GuocoLeisure (GLL SP) is expected to report its full year earnings over the next 2 weeks, which is likely to see a substantial surge in operating profit given the strong trading performance of its UK hotel operations and steady contribution from its Bass Straits royalty. For 9MFY11, the group achieved a 82.7% increase in net profit to US$45.3m, boosted by improved room rates and costsavings initiatives implemented over the past few years. The group should benefit from the spike in tourist arrivals and game participants in the run-up to the London 2012 Olympics given that more than 5,000 of its rooms are located across London where most of the events are being held.
GLL also has a 55% entitlement to the Weeks Royalty, which entitled it to a 2.5% royalty granted by BHP/Esso on the gross value of all hydrocarbons produced and recovered in designated areas within the Bass Straits of Australia. This royalty has been providing the group with annual cash flow of US$40m p.a with reserves expected to last another 20 years. GLL’s other key asset is the ownership of 54,677 acres of property on the island of Molokai, Hawaii. This asset is carried at book value of US$179m, but management believes the property is worth more and has recently started to lease some land to a wind power project.
An interesting corporate development which transpired recently is the successful takeover of
Rank Group, the UK bingo and casino group, by Guoco Group, which currently controls 74.8%
of Rank. Rank has 37 operating licenses for casinos in the UK, and there could be further
collaboration between Rank and GLL’s Clermont Leisure casino operations, as the latter has
been less successful in securing additional casino licences given the deeply conservative stance of the current Conservative-led coalition government.
Our sum-of-parts valuation suggests the stock is worth $0.97 per share, and applying a 10%
holding company discount, fair value is $0.87, suggesting 52% from current levels. In 2005,
Quek Leng Chan offered as high as $1.25 to privatize the company, and he continues to be an
active buyer of the stock in the market.
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