With a healthy balance sheet and steady dividends (GL has been paying stable dividends for more than the past decade, and we expect the 2.2 S cents dividends to continue), investors can get paid to wait for positive share price catalysts.

Valuation 

Initiate coverage with BUY and SOTP-based target price of S$1.185. 

• The UK’s tourism sector is a rare bright spot against the backdrop of Brexit. We like GL for its:
  1. solid portfolio of rare hospitality assets in London,
  2. continued strong hotel performance, 
  3. healthy balance sheet with steady dividend payments,
  4. potential asset disposal to unlock value, and
  5. potential privatisation arising from asset streamlining.
• We value GL at US$1,132.2m, or S$1.185/share, based on SOTP valuation: DCF for its Brass Straits concession; and cost and comparable method for its hotels and Molokai properties.
• Currently, GL has 15 owned and 2 managed hotels, and 5,065 rooms under management, with the majority sprawled all over tourist hotspots in London’s prime district of Mayfair and Belgravia.
• UK hotel transactions remain resilient. 
• Despite uncertainties due to Brexit, the UK hotel market reached £2b in 1H17 and is set to reach £5.1b for 2017, up 28% yoy. The investment market was driven by individual sales in London as investors continue to demonstrate considerable appetite for big ticket purchases that promise stable long-term income. Savills and PwC noted that the average value per key has risen over the past 12 months.
• Going forward, competitive pressures from offshore capital seeking trophy assets should maintain per key values of hotels at the upper end of the spectrum.

Hotel portfolio worth US$1,557.9m. 

• Hotel transactions in London yielded an average €0.32m per key in 2016, with the following price per key for different categories of hotels: €0.61m for 5-star, €0.41 for 4-star and €0.21 for 3-star. We have applied these benchmarks to GL’s portfolio of owned hotels, taking into account the leasehold status of each hotel, and arrived at a portfolio value of US$1,557.9m (€1: £0.85, £1:US$1.31). We believe this estimate is conservative as we had assumed short-lease hotels (less than 50 years) to be at book value. Figure 3 shows our analysis of the impact on GL’s hotel value under different exchange rates (GBP:USD).

Bass Straits concession worth US$173.5m. 

• We value the concession at US$173.5m, based on DCF methodology and assuming an effective lifespan of 23 years (until 2040), 10% WACC and cash inflow of US$17.3m, US$18.2m and US$19.1m in 2018-20 respectively. We based our cash inflow projections and long-term oil prices according to Bloomberg’s consensus oil price.

Opting to be conservative with a generous 40% discount. 

• Based on £1:US$1.31, we derive a SOTP-based target price of S$1.18. We opt to be conservative and give a generous 40% discount (noting the volatility brought about by Brexit on the sterling pound and accounting for this risk by taking an additional 10% discount to the 30% holding company discount applied to GL’s fair value). 

Peer Comparison 

• Hotel business: Deep discount at 6.6x 2018F EV/EBITDA, or 50.7% discount to peers’ average. While the increasing popularity of “asset-light” business model and its associated lower gearing does not make for easy comparison, we think GL’s hotel valuation is undemanding in relation to European peers which are trading at an average EV/EBITDA of 13.4x. We derive GL’s 2018F EV/EBITDA based on share price of S$0.905 (US$1:S$1.36) and 2018F hotel EBITDA of US$93.3m.
• The perennial underperformance of its property development (Molokai Island) and gaming (Clermont Club) businesses has largely marred the earnings quality of GL’s hotel business, resulting in an overhang on its share price. One-off legal complications in relation to terminated leases also distracted investors from the strength of GL’s performance in FY17.
• Casting the one-off lease complications behind them, lower hotel lease rates and acquisition prices in yesteryears put GL in an enviable position to deliver strong earnings even as it doubles down on refurbishment efforts in its largest hotel (Hard Rock Hotel London, previously The Cumberland) in 2018.
• GL’s established status as a major player in the London hotel market and its diverse array of offerings near tourist hotspots only underline the quality of its portfolio and the massive discount of its share price to its fair value. 
• We think the potential sale of Clermont Club and Molokai Island will unmask the true potential of GL’s hospitality assets and trigger a re-examination of its fair value. Moreover, the upward momentum in big-ticket transactions in the London hotel market and continued strong investor demand for trophy assets might highlight the substantial hidden value in GL.

