Fragrance Group

Kim Eng on 22 Mar 2012

Background:

Fragrance Group has two business divisions – property development and hotel. Its property development division offers homes at affordable prices and has launched more than 50 projects, the latest being Parc Rosewood at Woodlands. Its hotel division operates under the Fragrance brand, which has 22 hotels islandwide catering predominantly to budget travellers. Parc Sovereign Hotel, a new hotel brand set up recently, is situated in the heart of Bugis.

Recent development:
Fragrance Group has proposed to spin off and list its hotel division as a separate entity called Global Premium Hotels (GPH). The market value of its Fragrance hotels as at last September was $635.2m. Upon completion of the restructuring, the group stands to reap a net gain of approximately $464.0m. It said the proceeds will be used for property development. Fragrance Group is expected to own more than 50% of GPH.

Spin-off is positive, but valuation is a tad too expensive

The spin-off is positive for Fragrance Group, as it allows the sale of its 22 tourist-class hotels, which have consistently returned gross and net margins of 85% and 50%, respectively. The resources can then be channelled to its property development business. However, valuation is looking a tad too expensive at this point. We estimate the book value of the consolidated entity post the spin-off, assuming Fragrance Group retains 55% of GPH, is $0.29 per share. Taking into account development profits, in particular its 60% stake in Parc Rosewood, last month’s best-selling project, our estimate of Fragrance’s RNAV post spin-off is $0.41 per share. Current stock price implies a 15% premium over its RNAV, compared to its peers that are trading at a discount. A plus for the spin-off is an improved balance sheet – a turnaround from a net gearing of over 104% to almost net cash. This puts the group on a strong footing to landbank in the years ahead.

Fragrance Group

Kim Eng on 8 Mar 2012


Fragrance Group recently provided more updates on the proposed spin-off and listing of its hotel business. Under the restructuring exercise, the group’s hotel assets will be held by its new investment holding company, Global Premium Hotels. According to an independent valuation on 22 November 2011, the net tangible assets spun off would amount to $635.2m. Fragrance stands to receive a total consideration of $558.0m, after netting off a discount of $67.2m and a dividend of $10.0m. We understand that the net proceeds of about $420.5m will be mainly used to repay debts and expand its property business. In addition, a special dividend may be paid out to shareholders, after taking into account the group’s overall cash position and future growth strategies.

We expect the proposed listing of Global Premium Hotels to help unlock value for shareholders and increase Fragrance Group’s overall financial capacity and flexibility to strengthen the growth of its property business. Moreover, by creating a separate listed entity, the hotel business will have additional financial capacity and direct access to capital markets. In our view, the new listing may kindle interest in other smaller hotel plays listed here.