MCK - Millennium & Copthorne Hotels.

[clearasmud]

Majority control may give them more options.

[BlackPeter]

Interesting info thanks.

I find it strange how uber rich families/empires have small listed companies like this floating around, especially in a foreign country. CDL Singapore has 12.5b in net assets and I'm guessing this Kwek family has several billions more. MCK is worth 700m which is pocket money, surely it's far less headache to just take it private? Much like Buffett pretty much owns all his smaller subs outright.

I'm guessing there must be some tax/legal advantage the companies have when they're NZX listed as opposed to being 100% foreign owned.

You might have noticed that NZ is a quite small nation compared to the world ... and subsequently is CDL (NZ) quite small compared to the reminder of the rest of the CDL empire. New Zealand is not the only country in the world where they have exchange listed branches (or however you might want to call them). Others are in Singapore, the UK and China. There might well be others.

You need to ask them why they listed in NZ. Just send them an email or call : Some companies list to have a governance framework to follow. Others list to easier determine market value of their properties or alternatively to hide wealth in their books (utilizing the difference between NTA and market value). Some might list to have a low risk training ground for young board members, to have a local address or to have easy access to local capital markets. I recon for the Kwek family its not the last of these reasons, but who knows?

[LaserEyeKiwi]

I would also imagine there may be some OIO issues for CDL property transactions if it was not a NZ entity.

These types of company structures are actually very advantageous. MCK & CDL are 4th and 5th level companies, with all the intervening levels allowing the originating parent company to control significantly larger amount of assets than they own themselves, using additional shareholder funds on each step up the ladder.

I don’t really think there is any danger in the company structure in NZ, any fears they would withdraw large amount of funds via dividends would also enrich all other shareholders to the same degree, and the value of the underlying property assets wouldn’t change.

[LaserEyeKiwi]

Market value of MCKs 66.6% holding in CDL jumped to ~$230 million today.

this compares to MCK total market cap of ~$382 million, or just $152 million for the entirely of the hotel operations, cash on hand, and the remaining Sydney apartment holdings.

To add to that, the Sydney properties were valued at $74 million in the last Annual report, so that means the hotel operations you could say are being valued at just $76 million - despite the hotel net assets being valued at over $500 million.

[thebdogg]

What do you think is the reason(s) for MCK trading below book value by 30-50%, not only today, but almost constantly since 2013? (maybe even longer but I don't have the accounts further back than that). I know it's not uncommon for companies to trade under book value, but a discount that big for a company with solely property assets is quite odd? At least the first one I've seen.

[Scrunch]

What do you think is the reason(s) for MCK trading below book value by 30-50%, not only today, but almost constantly since 2013? (maybe even longer but I don't have the accounts further back than that). I know it's not uncommon for companies to trade under book value, but a discount that big for a company with solely property assets is quite odd? At least the first one I've seen.

Its basically become the accepted norm. Also the free float isn't enough to get brokers interest so the pathway to a higher valuation from bullish brokers doesn't happen. The owners haven't shown any interest in special dividends or share buybacks so neither of these channels correct the gap.

[Snoopy]

What do you think is the reason(s) for MCK trading below book value by 30-50%, not only today, but almost constantly since 2013? (maybe even longer but I don't have the accounts further back than that). I know it's not uncommon for companies to trade under book value, but a discount that big for a company with solely property assets is quite odd? At least the first one I've seen.

Hotels are a tough business. There is a large capital expense when constructing a new hotel. Then every 5 to 10 years there is the cost of refurbishing rooms, not only to repair wear and tear but also to bring them up to current 'tech spec'. The latest spend up will probably concentrate on updating the ventilation systems for a Covid-19 world. The other problem is that no matter how good a standard you keep your hotel, it will only be a short time before the new hotel down the road usurps it as 'the place to go'. Existing hotels must then reposition themselves by discounting their room rates.

On the income side, tourism is a fickle and seasonal business. A hotel's earning capacity is not constant throughout the year. So sizing the staff payroll for peak tourist season will leave you overmanned for the off season. The solution to that is casual labour, but that has its own disadvantages: higher staff turnover and more time required for training. This means that 'Return on Assets' or 'Return on Equity' for hotels will be comparatively low, because the sub optimal use of assets when viewed over a whole year of use. Low ROE/ROA feeds back to investors, as those investors only willing to pay less for the asset up front to get an acceptable return. This is where the large market discount to NTA comes in. It is a reflection of the below average earning power of the asset.

