Spotlight falls on low-profile Hotel Properties

 

Ven Sreenivasan

 

15 September 2012

 

The recent successful listing of Far East Hospitality Trust (FEHT) - which attracted a subscription rate of over 30 times - has thrown the spotlight on the somewhat low-profile and under-researched Hotel Properties Ltd (HPL).

 

In a July 12 Maybank-Kim Eng report, analyst Alison Fok noted that Orchard Parade Holdings? spin-off of Orchard Parade Hotel into Far East Hospitality had yielded a gain of $702 million for the listed entity. Turning to HPL?s own significant asset holdings - including two prime hotels in the Orchard Road belt - her report concluded that there was a huge ?undervaluation of HPL?s assets in the Orchard Road area?.

 

Not surprisingly, activity in HPL?s stock has picked up significantly, with the counter now surpassing Ms Fok?s own target price of $2.75.

 

FEHT effectively encapsulates Far East group?s assets worth some $1.5 billion, re-valuing its 388-room Orchard Parade Hotel, which has a lease of 50 years, at $1.1 million per room key.

 

HPL?s own properties include the freehold Hilton Hotel, the 999-year leasehold Four Seasons Hotel and the 99-year leasehold Concord Hotel. Its other properties include the freehold Forum mall next to the Hilton, HPL House and Ming Arcade at Cuscaden Road, and the Concorde Shopping Mall. On the residential front, there is the 36-storey Tomlinson Heights, and shares in The Interlace and d?Leedon. It will soon be launching Beverly Mai, which was bought some six years ago. It also has about two dozen other good-class properties, comprising predominantly hotels, in Malaysia, Maldives, Thailand and Indonesia.

 

HPL has never re-valued its books to account for the appreciation of its properties, which were mostly bought in the 1980s and 1990s.

 

The FEHT restructuring and listing valued Orchard Parade Hotel at $1.1 million per room key. Applying a conservative 20 per cent premium to this valuation - to account for the fact that HPL?s hotels have much longer leases - would yield a valuation of $1.32 million per room key. Applying this to its three Singapore hotels - comprising 1,083 rooms - would place their value at about $1.43 billion.

 

HPL carries the three hotels in its books for some $440 million, or about 28 per cent of the value of total assets. So a revaluation would give HPL a potential realisable one-off gain of almost $1 billion.

 

As at June 2012, the net book value per HPL share was $3.08. Going by the current market prices, this should be at least 2.5 times higher, at $7.70 per share.

 

The under-valuation is glaring.