Company Update, 10 March 2014 GuocoLeisure (GLL SP) Buy (Maintained) Consumer Cyclical - Leisure & Entertainment Market Cap: USD904m Target Price: Price: SGD1.43 SGD0.84 Macro Risks Dawn Of a New Era Growth Value GuocoLeisure (GLL SP) Relative to Straits Times Index (RHS) 122 0.85 115 0.80 108 0.75 102 0.70 45 40 35 30 25 20 15 10 5 95 GLL is embarking on a hotel-operator model that will see it expanding to 100 major cities by 2023. Its hotel division CEO, Michael DeNoma, has an impressive record for value-creation in his previous appointments, and we are positive on his execution capability. We reduce our holding company discount from 30% to 20%. Maintain BUY, with a higher TP of SGD1.43. ♦ New broom sweeps clean. Since Michael DeNoma came on board as CEO of GLL’s hotel operations about two years ago, the group has embarked on an overhaul of its business model, retrofitting its flagship hotels to revitalise earnings while introducing new brands to serve niche segments more effectively. Underpinning the overall strategy is a vision to become a global hotel operator with a presence in 100 major cities by 2023. ♦ Capable CEO whose interest is aligned with shareholders’. Mr DeNoma has a sound record in creating value in his previous capacity as CEO of Standard Chartered Global Consumer Bank. With his experience in brand-building coupled with GLL’s portfolio of prime hotel properties, the shift towards an asset-light hotel management model will enhance returns on capital as well as catalyse the stock’s re-rating. Notably, the interests of Mr DeNoma and his top managers – who have received up to 33m share options exercisable at SGD0.86 each - are aligned, and there is now incentive to move the options deep into the money. ♦ Earnings on an upswing. London’s hospitality market is poised for strong gains in 2014-15, with revpar (revenue per available room) projected to grow 4-5% over 2014-15 as hoteliers regain pricing power, spurred by rising corporate demand. As one of the largest hotel operators in London, we expect GLL to benefit from the upswing. While retrofitting cost will weigh on earnings in the current year, this will be offset by interest savings from expiring high-cost mortgage bonds. ♦ Maintain BUY, with higher TP of SGD1.43. We are reducing our holding company discount from 30% to 20% as the group makes the transition to an earnings-driven model. GLL has defined hospitality as its core business, while its non-core assets such as its Molokai property or Bass Straits Royalty may be divested at the right price, with the potential proceeds re-invested in its hospitality business. Jan-14 0.90 Nov-13 128 Sep-13 0.95 Jul-13 135 May-13 1.00 Mar-13 Vol m Price Close Source: Bloomberg Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) Hong Leong Malaysia Bhd 0.63m/0.50m 48.8 19.8 0.73 - 0.96 33 66.6 Shariah compliant Forecasts and Valuations Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Total turnover (USDm) 350.6 331.1 391.1 369.8 380.3 Recurring net profit (USDm) 67.40 49.50 80.60 77.00 Recurring net profit growth (%) 18.87 (26.56) 62.83 (4.47) Core EPS (USD) cents 44.00 (42.86) 5.10 3.70 6.10 5.90 3.30 Goh Han Peng +65 6232 3893 Core EPS growth 21.43 (27.45) 64.86 (3.28) (44.07) [email protected] DPS (USD) cents 0.01 0.01 0.02 0.02 0.02 Dividend Yield (%) 3.01 1.81 1.81 2.41 2.41 12.86 17.72 10.75 11.11 19.87 Edison Chen +65 6232 3892 [email protected] Core P/E (x) Return on average equity (%) P/B(x) EV/EBITDA(x) Net debt to equity (%) 6.3 5.0 7.7 6.9 3.9 0.87 0.90 0.79 0.78 0.78 13.9 13.1 8.9 9.4 10.6 48.50 40.87 36.18 31.61 29.75 Source: Company data See important disclosures at the end of this report Powered by EFATM Platform 1 GuocoLeisure (GLL SP) 10 March 2014 London’s hospitality market booms 2014 to be record year for London hotels. Macro-economic factors such as increasing corporate spending (the Global Business Travel Association forecasts that corporate travel will grow 3.7% this year) appears to suggest growth in demand from the higher paying corporate segments of the demand base. PwC expects 2014 to be a record year for London hotels, with revpAR rising 3.8% to GBP117.1, while data from advisory firm BDO affirms the trend, showing that London hotels ended 2013 with an upward trajectory in December, with room yield rising 5.9% y-o-y to GBP95.44. Figure 1: London and UK regional 2012 & 2013 monthly average daily room yield per available room 160 140 120 100 80 60 40 20 0 Mar Apr May 2012 UK Regional hotels (GBP) Jun Jul Aug 2013 UK Regional hotels (GBP) Sep Oct 2012 London hotels (GBP) Nov Dec 2013 London hotels (GBP) Source: BDO United Kingdom Figure 2: London, provinces and UK RevPar forecast trends 140.00 6.00% 5.00% 120.00 4.00% 100.00 3.00% 80.00 2.00% 60.00 1.00% 0.00% 40.00 -1.00% 20.00 -2.00% 0.00 -3.00% 2013 2014F 2015F 2013 London 2014F 2015F Provinces RevPAR (GPB) 2013 2014F 2015F UK y-o-y growth rate (RHS) Source: PwC See important disclosures at the end of this report 2 GuocoLeisure (GLL SP) 10 March 2014 Transforming into a global hotel operator A fresh start. CEO Mike DeNoma’s entry into GLL marked a new strategic direction for the company, as well as the introduction of a different operating model. Carrying out extensive market research into what affects the decision-making of owners and guests, GLL’s