When investing in the equity market, we often look at financial indicators such as price-to-earnings (P/E), price-to-book (P/B) and dividend yield to identify investment worthy stocks.
Apart from such financial indicators, there are also many more criteria to consider before putting your hard-earned money to work. Two of these criteria are ownership and free float.
While retail investors hold a certain percentage of ownership of the company which they invested in, this percentage is often hardly significant and most retail investors end up as minority shareholders.
Minority shareholders do not have much power in controlling the direction of the company. As such, the company is often run according to the long-term view of majority shareholders.
If minority shareholders do not agree with the view of the majority shareholders, they could vote against the major shareholders provided that the collective ownership of the former is larger.
For companies where the largest single shareholder holds over 50 percent of the shares, any disagreements by minority shareholders is almost futile and the only way out is to simply sell their shares.
This brings up the concern of free float, which refers to the number of shares that is publicly available for trading.
It is likely for a company that has a single or few shareholders owning a majority of the shares to have a small float. This is because these shareholders have an underlying interest in the company and could also hold management positions in the company. Thus, their shares being tightly held cause a low free float, which in turn reduces liquidity of the company’s shares.
A company with a low free float tends to have a larger bid-ask spread and share prices could be highly volatile due to the limited supply in the open market.
Having established the importance of ownership and free float, we take a look at Hotel Properties and apply the above criteria.
Hotel Properties has interests in 32 hotels under prestigious hospitality brands such as Four Seasons, Hilton International, Como Hotels, InterContinental Hotels Group and Six Senses Hotels. The group also manages its own portfolio of hotels under well-established brands such as Hard Rock Hotels and Concorde Hotels & Resorts.
Apart from hotels, the group is also engaged in the quality and premium residential and commercial property market and is known for building quality residential developments in prime locations.
The group’s hotels, resorts and shopping galleries are geographically diversified in 13 countries, namely, Singapore, Malaysia, Thailand, Indonesia, Maldives, Seychelles, Vanuatu, the United States of America, Bhutan, Tanzania, South Africa, Vietnam and United Kingdom.
The group’s hotels segment contributes to the bulk of total revenue, providing a steady source of income, while the properties segment provides the additional boost to the overall performance. For FY17, the hotel segment contributed to 74.1 percent of total revenue and 70.9 percent of earnings before interest and tax. This was further lifted by $126.8 million from profits from the Burlington Gate and Holland Park Villas in London.
In 1Q18, the group’s revenue increased by 19.7% to $173.4 million mainly from the sale of completed condominium units from the Tomlinson Heights development. Meanwhile, net profit increased by 5.4 times to $87.5 million mainly due to profits from Holland Park Villas development in London. With that, the group is well-positioned to end the year on a good note.
In terms of financial position, Hotel Properties has borrowings and debt securities amounting to $775.4 million comprising $175.5 million in short-term borrowings and $599.9 million in long-term borrowings. With a cash balance of $213.1 million, the group has more than sufficient resources to cover its short-term debt obligations.
Two Substantial Shareholders
As at 19 March 2018, Hotel Properties’ two largest shareholders hold a cumulative 75.6 percent of the group’s total shares.
68 Holdings, a joint venture between co-founder property tycoon Ong Beng Seng and Wheelock Properties (Singapore) has a 56.3 percent ownership of Hotel Properties while Ong holds another 19.3 percent.
In 2014, Ong, who is also the managing director of Hotel Properties, together with David Ban and Wheelock Properties (Singapore), decided to consolidate their shareholdings so as to be in a position to cooperate and implement their shared objectives and to enhance value over time.
At that time, 68 Holdings stated its intention to retain Hotel Properties’ listing on the Singapore Exchange but said that it may decide to take it private if the group’s free float falls below 10 percent.
According to SGX StockFacts, Hotel Properties’ current float is at 6.2 percent. While it is unclear whether Hotel Properties would be privatised, what we do know is that investors should ensure that they agree with how the company is being run before making an investment decision.
Hotel Properties’ shares are very thinly traded with an average three-month volume of only 10,000 shares changing hands per trading day. At time of writing, Hotel Properties also had a bid-ask spread of $0.04, or 1.1 percent, based on the current ask price of $3.76.
While the spread is not significantly large, volume on the queues are thin as well. This means that an investor may not be able to buy or sell his intended number of shares at the current prices.
A wide spread is disadvantageous to investors as it can erode investment returns. Assuming that the shares of Hotel Properties maintain a spread of $0.04, an investor who purchased shares at $3.72 would only break-even on his investment, excluding transaction costs, if the price moves upwards by $0.04. In other words, an investor is immediately in the red by 1.1 percent upon taking a position.
Comparing valuations against other players in the hotel industry, Hotel Properties’ valuations do not seem too attractive. The group’s P/E comes in the lowest at 11.8 times, however, P/B is the highest at one time while dividend yield is the lowest at 1.1 percent.
Among the five companies, Amara Holdings’ (Amara) valuations would appear to be more attractive. In addition to a comparable P/E of 12.3 times, Amara trades at a 20 percent discount to book value while providing a much higher dividend yield.
Due to the above-mentioned factors, investors interested in Hotel Properties should only view it as a long-term investment.