Company Background: 

• Over 4700 hotel rooms in prime London Founded in 1961, GL (formerly GuocoLeisure or BIL International) is the SGX-listed hospitality arm of Guoco Group. 
• GL’s core hospitality business operates out of GLH Hotels, the largest owner-operator hotel company in London with 16 hotels in the UK, including 14 hotels in top London locations.
• Other than its hospitality business, GL also owns:
  1. 2.5% royalty granted by BHP/ExxonMobil on the gross value of all hydrocarbons produced and recovered in designated areas within the Bass Straits of Australia,
  2. property development including 55,000 acres of land in Molokai Island, Hawaii, and
  3. Clermont Club, an exclusive casino in Mayfair, London.

Timeline 

• 1961 - The group was established in New Zealand as Brierley Investments Ltd (BIL) in 1961. Founded by Sir Ronald Brierley, BIL’s initial focus was to acquire substantial shareholdings in public companies in Australia and New Zealand.
• 1980 - By the 1980s, BIL had made numerous global investments with shareholdings in over 300 companies. In the late-1980s, BIL began to realign its strategy by focusing on a smaller number of assets with a core of trading subsidiaries and associated companies.
• 1997 - The Asian economic crisis in 1997-98 led the Board to initiate a review of BIL’s corporate philosophy and investment strategy. This resulted in the disposal of a number of non-performing investments.
• 2000 - Year 2000 represented a significant milestone for BIL as the group shifted its primary stock exchange listing from New Zealand to Singapore, and its management team proceeded to restructure the group’s investment portfolio.
• 2007 - In Oct 07, the group changed its name to GuocoLeisure Ltd.
• 2015 - In Oct 15, the group changed its name to GL Ltd.

17 hotels with 4,700+ rooms in prime London and 300+ in other key UK locations.

• GLH Hotels has a portfolio of 17 hotels in the UK. In addition to the older Guoman and Thistle brands, there has been three newer brand additions:
  1. Amba, a global four-star hotel brand;
  2. every, a four-star limited-feature category hotel brand with a focus on technology; and
  3. Thistle Express, a Thistle brand for located at key locations outside London. 
• Of these, more than 4,700 rooms are available in prime locations across London while 300+ rooms are in other key UK locations.

Risk Factors 

Fallout from Brexit. 

• One of the greatest uncertainties facing the UK is Brexit. The weakening sterling pound is one example of how Brexit could have an impact on GL. In this case, it has a beneficial impact as the weakened sterling pound encourages tourism but negative impact in terms of reporting currency. There is a great deal of uncertainty as to how Brexit would eventually take place and as such investors have to be aware of the geopolitical risks involved.

Foreign-currency fluctuations. 

• The weakening sterling pound has already had an impact on GL’s hospitality profits and balance sheet which is reported in US dollars.
• Along with other currencies such as the Australian dollar from its other profit streams, we note the risks of weaker foreign currencies against the Singapore dollar as GL is traded in the Singapore dollar. Nonetheless, GL actively manages its exposure to foreign currencies through derivative financial instruments.

Oil prices. 

• A large part of GL’s profits is generated from its Bass Straits royalty, which is heavily influenced by global oil prices. A significant drop in oil prices will have a negative impact on GL’s bottom line, however, the reverse is also true if oil prices move up.

Intensifying competition. 

• With supply expected to increase faster than demand in London, competition will undoubtedly intensify. However, we note that GL’s brand value and that its London hotels are primarily operating in the more premium segment should shield most of the impact (as most of the rooms are in the branded budget segment).

Geopolitical risks and external events affecting tourism and property development. 

• The hospitality and property development industries are extremely susceptible to external events such as terrorism, natural disasters, economic slowdown or even a disease outbreak. For example, London hotel occupancy rates fell in Jun 17 following a terrorist attack. However, London hotels have shown resilience and GL has typically weathered through these tragedies well.

Edison Chen UOB Kay Hian | Yeo Hai Wei UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-31

UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 1.185 Same 1.185