Disclaimer:
This post is only intended for informational and discussion purposes and
should not be taken as financial advice. I am merely sharing my rationale for
buying GL Limited shares, and may acquire more shares and/or divest my positions
without updating this article. Please do your own due diligence and/or consult
a licensed financial advisor before dealing with shares in GL Limited.
Overview
On
15th Jan 2021, GL Limited announced a voluntary conditional general offer from
GuocoLeisure Holdings Limited, at an offer price of $0.70 per share. GL Limited
is a company that operates in the hospitality, oil & gas, and property
development segments.
Following
the announcement, analysts from Lim & Tan Securities have suggested that GL
Limited could be worth as much as $1.16, as reported by the Business Times.
In this article, I would be discussing the various segments of the company, and also my rationale for purchasing shares of GL Limited at $0.725, which is above the offer price.
The Group’s net asset value (“NAV”) stood at 72.3 US cents as of 31 Dec 2020. Based on an exchange rate of 1.33 for USDSGD, the NAV would be 96 cents. The following section illustrates the main balance sheet items which contribute to the NAV.
Hotels
GL Limited accounts for its hotels at cost less accumulated depreciation.
In contrast, other real estate companies such as Capitaland account for their
properties on fair value basis, which results in fair value gains/losses. An analogy
would be if you bought your HDB flat for 300K 20 years ago, and it is worth 500K
today, you would still recognise it on your “balance sheet” at 300K, less
accumulated depreciation. Thus, this gives rise to the possibility that the
hotel assets may be actually worth more than what is stated on the balance
sheet.
However, it would be good to note that GL Limited had still booked
24.3 mil of impairment losses for their hotels for the period ending 30 June
2020. Using the same analogy above, if the value of your HDB drops to 250K, you
would have to impair the asset as the net realisable value (”NRV”) is lower
than the carrying value (cost less accumulated depreciation). Basically, when
accounting on a cost basis, when the asset value goes below NRV, you would have
to impair the assets, but when the value goes up, you still account for it at
cost less accumulated depreciation. Just some accounting technicalities.
The company would only record a gain when the assets are sold above
the carrying value. For example, when GL Limited sold the Thistle Euston Hotel in
2020 due to a compulsory acquisition from the UK govt, they recorded a pre tax
gain on sale of 15.9 mil USD.
Thus, it may be possible that the current market values of the hotels
are above the cost prices, but on the balance sheet, they are still accounted at
cost less accumulated depreciation.
Molokai Property
GL Limited owns a huge plot of land in the Molokai island in Hawaii.
Their plot of land is approximately 35% of the island, comprising 55,575 acres
of land. For a comparison. Singapore’s land area is about 179,900 acres, which
means that plot of land that GL Limited owns would be more than 25% of
Singapore’s land area. Huge. Unfortunately, GL Limited was not able to develop
the land into luxury properties and hotels, as there was fierce opposition from
the locals.
GL Limited had bought the land around 30 years ago in 1987, and it
is currently accounted for on their balance sheet at 171 mil USD. For some
context, the company had put the plot of land on sale for 260 mil USD in 2017.
Whether or not the company can still fetch 171 mil for that plot of land may be
questionable, given that local oppose commercial developments. However, locals
have indicated that they would be open to private buyers, and Mark Zuckerberg
reportedly considered buying the Molokai property years ago.
I have sourced for some articles on regarding the Molokai property:
https://www.wsj.com/articles/a-chunk-of-the-hawaiian-island-of-molokai-seeks-260-million-1504785596
Bass Strait Oil Royalty
Lastly, GL Limited owns the royalty to oil and gas production from
Australia’s Bass Strait. This is accounted for on their balance sheet at 58.8
mil USD, on a cost less accumulated amortisation basis. Amortization is similar
to depreciation, except that it is for intangible assets in this case. Royalty
income from this segment was 24.6 mil in FY17, 24.2 mil in FY18, 29.2 mil in FY19
and 25.2 mil in FY20. Thus, the cash flows provided by the royalty may indicate
that the asset may potentially be worth more than the 58.8 mil assigned to it
on the balance sheet. For some context, the company used a 10% discount rate
and an assumed production life of up to 2036 when calculating the value in use
of the royalty interest. Similar to the example above for the accounting of
hotels, the value in use of the royalty stream may possibly be worth more than
the 58.8 mil value assigned to it on the balance sheet, based on a 16
year DCF of c.20 mil annually, using a discount rate of 10% (10% discount rate is used by the company in their annual report).
