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GuocoLeisure – Portfolio Of Undervalued Assets?
Perspective | 20 February 2013
Related stocks:
B16
By: Ernest Lim
Articles (134) Profile

GuocoLeisure Limited (GLL) is a $1 billion company in market capitalisation. Quek Leng Chan, #5 richest man in Malaysia (Forbes 2012) has about 66 percent interest in GLL. GLL’s intermediate holding company is Guoco Group Limited which is in the process of being taken private by Quek.

Description of GLL

The screen shot below describes GLL’s various business segments.

Source company http://www.guocoleisure.com/corpstruc.html

Investment Merits

Potentially Undervalued Assets

According to GLL’s annual report 2012, GLL has 8,911 rooms with 8,280 rooms in UK with the balance in Malaysia. Out of the 8,280 rooms in UK, 5,110 rooms are in London. GLL operates under two hotel brands namely Guoman and Thistle brands. These hotels are valued at US$1.2b in GLL books as of 31 December 2012. With their portfolio of assets (refer to the 2012 annual report http://www.guocoleisure.com/uploads/annual.reports/GuocoLeisure%20AR%202012.pdf), there is a likelihood that the assets may be worth more than what are recognised in the books.

Another interesting asset which they have is the 55.1 percent entitlement to the Weeks Royalty. The Weeks Royalty refers to a 2.5 percent overriding royalty relating to all hydrocarbons produced by BHP Billiton from designated areas in the Bass Strait, Australia, granted by BHP. The production is undertaken by BHP and Esso. According to Esso’s estimates, the estimated reserves for these designated areas are likely to last approximately another three decades.

For the last five years, GLL has been receiving a steady stream of cashflows of around US$39 to US$54 million per annum. This asset is recognised on GLL’s books with a figure of US$122.4 million as of 30 June 2012. Although I am not an expert, given the steady cash flows, it is likely to be undervalued on GLL’s books.

Source: GLL annual reports (2008-2012)

It is also noteworthy that GLL has 54,636 acre of land parcel on Molokai island in Hawaii and some properties in Fiji. As of 31 December 2012, these properties are recognised in GLL’s books around US$177 million. According to DMG research in June 2012, GLL has entered into transactions which involve several land parcels changing hands at prices above its book value. This is another area where its assets may be undervalued.

Potential Revaluation Exercise

Quek has offered to take Guoco Group Limited private. Such exercise will involve an independent financial adviser which has to evaluate whether the offer by Quek is fair. I would guess that the financial adviser would have to do a valuation of Guoco Group Limited’s assets in order to be able to assess the attractiveness of the offer by Quek. If this were the case, it is likely that Guocoleisure, being part of Guoco Group Limited may have to do a revaluation of its assets. Given current market conditions and the nature of GLL’s assets, the revaluation exercise is likely to be positive for GLL.

Decent Valuations

GLL trades at 0.68x P/BV (NAV/share: $1.075) with a historical dividend yield of 2.7 percent. Valuations seem to be rather decent.

Likely Delisting Candidate In The Long Term

Within two months, Quek has offered to take Guoco Group Limited and Hong Leong Capital private. Although it is unlikely that he will launch an offer to take GLL private soon, this may arguably be his plan in the long term. Recall that Guoco Group offered $1.20/share to privatise GLL in 2005 but it didn’t succeed. In addition, Quek has been regularly accumulating GLL on the open market. The most recent transaction was the purchase of 667K shares at $0.64875 on 16 October 2012.

Investment Risks

No Rated Analyst Coverage

According to Bloomberg, there is no rated analyst coverage on GLL. The drawback to this is that investors and fund managers are still not familiar with GLL business and prospects, thus it may take some time for Mr Market to recognise this undervalued gem. Conversely, investors who understand and believe GLL’s prospects now can purchase it with a significant margin of safety.

Illiquidity

The average 30-day and 100-day volume is 2.2 million and 1.6 million share respectively. It is noteworthy that it is not an exactly liquid company thus investors who are vested may not be able to enter or exit quickly.

Conclusion

This is just an introduction to GLL. For readers who are interested, they should take a look at the company website and the annual report using the links which I have provided above. In addition, readers who are interested can drop me an email at crclk@yahoo.com.sg where I can send them two unrated analyst reports on GLL.

This is an abridged version which I had sent to my clients a couple of days ago.

Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

Please click here for more information about this author.

GL  -- -- --   
Business: Co holds a portfolio of hotels, as well as a range of other investments. [FY18 Turnover] Hotels (92.2%), oil & gas (7%), ppty devt (0.8%).

Insight: Apr-19, 9M19 revenue rose 1.9% due to higher reven... Read More


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