owner-operator strategy focuses on the 100 major global cities, with a 10-year ambition to deliver the best guest centred experience in the industry. With thorough data building and collection, GLL will set out to transform the current model by using data to differentiate the guest experience. New entrepreneurial approach to unlock employee potential. The new business model will provide an alternative to the current model for the hotel industry by giving autonomy to its individual hotels. It puts a new layer of profit-accountable general managers reporting to the hotel general manager, so that they become true hotel general managers. It aims to move away from a hierarchical way of management that gives GLL’s general managers more autonomy, thereby unlocking their full potential. Offering flexible terms to property owners and developers. GLL offers more flexible terms and conditions to property owners and developers, which challenges the status quo and readdresses the risk/reward balance within the industry. Calling for developers and property owners to join the company, some of the changes include offering more flexible terms and conditions to property owners and developers, such as shorter terms of agreement. Free Wifi enhances customer loyalty. Building on BDRC Continental research that hotel guests value free wifi as much as good night’s sleep, GLL has installed a total of 2800 access points that provide guests with free Wifi at a click. According to the company’s internal customer scoring system, this led to customer loyalty growing by13% - an impressive achievement given the short period of time. Launching luxury brand, Clermont. To date, GLL has launched two new brands. Clermont, a luxury hotel and private residence brand, comprises: i) Clermont London, the rebranded Royal Horseguards Hotel near Westminster and overlooking the River Thames, due to open after renovations this year, ii) Clermont Singapore, part of Tanjong Pagar Centre and Singapore’s tallest building, due to open in 2016, iii) Clermont Kuala Lumpur, located Damansara City on prime freehold land in Damansara Heights, due to open in 2016, and iv) Clermont Residence, luxury residence apartment serviced by adjoining Clermont hotels in Singapore and Kuala Lumpur (200 and 370 apartments respectively). The group is looking to launch 30 Clermont hotels over the next decade. Figure 3: Details on Clermont hotels/residences Source: GLL Enter Amba, a new 4-star brand. After extensive research, GLL launched its second brand, Amba, a contemporary 4-star hotel brand, which aims to address unmet demand in the 4-star segment. This involves a rebranding of Guocoleisure’s other four main hotels in London: i) the Tower Hotel near London Tower Bridge, ii) Charing Cross in central London near Trafalgar Square, iii) the Cumberland Hotel located on Oxford Street near Marble Arch, and iv) the Grosvenor in Victoria. After undergoing major refurbishments, these hotels will relaunch as early as June. Looking at a combination of great location, warmth hospitality and technology, Amba See important disclosures at the end of this report 3 GuocoLeisure (GLL SP) 10 March 2014 is targeting 30 key cities in the UK and will also expand internationally in China, the US and Europe. 5 key London hotels to undergo refurbishment. The bulk of the value of GLL’s hotel portfolio is concentrated in five key hotel properties located in prime locations in London, namely: i) The Royal Horseguards Hotel (the rebranded Clermont London, ii) the Tower Hotel, iii) Charing Cross, iv) the Cumberland Hotel near Marble Arch, and v) the Grosvenor in Victoria with 2,359 rooms. In February, the group embarked on a major refurbishment of the five hotels. Although the cost of refurbishment as well as re-branding initiatives will impact on the group’s 2H14 performance, we believe that it is taking a necessary step towards improving the overall value of its hotel properties. Figure 4: GLL’s London hotels Source: Company data, Bing Multiple funding sources available. Financially, we believe that GLL’s ambitions are well funded by several sources: i) internal funding – the current London hotels’ free cash flow coupled with the Bass Straits Loyalty provides the group with a steady stream of cash, ii) potential sale of Molokai properties at the right price, and iii) possible sale and lease back of three hotel properties pledged under a 2014 mortgage debenture stock. The 11% debenture stock will likely be separately funded under a cheaper instrument. See important disclosures at the end of this report 4 GuocoLeisure (GLL SP) 10 March 2014 Aligning management interest with share price performance In capable hands of an established brand builder. CEO Mike DeNoma has considerable experience in transforming international businesses in several industries. More importantly, he is an established brand builder. As the then CEO of Standard Chartered’s Global Consumer Bank, he relaunched the group’s global brand positioning, helping it to expand all over Asia, Africa and Middle East. Over a 7-year period, the group’s customer base tripled while the number of branches grew by over 1000 to 1600, and revenues jumped by more than USD4.0bn. Looking at Mr DeNoma’s “10 years, 100 cities” ambition, we can see the same happening for GLL. Figure 5: CEO