SGX has seen more delistings than IPOs recently. It is a matter of time one of the stocks that we own would be the target of a delisting attempt.
True enough, founder of GP Hotels Koh Wee Meng has offered to buy back shares of his company at $0.365 per share. He has also announced his intention to delist the company.
We want to present our point of view about this delisting and explain why, as shareholders of GP Hotels, we would be rejecting the offer.
GP Hotels own and operate the economy-tier hotel chain, Fragrance. The chain used to owned by sister company Fragrance which is also listed on the SGX but its operations and assets were sold to GP Hotels when the latter went IPO in 2012.
Koh Wee Meng is the founder of GP hotels. According to Forbes, he is the 26th richest man in Singapore with an estimated net worth of US$1.09B. His brother, Koh Wee Seng, is the 43rd richest man in Singapore with an estimated net worth of US$545m. Koh Wee Seng controls the SGX-listed Aspial, a jewellery company which owns many familiar brands such as Lee Hwa, Gold Heart and Citigems.
Both brothers have taken to Australian properties in the recent years and they have been acquiring land Down Under. For example, GP Hotels has recently announced plans to build the tallest hotel in Perth.
Why did we invest
We have invested in GP Hotels in Oct 2014 at a share price of $0.325. It had a CNAV discount of 40% and a POF score of 2. The book value then was $0.64. This implies that we have a potential upside of 100% even if we sell it at book.
The 22 hotels and the land they reside on (as of 2013 annual report) constituted the majority of the assets. They were valued at S$1 billion. Our investment in the stock allows us to own parts of the hotels at way below valuation. On top of that, We are also able to partake in the profitable hotel operations for free. We did not pay a single cent for future earnings.
It is good to always ask why is a particular stock is undervalued. We can make some guesses but we will never know the real reasons.
The hotel seems, to us, less glamorous than the Marriott or the Hilton. Less glamorous stocks do not attract enough investors and hence end up trading cheaply. The lesser known facts are that GP Hotels own another hotel brand, Parc Sovereign, and has invested in Australian properties to expand the hotel business. So they have been moving up the service tier with their new hotels.
Second, new hotels in Singapore are launching faster than the growth in tourists’ arrivals. RevPAR (Revenue Per Available Room is a key metric that the hotel industry pays close attention to) has been declining. The economy-tier hotels would be most vulnerable as Airbnb expands its presence in Singapore. Hence, investors are pessimistic about the outlook of hospitality in Singapore and would tend to avoid hotel stocks like GP Hotels.
As value investors, we are comfortable with less than favourable news. We are looking to buy good assets at steep discounts and unflattering news allows us an avenue to do so. We would then wait for trigger events such as an earnings turnaround, a merger and acquisition attempt, or even a delisting opportunity, to exit our investment. Such is the case with GP Hotels.
Accumulating shares patiently
On 13th Mar 2014, Koh Wee Meng has made an unconditional cash offer of $0.33 to accumulate more shares. The Offer Letter stated that he had no intentions to delist GP Hotels at that point in time and merely wanted to own more shares. The offer closed on 24th Apr 2014 and approximately 7.45 per cent of the shares were sold to Koh Wee Meng.
In the past few years, Koh Wee Meng has been steadily purchasing shares from the open market. His intention became clearer upon making this delisting offer. One must be confident to delist the company in order to make the current Offer.
|Year||Koh Wee Meng’s Ownership %|
|Now (as of 2 Mar 2017)||73.13%|
Koh Wee Meng, via his fully owned JK Global Capital Pte Ltd, has offered $0.365 for all the GP Hotels shares he does not currently own. The announcement was made on 23rd Feb 2017.
This Offer has a condition. He would only buy your shares if he has received enough acceptance to increase his stake to at least 90 per cent of GP Hotels. Otherwise, the offer does not stand.
There is an additional clause where he can still buy over the shares even if the 90 per cent mark is not achieved, provided that the Securities Industry Council gives the go ahead.
The Offer announcement stated 5 reasons for the delisting offer. We do not agree with some of them.
1) Compelling Premium. A premium of 18.5 per cent over the last trading price might sound somewhat compelling to the uninitiated. However, on closer examination, the offer price is just slightly over half of the book value. On that account, it is far from compelling.
2) Low Trading Liquidity. Small time shareholders do not own a lot of shares and hence would not have difficulty selling them if they want to. Liquidity should not be an issue for the retail investor.
3) Unlikely to Require Access to Equity Capital Markets. Agree with this. No rights issue has been carried out and we do not think it is needed given the strength of the balance sheet.
4) Compliance Costs of Maintaining Listing. We agree that delisting can save listing costs since (3) is not needed.
5) Greater Management Flexibility. Of course a private company would not draw public scrutiny.
We are not against the delisting. We want a better price.
Offer can be better
We believe in Koh Wee Meng’s business acumen. I have observed him during the AGM and he appeared to be a no-nonsense guy. He has everything about GP Hotels at his fingertips even though he was the non-executive chairman. He has made many good decisions and has grew GP Hotels’ asset base over the years.
The offer seems to low compared to the book value of GP Hotels. We believe that shareholders would prefer an offer that is closer to $0.69.
It was clearly stated in the Offer document that the Offer Price is final. We believe not accepting it would be the right way to go if there is no room for negotiation.
The intention of this article is to share our views on this matter and hope that fellow shareholders can consider selling their shares carefully. We might get a better deal in the future if the delisting does not materialise this time round.
Update (7 April 2017)
GP Hotels announced that the acquirer has collected 90.08% of the shares as of 7 Apr 2017. 14.35% of the shares were accepted via the offer letter. The game is over and we will be filling up the offer letter and submitting it. We will receive the money after the letter has been processed, within the next 7 days. Trading of the shares will be suspended so you cannot sell on the open market. The Offer has been extended to 27 Apr 17. If you have misplaced the offer letter, you can download it here. Else you can request the offer letter from The Central Depository (Pte) Limited (Tel: +65 6535 7511) or Tricor Barbinder Share Registration Services (Tel: +65 6236 3333).