Guocoleisure

UOBKayhian on 12 Mar 2013

Valuation

·          Guocoleisure (GLL) is trading at 10.36x FY12 PE and 0.69x FY12 P/B.

·          Share catalysts include higher-than-balance sheet valuation of GLL’s assets from the independent valuation report.

Investment Highlights

·          Market leader in the UK. Thistle Hotel is one of the largest hotel chains in the UKwith more than 8,000 rooms. Over 5,000 of its rooms are in London, the country’s capital that has traditionally been resilient to recession due to its status as a global city. Despite the hangover from the London Olympics, Price Waterhouse Coopers (PwC) is still positive on the outlook for the London hotel industry, with a 77.1% occupancy rate forecast for 2013 (the third highest forecast for an European city).

·          Oil and gas royalty - a steady cash generating machine. For the last five FYs, GLL has been receiving a steady cashflow stream of US$40m-50m. With the resources in Bass Straits of Australia likely to last till 2048, the royalty income will serve as a support for future earnings. Royalty income represented approximately 63% of FY12 net profit. In addition, using the DCF model, with a projected cash flow of approximately US$35m over the next 30 years at a discount rate of 9%, net present value of the royalty income stream is approximately US$357m. This is three times higher than the asset’s historical cost of US$122.4m as at end-FY12 in the balance sheet.

·          Properties held at deep discount to book value. GLL carries its hotels and property, plant and equipment (PPE) at historical cost less accumulated depreciation. According to management, the last revaluation date was in 2005. With an independent valuation report of GLL’s assets likely to be issued in the near term (due to privatisation of Guoco Group, the ultimate holding company of GLL), we believe it will shed light on the highly undervalued property portfolio of GLL, providing a powerful catalyst for the stock price.

·          Future Plans:

1.       Rationalise assets (Dispose some of its development properties to focus on its core business - hotel management).

2.       Increase its foothold in Asia (Two additional hotels are work-in-progress - one in Malaysia and one in Singapore).

Our View

·          GLL is trading at an attractive valuation at 0.69x FY12 P/B. We believe the independent valuation report on GLL’s assets will highlight GLL’s undervalued property portfolio to the market that will serve as a short-term price catalyst.

·          Steady income stream from oil and gas royalty and its market leader position inLondon’s hotel operation also make GLL an attractive investment to value investors.

·          We believe the current depressed valuation is due to the lack of market exposure by GLL. With recent news about the privatisation of GLL’s parent Guoco Group and plans to set up a hotel in Singapore, we believe there will be an increase in investor interest in the stock. The stock has already seen an increase in volume since the start of the year.