profile Source: glh. Share options align management interest with shareholders. With Michael DeNoma and his team of managers having received up to 33m share options, the interest of GLL’s management should be strongly aligned with those of its shareholders (another 46m options were granted to other employees.) Upon achieving their performance targets, the first tranche of 20% to 35% will be vested at the end of FY15/16, and the second tranche of 65% to 80% at the end of FY18/19. Currently, as GLL has acquired 62m shares to provide for those options, a dilution is unlikely to be a concern. This means that the options, exercisable at SGD0.86, are currently out of the money, and management will have the incentive to move them into the money. Figure 6: Options granted *The expiry date for these options are further divided into three sections via a 40-40-20 ratio, exercisable within 6 months, 13 to 18 months and 25 to 30 months from the vestment date. Source: HK Stock Exchange Another privatisation offer possible? Malaysian tycoon and controlling shareholder, Mr Quek Leng Chan, has been trying to take private the companies under his control. While his offers have thus far been unsuccessful, what we would like to highlight is the market response to his privatization offers. In his words, “it (referring to the latest privatisation offer for Guoco Group) prompted the market to recognize the intrinsic value of the company”. We note the previous offer in 2005 was to take the company private at SGD1.25 per share, and suspect the possibility of another offer being made in the near future. See important disclosures at the end of this report 5 GuocoLeisure (GLL SP) 10 March 2014 Figure 7: Quek Leng Chan’s offers to take private companies controlled by him Second First Privatisation Offer Privatisation Offer HKD 88 HKD 100 Year of Offer 2012 Price before Privatisation HKD 66 Hong Leong Capital Bhd (HLG:MK) 2013 MYR 1.42 MYR 1.71 Guoco Leisure Ltd (GLL:SP) 2005 - SGD 1.25 Guoco Group Ltd (HLG:MK) - Latest Price HKD 94.4 Change in Price before Privatisation and Latest Price 44% MYR 10.9 668% SGD 0.845 - Source: Company data Maintain BUY, with higher TP of SGD1.43. We have reduced our holding company discount from 30% to 20% as the group makes the transition to an earnings-driven model. GLL has defined hospitality as its core business, and its non-core assets such as its Molokai property or Bass Straits Royalty, could be divested at the right price, with the potential proceeds re-invested in its hospitality business. Figure 8: SOP valuation Components USDm SGDm 1,664.6 2,080.8 1.52 Bass Straits' NPV estimate 410.6 513.2 0.38 Molokai properties 202.0 252.5 0.18 56.3 68.7 0.05 (467.9) -0.34 Hotel valuation Clermont Leisure casino Less: Group net debts SOTP valuation less 20% holding company discount (383.5) 1,950.0 2,447.3 Per share (SGD) 1.79 -0.36 Fair value 1.43 Price 0.87 Source: RHB estimates See important disclosures at the end of this report 6 GuocoLeisure (GLL SP) 10 March 2014 SWOT Analysis • Portfolio of hotels in iconic sites in London City; hardto-replace assets. • A slow or low growth macro landscape could crimp corporate spending on accommodation • Exposure to oil and gas sector via BassStraits Royalty Trust, without having to bear the attendant exploration risks • Cash-generative assets can support hotel expansion • Unlocking hotel value via a separate listing or setting up a REIT • Organic growth through management contracts • Upside from Bass Straits Royalty on successful drilling activities • The conglomerate/investment holding structure may subject it to a holding company discount P/E (x) vs EPS growth P/E (x) vs EPS growth 0% PE (x) (lhs) EPS growth (rhs) Source: Company data, OSK-DMG estimates Jan-12 Jan-11 Jan-10 Jan-09 0.0 Jan-08 5.0 -200% 6% 1 5% 0.8 4% 0.6 3% 0.4 2% 0.2 1% 0 0% PB (x) (lhs) Jan-12 10.0 1.2 Jan-11 200% 15.0 7% Jan-10 20.0 1.4 Jan-09 400% Jan-08 25.0 Return on equity (rhs) Source: Company data, OSK-DMG estimates Company Profile GuocoLeisure - formerly known as BIL International - is the investment and hospitality arm of the Guoco Group. Its investment portfolio comprises the Guoman/Thistle hotel chain, Bass Straits Oil Trust, and 55,000 acres of property in Molokai, Hawaii. See important disclosures at the end of this report 7 GuocoLeisure (GLL SP) 10 March 2014 Recommendation Chart Price Close Recommendations & Target Price 0.78 0.9 NR 1.0 0.8 0.7 0.6 0.5 0.4 0.3 Buy 0.2 Mar-09 Neutral Sell Trading Buy Jun-10 Sep-11 Take Prof it Not Rated Dec-12 Source: OSK-DMG estimates, Bloomberg Date Recommendation 2012-06-14 Trading Buy Target Price Price 0.78 0.59 Source : OSK-DMG estimates, Bloomberg See important disclosures at the end of this report 8 RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB” which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of 9 March 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) As of 9 March 2014, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) Goh Han Peng DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N) Kuala Lumpur Hong Kong Singapore Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693 RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) 2525 1118 Fax : +(852) 2810 0908 DMG & Partners Securities Pte. 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