When Mandarin Oriental shot up from USD1.50 to a peak of USD2.81 after it announced a strategic review for its The Excelsior Hotel in Hong Kong, I did not pursue the stock. But when City Developments announced that it was privatising its hotel subsidiary, Millennium & Copthorne, I decided to take a closer look at the hotel groups listed on SGX. As discussed in Some Hotels Could Be Very Valuable!, there are indeed hidden value in hotel stocks, arising from the fact that the hotels are sitting on the land for a very long time and are seldom revalued. Nevertheless, without a near term catalyst to sell or revalue the hotels, the undervaluation in hotel stocks will probably continue for a very long time.
Last week, I discussed about Stamford Land, a developer and hotel owner in Australia. This week's story is about GL (formerly known as GuocoLeisure). Like Stamford Land, GL owns 16 hotels in the UK, of which 15 are in London. The current book value of these hotels is USD1,015.3M. Based on a search of the hotel transactions in Europe in 2016, the average price per room for hotels in London is EUR291,000 or USD347,000 per room (see HVS website). GL operates 5,110 rooms in London (based on information in 2014 Annual Report). Assuming the hotel transactions mentioned above are accurate reflection of the market value of GL's hotels, the value of GL's 15 hotels in London could be worth USD1,771.8M. This is 75% above the book value of USD1,015.3M. Adding these "revaluation surplus" back to GL's equity, the net asset value would increase from USD0.84 to USD1.42, or from SGD1.13 to SGD1.91.
Again, for undervalued stocks, you need to ask what is the catalyst that would unlock shareholder value. As discussed in Some Hotels Could Be Very Valuable!, the reason why hotel stocks are undervalued is because they have not sold hotels for a long time and there is no reason to believe why they would do so and return money to the shareholders in the near term. However, unlike Stamford Land, there is a potential catalyst for GL. Due to the construction of the High Speed Rail in London, one of GL's hotels, Thistle Euston, was compulsorily acquired by the government in Jul 2017. The transfer of land is scheduled for completion in Oct 2017. Thistle Euston has 362 rooms. Going by the market value of USD347,000 per room, the market value of Thistle Euston should be USD125.5M. What is the book value of this hotel? USD9.0M.
Of course, there are many things that could go wrong with my estimate of the value of Thistle Euston. For one, it is a leasehold property. Perhaps it might only have a few years left on its lease and therefore not worth as much. Secondly, GL might have leased the hotel and/or land from the original lease holder and therefore has to share the compensation with the original lease holder. Thirdly, since it is a compulsory acquisition by the government, perhaps the government might not pay as much as what the private sector would. Fourthly, it is a 4-star hotel and might not be worth as much as USD347,000 per room. Still, even if it is worth only 25% of the reference value of USD125.5M, its value would be USD31.4M, still 3.5 times higher than the book value of USD9.0M. I am eagerly awaiting news about the price GL receives for the hotel.
Actually, regardless of what price the hotel is sold, the profit from the sale of the hotel is relatively small. The investment thesis for GL is not how much profit GL can make from the sale of Thistle Euston, but a realisation by the market that GL's hotels are undervalued and re-rate it to closer to its "revalued" net asset value of SGD1.91.
Will GL rise like Mandarin Oriental? I am vested in GL and I certainly hope so.
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Hello, thank you for the quality post. I have been reading your blog for a few years now, and I always appreciate the information. Helps to keep me grounded in reality!ReplyDelete
Your article has triggered my interest to take a look at GL.
One doubt I have is regarding the returns.
For example, the return on asset for the hotel segment for 2017 is 41/1075 = 3.8%
This seems hardly attractive and is comparable to some of the (not so cheap) REITs we have in Singapore.
If the hotels are deeply undervalued, I would expect a higher ROA.
Is this a sign of some inefficiency? For example, admin expense is 1/3 of revenue, which seems high.
Would like to hear your thoughts about this.
Thks for pointing this out. For FY2017, there was a one-off settlement of a legal claim of USD10.1M. Adding this back, the ROA should be around (43+10)/1075 = 4.9%.
I took a quick glance of Millennium & Copthorne's results for FY2016 ending in Dec 2016. Although not directly comparable as M&C has hotels outside UK, its ROA is lower, at GBP98/4731 = 2.1%. Its admin expense as % of revenue is also higher, at GBP382/926 = 41.3%. I supposed expenses are higher overseas compared to Singapore.