Sharing my next punt : Mandarin Oriental

I will be buying Mandarin Oriental on 24 July Monday. Note that this stock is in USD.

Reasons :

  • Hotel owner and operator Mandarin Oriental is looking to sell its prime waterfront hotel. Potential sale of Excelsior HK could trigger further upside.
  • The Excelsior in Hong Kong is estimated to be worth US$3.07b, 26% above its current market cap. A sale could boost its net cash position to US$2.77b. The target price is US$2.19, well above its current market price, or they may pay a special dividend.
  • Price chart in uptrend and pausing in a flag pattern.
  • Mandarin Oriental added to the Value Portfolio of Maybank Kim Eng Value Model Portfolio. See this link for their performance thus far: http://www.maybank-ke.com.sg/research/research-listing/singapore-growth-value-yield-portfolio/

Report of Maybank Kim Eng research

In early-Jun, the group disclosed that it is undertaking a strategic review of its prime waterfront hotel, including a possible sale.

Mandarin Oriental is mulling the sale of the four-star Excelsior in Hong Kong after a recent government tender set a record price, bolstering chances of it fetching a similar value.  The property, located in the Causeway Bay shopping district, has received regulatory approval for the development of a 683,510 sf commercial building. Notably, a Murray Road car park in Central was recently sold by the HK government for US$3b, or an eye-popping HK$50,056 psf, to HK-listed Henderson Land amid strong investor interest from eight bidders. This was underpinned by the tight vacancy in the city’s core-area despite yields remaining at low levels.

Taking the lower end of market estimates, The Excelsior could be worth US$3.07b or HK$35,000 psf (30% discount to the Murray Road site). This is 26% above Mandarin Oriental’s current market cap, implying that its other assets could come for free.

The hospitality group currently operates 29 hotels (including The Excelsior) and eight serviced residences across 19 countries. It has a strong pipeline of hotels and residences under development, including 11 hotels and five residences to be completed over the next five years, which will increase room capacity by 34%.

However, the street remains generally negative on Mandarin Oriental with 1 Hold and 1 Sell ratings on the stock with wide TP range of US$1.03-1.73, primarily due to the challenging global hospitality environment and unappealing earnings valuation.

The Excelsior opened its doors in 1973 and is carried at book cost. Given its comfortable net gearing of 25%, we reckon that the possible sale of the hotel asset could could boost its net cash position to US$2.77b (US$2.19/share), well above its current market price, which may also prompt a special dividend.

Even after its recent 40% rally, the stock trades at a significant 37.5% discount to its adjusted NAV/share of US$3.10 but above its book value of US$0.93.

We are adding Mandarin Oriental in Market Insight’s Value basket at an entry price of US$1.94.