W Hotel’s Price Fair; To Bolster IOI Properties’ Hospitality Portforlio – Kenanga
The price tag of RM270 million for W Hotel, acquired by IOI Properties Group Bhd, is fair toward the group, and would bolster its hospitality portfolio, especially with the returning tourism sector, according to Kenanga Research.
The research house maintains its MARKET PERFORM call, its forecasts, TP of RM1.75, based on a 60% discount to its revalued net asset value (RNAV), in-line with our assumption for the property sector, with no adjustment to its 3-star ESG rating.
“The acquisition may only slightly increase IOIPG’s net gearing of 0.70x to 0.71x. That said, details on the profitability of W Hotel is still outstanding and hence we abstain from incorporating model updates for now,” it said in its Company Update note today (Dec 7).
Yesterday, IOI, via its indirect subsidiaries IOI PFCC Hotel Sdn Bhd and Flora Development Berhad, signed a sale and purchase agreement with Tropicana Corporation Bhd to acquire W Kuala Lumpur and its assets for RM270 million.
The agreement was reached on a willing-buyer-willing selling basis and is expected to be completed by 1QCY24. W KL is a 5-star hotel that features 25-storey, 150-room together with hotel facilities and 346 parking spaces.
Kenanga said the hotel is fairly priced, as the acquisition cost of RM270 million (translating to RM1.8 million/key) is slightly above 1.0x of W KL’s net book value of RM265.1 million (or RM1.77 million/key).
“While hotel asset transactions are infrequent within Kuala Lumpur, we gathered that Tropicana had in 2016 intended to dispose of W KL for RM360 million (c.RM2.4m/key) when market value likely lingered towards RM1.6 million to RM1.8 million.
“Supporting this was the disposal of Renaissance Hotel KL (also in 2016) by IGB Corporation for RM765 million (@RM1.88 million/key for 406 rooms).
“By these accounts, we deem IOI’s acquisition cost to be fair,” it said.
The research house said view the acquisition positively given W KL’s strategic location and the anticipated full recovery of Malaysia’s tourism sector by next year surpassing pre-Covid 19 levels.
“This has the potential to contribute to the long-term earnings of IOI. Based on its 1QFY24 earnings, the hospitality segment made up 8% of group revenue.
“We continue to like IOI due to its focus on high-value products at matured townships with its well-diversified products, its expanding investment property portfolio which provides recurring incomes, and its presence in the vibrant property sector in Singapore.
“However, its valuations have become rich after the recent run-up in its share prices,” Kenanga added.
The risks to its call include a prolonged downturn in the local property market, rising mortgage rates hurting affordability, rising construction cost, and risks associated with overseas operations.