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GL Limited: Voluntary Conditional General Offer at $0.70

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.

https://www.businesstimes.com.sg/companies-markets/gl-has-deeper-value-than-just-70%C2%A2-a-share-analysts

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.bloomberg.com/news/articles/2017-09-20/a-third-of-hawaii-s-molokai-island-is-for-sale-for-260-million

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.

Since the privatisation offer on 15 Jan, the offeror has been raising its stake via purchases in the open market, from 70.84% on 15 Jan to 73.67% as of 19 Jan. To me, this signals that the offeror is determined to see the delisting succeed.

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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2 comments:

  1. Hi,

    I think you have mistaken on the delisting process here. First, this offer is done via the General Offer route. There is no voluntary delisting at present and therefore there will not be a EGM held for delisting. Secondly, if the offeror received more than 90% acceptance, even if the IFA said that the offer is not fair and not reasonable, the delisting will still go through as the rest of the shareholders will be compulsory acquired under Bermuda Compant Act and SGX will allow them to delist as there are no longer any other shareholders left other than the offeror.

    ReplyDelete
    Replies
    1. Hi ghchua,

      Thanks for pointing that out. I have edited the article for clarity.

      Delete