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Thursday, 19 April 2012

Global Premium Hotels Limited

Global Premium Hotels Limited ("GPH" or "Company") is offering 13m shares for the public and 437m via placement at $0.26 each. The IPO will close on 24 April at 12pm. The Company is a hotel operator and operates under the "Fragrance" or "Parc Sovereign" brands. 

Pro-forma revenue for FY2010 was $44.2m and net profit was $19.9m. For the 9 months in FY2011, the revenue was $38.9m and the net profit was $17.3m. The company intends to distribute at least 80% of its net profit after tax for FY2012. The Company intends to expand its rooms and into the Asia Pacific region in future under that 2 brands. My personal opinion for the Group will be for it to move up the value chain and create more Parc Sovereign hotels. 

The post IPO number of shares is 1 billion and the EPS using the enlarged share cap for 9 months FY2011 is Singapore 1.66 cents. Assuming the occupancy rate remains the same and we pro-rate it to the full year, the EPS will be around Singapore 2.21 cents. That translate into a listing PER of around 11.76x. The NAV per share is around 28.97c.  The market cap is $260m based on the IPO price.

With visitors rate continue to remain robust and assuming the average occupancy rates remain the same, the net profit after tax will be around $22m. The dividend payout will be 80% x $22m = $17.6m. Dividend per share = Singapore 1.76 cents for FY2012. That translate into a yield of 6.7%. This will definitely be attractive to investors who wants a decent return for their cash. It is a pity this 80% payout is only for FY2012. The intent after FY2012 was not stated. 

The Company is basically a spin-off of the hotel operations from the Fragrance Group. The closest comparable listed on SGX are probably Amara, HPL, OUE, Hotel Properties Ltd etc but they are trading at very wide ranging PE multiples. Looking at the current IPO market sentiment, investors who want to stag this counter could probably do so. I will give it a 2 chilli rating for its high yield for 2012 and a fair trading range of between 29 cents to 35 cents based on 13-16x FY2011 EPS. 

The two things that i don't really like is the "spin-off story" and that OCBC being the placement/underwriter. The track record by OCBC for IPO isn't great.  Just for the records, the 26c price was at the lower end of the 25-28c book building by OCBC a few weeks back. Happy IPOing.


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Anonymous said...

May i know how to subscribe this Global Premium Hotels IPO? Thanks.

Anonymous said...

Hi guys, I was analysing the prospectus of this IPO, and this is what I feel ( it is just my opinion so please don’t be offended if it differs from yours.)

On page 61, it says

As adjusted for the Restructuring Exercise, the net proceeds from the issue of New Shares and the intended use of such proceeds ($’000)

Cash and Cash Equivalents 58,882

Term Loans (Secured and Guaranteed)(2) 20,147
Term Loans (Secured and Guaranteed)(2) 443,035

Total Indebtedness 463,182

Total Shareholders’ Equity 299,119
Total Capitalisation and Indebtedness 762,301

Now, here is the crucial part. Assuming a 2.5% interest rate (page 190, first sentence states loan facilities between approximately 2%to 3%per annum) on the long term loan, in the next few years, the company will have to pay interest expense of 443m x 2.5% = 11m

On page 120, under audited 9m2011,
The pretax, pre-finance cost profit is (21.248 – 2.158)m = 19m
Adjusting it for 12 months, 19m / 3 x 4 = 25m
Accounting for the 11m interest expense per annum, pretax profit = 14m
Accounting for tax of 18%, net profit after tax = 11.5m
Therefore eps = $0.0115 (total 1,000,000,000 shares after IPO)

Considering a share price of $0.26, PER = 23 !!! WITH LARGE LEVERAGE
Even if shareholders are willing to forgo their dividends, it will take 443m/11.5 = 38 years to clear off its debt. What if interest rate rises to 5% in the next few years?

Can someone point out where I have gone wrong? Would really appreciate it.

Anyway, assuming I am correct, I would conclude that this IPO is a speculative investment. As a value investor, I think if we have friends or relatives interested in this IPO, we should make an effort to advise them.

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2Y Capital said...

Dear anonymous (do leave your name next time),

Thank you for sharing your insights on the indebtedness of the Company. It is definitely correct to assume that the company will be highly geared. The question is whether the company can meet its debt obligations. The use of good leverage do have a good impact on the Return on Equity.

You are right to point out that finance cost will escalate for FY2012 and thereby reducing the profits and increasing the PE ratio. Based on your EPS, this also means the dividend yield is now 3.53%, which is still decent.

This is a hit and run for me. Perhaps you may want to analyze if Fragrance Group Limited is a better buy now that it has spun off the hotel arm and will receive 'huge' cash payout of $420.5m.

There are a few mitigation factors if interest rates goes up. The company can issue more shares to boost up its equity, FGL can subscribe for more shares in the company using its cash hoard (if it has not paid it out as dividends).

Darren Tan said...

Market looks down today

Anonymous said...

I will like to point out some issues with this IPO. I personally hold many REITS with dividends of above 7% and with NAV at around 30% discount.

There is this strong rush to IPO a company's hotel portfolio because the CAGR is starting to grow less strongly, hence, companies will want to sell off at the best price possible, this is true for Fragrance too.

Next, one weird thing in the prospectus is that their creditors are largely finance companies instead of the usual banks. Yup, the three local banks are there, but if their credit is so safe, why bother to go Hong Leong Finance or Sing Investment? These places charge higher interest and also, will be hard to get funding in times of a freeze up.

As a hotelier, I think it is very risky to hold only 2 mil cash as compared to debt of 200 mil, asset of 700 mil, NAV of 500mil. It is around 0.4% of the NAV. In this case, I think it is very risky. If there is a fine (due to bad activities), interest rate changes, or just more receivables, I think it will need to call for help. Its sponsor is Fragrance, thus I think it is not a strong sponsor after all. Many REIT that can survive in the 2009 crisis is because of them having strong banks and sponsors. In this case, I hope ppl will consider more and treat this as a hit and run only.

2Y Capital said...

That is why i never like spin off plays. Basically it is Fragrance Group trying to monetize its assets (as most were acquired over a long period of time) and then sell it at fair market value to a new set of investors.

But i want to give them the benefit of the doubt as this is a strong cashflow business unless SARS happen again.

Its interesting to hear that you are a hotelier, so you should be in a better position than me to share some insights about this company. :)

Anonymous said...


farmland investment said...

I see some arguments in favor, and some opposed. However, ultimately my concern about the very high gearing does scare me away. I see the argument that they would be able to pay, but one of my criteria is low gearing and this just does not fit the bill.

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