GUOCOLEISURE: Reiterate Add, with higher target price of S$1.26

Excerpts from analysts' report

Stellar 1QFY16 boosted by strong hotel operations and one-offs
Headline net profit rose 89.2% yoy to US$31.4m in 1QFY16 (1QFY15: US$16.6m). Excluding a one-off compensation of US$13.1m for the cessation of 19 managed hotels, core net profit rose 24.6% yoy, on the back of: 1) strong hotel performance, 2) reduced losses from the gaming segment, and 3) lower interest cost from the refinancing of a 10.75% mortgage debenture (completed in Dec 2014). The strong hotel performance was partly offset by lower oil & gas royalty income from Bass Strait.

Hotel development bearing fruit; 11% RevPar growth beats market
1QFY16 hotel core operating profit rose 14% yoy to US$23.5m (1QFY15: US$20.6m). The strong 1QFY16 RevPar growth of 11% was particularly encouraging, in view of the generally slower UK hospitality sector as the weaker Euro turned the UK into a more expensive destination for Eurozone travellers. Hotel operating margin expanded 2.7% pts yoy to 22.3% in 1QFY16, thanks to better cost management under the group’s newly adopted VCGM model that focuses on operating efficiency at individual hotel level.

Earnings volatility from non-core businesses
Non-core businesses continued to add volatility to the group’s bottomline. In 1QFY16, oil & gas royalty income from Bass Strait fell 50% yoy to US$6.5m (1QFY15: US$13m) due to the significant decline in global oil prices and weaker A$ against the US$. The Clermont Club, GLL’s only casino, posted reduced operating loss of US$0.5m in 1QFY16 (1QFY15: US$3.8m loss). The property development business in Molokai also reported lower operating loss of US$0.1m in 1QFY16 (1QFY15: US$0.4m loss).

"Reiterate Add, with higher target price of S$1.26 We raise our FY16-18F EPS by 5.9-7.6% to reflect the stronger hotel operations. The new target price of S$1.26 is based on 25% discount to CY16 RNAV (previously 25% discount to CY15 RNAV). "Key potential re-rating catalysts for GLL include organic earnings growth of the group’s core hotel business, new hotel management contract wins and monetisation of its non-core businesses." -- Roy Chen (photo) & William Tng, CFA

Refurbishment on track, FY16 to be earnings sweet spot for hotels
We expect GLL’s FY16 hotel earnings to continue to benefit from RevPar growth of the Amba Hotel Charing Cross (239 rooms) and the Every Hotel Piccadilly (82 rooms) that were refurbished and relaunched in FY15.

The Amba Hotel Marble Arch (692 rooms), slated to be relaunched in 2QFY16, would also contribute positive earnings. In FY16, we estimate that refurbishment will take c.25k room nights out of room inventory, half the number of room nights (c.50k) taken out in FY15.

Full report here.