Delisting Rules
Edit: A comment on this post has notified me that I have misunderstood the delisting process. There would be no EGM held for voting in this instance.
I have linked the following articles regarding general offers on the SGX:https://www.sgx.com/media-centre/20200504-regulators-column-sgx-regcos-expectations-information-be-provided
https://www.sgx.com/media-centre/20190711-regulators-column-privatisations-through-general-offers
https://www.straitstimes.com/business/companies-markets/sgx-makes-key-changes-to-delisting-rules-exit-offers-must-be-fair
My Strategy
What I see here is that this is essentially a game of chicken - if
it appears to the offeror that minority shareholders are likely to hold on to their shares (90% acceptance threshold unlikely to be met) then there is the likelihood of the offer price
being raised. The prices transacted over the past week were in the range of $0.72/0.73,
which is higher than the offer price. To me, this seems as though the market is
expecting the offer price to be raised.
However, as a minority shareholder myself, if the offer price is
not raised and the delisting condition of 90% acceptance is not met, then I would run the risk of
scoring a Pyrrhic victory (at least in the short term) if the share price declines
due to the failure of the general offer. If the delisting process fails due to <90% of shareholders accepting the general offer, the offeror would not be able to make an offer for another 12 months.
Thus, my purchase of the shares at $0.725 is merely an
opportunistic play (my third smallest position). I am risking a 4% downside as
the share price would be supported at $0.70 as long as the offeror does not
withdraw the offer, while I would be holding on for a potential 15-20% upside if
the offer price is raised. An offer in the range of 85-90 cents (closer to NAV)
would probably seem more “fair and reasonable” to me.
15 Jan: offeror purchased 6.3m shares out of 7.2m
volume
18 Jan: offeror purchased 28.8m shares out of 29.8m volume
19 Jan: offeror purchased 3.7m shares out of 5.7m
volume
However, as the price had risen above the offer price of $0.70, I
believe that the offeror is prohibited from acquiring more from the open
market. Note 2 of Provision 20.1 of the MAS Takeover Code would compel them to
raise their offer if they acquired shares from the open market at above 70c.
Hence, it would be unlikely for them to be able to acquire enough shares from
the open market to meet the 90% threshold, which would then trigger a
compulsory acquisition. However, the offeror may still achieve the 90% through valid
acceptances from minority shareholders.
Closing Thoughts
Covid presented an opportunity for the offeror to privatise the
company at an attractive price - applying a similar privatisation premium of
25% on the pre-covid price of around $0.80 would have required at least a
dollar or more. To me, it would be in the interest of the offeror to see the
deal succeed. If the deal falls through, a year later, the recovery of the
hospitality sector and oil prices may not present such an attractive opportunity
for the offer again. Perhaps it would be a goodwill gesture to leave a little
more on the table for longer term shareholders who have held on for much longer
than me.
Would like to add that the power of retail investors have been highlighted recently during the entire GameStop saga. While many have perceived that the GameStop frenzy is mindless speculation, I would recommend watching this YouTube video of a retail investor sharing his buy thesis for GameStop in July 2020, when the stock was trading at $4. It reached as high as $413 last night. While the recent run up to $413 was likely due to speculation, buying GameStop at $4 was a deep value fundamental play, and the Youtube video shows that retail investors are definitely capable of doing in depth fundamental analysis too.
Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.
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