Wolf Money(Hotel Grand Central)
The below article is for educational purpose only. Kindly refrain from taking any action. It shouldn’t constitute as an investment advice. Please read the disclaimer.
I bought a position in Hotel Grand Central. To be honest, this stock is not my idea. I got it from a good friend who is very knowledgeable. He is a value investor that always manages to find hidden gems in the most obscure corner of our market. My hat off to him. Just before the month was up. I received a well-written report by him on Hotel Grand Central(HGC). There are many people dropping ideas on me, but very few ideas go past my initial interest to the buy basket. I will summarise the main context of the report and some of my comments in point form.
1.) The report starts by explaining the poor share price performance of Hotel Grand Central since covid. One of the main reasons was the weakening AUD and NZ. Given HGC has the bulk of their hotels in Australia and New Zealand. Most of their cash are kept in AUD due to their substantial business activities in Australia. Any weakness in AUD had a direct impact on P&L.
2.) The Australian mining sectors are booming. From gold to coal, Australia produces a lot of those commodities which are in high demand now. HGC’s hotels in Australia are located in mining cities. The boom in commodities will bring about more employment in the sector, thus increasing demand for hotel rooms in the city.
3.) The hotels in New Zealand have underperformed due to the weak economy. The recent opening of the New Zealand International Convention Centre after much delay is going to bring in trade show visitors to that area, thus increasing the demand for rooms in Hotel Grand Chancellor, Auckland. The hotel is just a walk across the convention centre.
4.) Reasonable dividend even during Covid period. The company has an unbroken record of paying dividends for the past 20 years. At the time of writing, stocks are trading cum dividends of 1.5c per share to be paid at the end of May.
5.) FY 25 losses were due to the negative revaluation of their properties and currency losses amounting to $48.5m. This amount could be written back if trading conditions improved for the Australia and NZ properties. Last year results might be a kitchen sinking bottom. Brighter outlook is expected.
6.) The stock is trading close to 58% discount to NAV of $1.67. I did a calculation. Their cash or cash equivalent is close to $254m which is 34c net cash per share. The share price is trading at 71c. If the results go well, an increase in dividend to pre-Covid of 4c per share is a possibility. A fortress of a balance sheet and strong cashflows is the best defence against the uncertainty in the world. Stock is trading at close to 15 years low at the time of writing.
7.) Australia and NZ are likely to attract more tourists due to the conflict in the Middle-East and Eastern Europe. ANZ is probably one of the only few western countries out of Iranian rocket range.
8.) Both the Hotel Grand Central and Grand Chancellor situated in Orchard have redevelopment potential given the award of extra plot ratio by URA to revitalise the Orchard precinct.
9.) The family and related parties held up to 82% of the company’s shares. The salaries drawn by the management and directors, in my opinion, are on the low side. One million pays the management and board with change to spare. Their interest is inline with the minority shareholders. The only way for the management to have good compensation for their work is through dividends.
Risks
There are risk factors associated with the company. The recent fall in commodity prices might take some shine away from Australia’s growth. The shortage of fuel is a problem for the Aussie economy as most of their refined oil products are imported. Australia has oil, but the country has insufficient refining capacity. I took a position in HGC with an eye for better results in the coming year.
Final note
I find the company inefficient with their capital management, which explains the depressing ROE. This is due to the management’s wish to keep more cash. At the minimum, they should eliminate the $63m loan in their books with their cash reserves, in the process of saving the company $3.3m in interest cost annually. The borrowing rates are higher than the savings interest they are receiving from their huge cash pile placed with financial institutions. A share buyback will improve the low ROE too. This is a patience stock. The underperformance of the stock didn’t happen overnight. Investors should consider the liquidity of the stock. Taking a measured approach to the stock is warranted. God bless. 🙏
Link to the report. Contributions from my friend who chooses to remain anonymous. Thank you.
https://drive.google.com/file/d/16iv37rloeE_voVR8Fg1KBhwI0fG5B3HB/view?usp=drivesdk
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All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for education only. Buyer beware,do you own due diligence.
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