Shangri-La’s assets appear undervalued

KUALA LUMPUR: Tan Sri Robert Kuok’s stable of companies in Malaysia were generally viewed as solid, stable and well-run, but also generally unexciting to investors due to a lack of rerating catalysts.

However, the tycoon’s recent move to privatise his Singapore-listed company Allgreen Properties Ltd at a steep premium of 39%, raises talks of whether he will plan for a similar exercise for his listed firms here, which include the likes of Shangri-La Hotels (Malaysia) Bhd, Malaysian Bulk Carriers Bhd and PPB Group Bhd.

Analysts concede that PPB Group, by virtue of it being his flagship company in Malaysia, is unlikely to be privatised.

PPB’s key asset is its 18.3% stake in one of Asia’s largest integrated agribusiness groups, Singapore-listed Wilmar International Ltd.

A closer look at Kuok’s other companies reveals that his thinly-traded Shangri-La may prove to be an undervalued, asset-rich company.

The company, which has a market capitalisation of RM1.1 billion, has a portfolio of five hotels and large tracts of valuable land across Kuala Lumpur, Penang and Sabah carried at very low prices in its books.

Shares in the company closed at RM2.60 on June 23 and this makes its net assets per share of RM1.85 as at March 31, 2011 understated.

Shangri-La’s hotel assets include the Shangri-La Kuala Lumpur, Traders Hotel, Shangri-La’s Rasa Sayang Hotel and Golden Sands Resort in Penang, and Shangri-La’s Rasa Ria Resort in Sabah. Collectively, these five hotels have a total of 2,217 rooms.
Tan Sri Robert Kuok's Shangri-La Hotels may come into focus with investors soon. The company has not been on the radar but it may be the most undervalued, asset-rich company listed on Bursa Malaysia.

In addition, the company has a landbank of 27.4 million sq ft.

Excluding those where the five hotels are situated, Shangri-La has about 24.97 million sq ft of land, or 573.3 acres (229.3ha). Of this, 399.8 acres are undeveloped land next to its Rasa Ria Resort, as well as 165.3 acres for the Dalit Bay Golf Club, both in Sabah.

It is worth noting that the undeveloped land at Rasa Ria was carried at RM3.71 million as at December 2010, or a mere 21 sen psf while the Dalit Bay land was carried at RM32.3 million or RM4.49 psf.

If both tracts of land are revalued to RM10 psf, there could be a revaluation surplus of RM210.2 million, according to calculations by The Edge Financial Daily.

With the property boom in Penang, a more interesting tract of undeveloped land is an 8.2-acre plot in the prime area of Batu Ferringhi, which has a book value of RM9.7 million, or RM27.11 psf. A revaluation to around RM120 psf could yield an estimated surplus of RM33.1 million.

Shangri-La’s fame lies in its strongly branded luxury hotels which are valued at low prices in its books.

The Shangri-La KL, its prime offering, is a 662-room five-star hotel with a net book value of RM190.73 million, and this translates into a book value per room of RM288,112, a very low figure compared to similar hotels in the area.

The benchmark for Kuala Lumpur hotel prices was set by the 443-room Westin Kuala Lumpur. The Westin, built in 2003, was sold for approximately RM1 million per room in 2007 by Ireka Corp to Netwood Assets Ltd, an international property investment company.

The Mandarin Oriental Kuala Lumpur, which is owned by KLCC Holdings Bhd, is transparent as KLCC Holdings revalues its assets almost annually. The 643-room Mandarin Oriental has a book value per room of RM839,000 based on its book value of RM539.57 million.

Compared with the pricing benchmarks of RM1 million and RM839,000 per room for the Westin and the Mandarin Oriental respectively, Shangri-La KL’s RM288,112 price-tag seems undervalued, although the hotel is older, with lower rates.

A comparison of hotel rates for a one-night stay on Nov 1, 2011 on a hotel reservation website showed rates of RM420 for Shangri-La KL, RM589 for Mandarin Oriental and RM510 for the Westin.

Using Mandarin’s room rate and book value as the valuation benchmark, the equivalent book value for Shangri-La KL would be around RM600,000 per room. At that price, Shangri-La KL would be RM397.2 million, with a potential revaluation surplus of RM206.47 million.

In Penang, its three hotels — Traders Hotel, Shangri-La’s Rasa Sayang and Golden Sands Resort — also appear undervalued relative to their room rates.

Based on book values provided in its annual report, Shangri-La’s Rasa Sayang had a book value per room of RM315,563, while Traders Hotel and Golden Sands Resort were at RM71,225 and RM122,925 respectively. The room rates, according to the website for Nov 1, 2011, were RM751, RM275 and RM500 per night respectively.

Using a similar rate and room cost valuation benchmark for the Kuala Lumpur hotels, for the market valuation, The Edge Financial Daily estimates the three hotels’ per room value could be worth RM1 million, RM390,000 and RM700,000 respectively.

Meanwhile, over in Sabah, the Shangri-La Rasa Ria Resort has a book value per room of RM212,467, while the room rate listed by the website was RM700 per night.

Assuming a value of RM1 million per room, the hotel could be worth RM420 million, instead of RM89.2 million.

At these market prices, back of the envelope calculations by The Edge Financial Daily suggest a potential revaluation surplus of RM1.35 billion, or a significant RM3.08 per share.

Based on its book value of RM1.80 and share price of RM2.60, Shangri-La’s revalued net assets could be worth some RM4.88.

For its 1Q ended March 31, 2010, the company’s net profit rose 23.7% to RM20.56 million from RM16.6 million the year before, on the back of a 13% growth in revenue to RM112.6 million.

Shangri-La KL has lower occupancy rates compared to its other hotels, though the figure improved to 59% in FY10 from 38% in FY09. Its other hotels registered occupancy rates ranging from 60% to 74%