Business travel is not so seasonal. Bot the coming of Covid-19 has shown how much can be achieved with 'Zoom' meetings over the net.

Buying something below NTA can be an indicator that repositioning the use of those underlying assets might be commercially rewarding. IIRC one of those MCK controlled hotels in Sydney is being repurposed as for sale apartments to the private market? But not every hotel can be repurposed in this way. There are council zoning and planning rules to work around, not to mention a considerable amount of work repurposing the inside space.

In summary, the answer to your question is that building and running hotels generally ends up being a poor use of capital, so the price ends up being discounted. The golden investment boy of the 1980s, Brierley Investments, came unstuck when it bought the Mt Charlotte Hotel Chain based in the United Kingdom at a 'bargain price', but then found extracting the value from that purchase was far from easy. Trawling the sharemarket for looking for more assets for your buck is not a new game, and often it is hotel companies that are trawled out of your company search net. The returns from such fishing expeditions, as regards hotels, have not improved over the decades.

SNOOPY

[Getty]

Very wise insight, thanks Snoopy.

[LaserEyeKiwi]

Hotels are a tough business. There is a large capital expense when constructing a new hotel. Then every 5 to 10 years there is the cost of refurbishing rooms, not only to repair wear and tear but also to bring them up to current 'tech spec'. The latest spend up will probably concentrate on updating the ventilation systems for a Covid-19 world. The other problem is that no matter how good a standard you keep your hotel, it will only be a short time before the new hotel down the road usurps it as 'the place to go'. Existing hotels must then reposition themselves by discounting their room rates.

On the income side, tourism is a fickle and seasonal business. A hotel's earning capacity is not constant throughout the year. So sizing the staff payroll for peak tourist season will leave you overmanned for the off season. The solution to that is casual labour, but that has its own disadvantages: higher staff turnover and more time required for training. This means that 'Return on Assets' or 'Return on Equity' for hotels will be comparatively low, because the sub optimal use of assets when viewed over a whole year of use. Low ROE/ROA feeds back to investors, as those investors only willing to pay less for the asset up front to get an acceptable return. This is where the large market discount to NTA comes in. It is a reflection of the below average earning power of the asset.

Business travel is not so seasonal. Bot the coming of Covid-19 has shown how much can be achieved with 'Zoom' meetings over the net.

Buying something below NTA can be an indicator that repositioning the use of those underlying assets might be commercially rewarding. IIRC one of those MCK controlled hotels in Sydney is being repurposed as for sale apartments to the private market? But not every hotel can be repurposed in this way. There are council zoning and planning rules to work around, not to mention a considerable amount of work repurposing the inside space.

In summary, the answer to your question is that building and running hotels generally ends up being a poor use of capital, so the price ends up being discounted. The golden investment boy of the 1980s, Brierley Investments, came unstuck when it bought the Mt Charlotte Hotel Chain based in the United Kingdom at a 'bargain price', but then found extracting the value from that purchase was far from easy. Trawling the sharemarket for looking for more assets for your buck is not a new game, and often it is hotel companies that are trawled out of your company search net. The returns from such fishing expeditions, as regards hotels, have not improved over the decades.

SNOOPY

This ignores the basic facts that most listed hotel companies trade far above their NTA values, and with long term PE ratios reflecting the healthy yields the assets return.

the simple fact is that MCK market valuation plummeted during the covid crisis and has yet to recover, despite the fact a large fraction of their earnings come from their non-hotel operations aka residential land development (CDL) & residential property sales/rentals (Zenith), meaning they have no cashflow concerns (even choosing to forego the regular large cash contribution from CDL).

MCK was consistently providing extremely good earnings per-covid (47c EPS), very low debt, and $500m+ In net hotel assets in the most highly valued property markets in New Zealand (queenstown, Auckland, Wellington). Yet the hotel operation is currently valued at just $76 million (per my observations in my last post). Any 2 of MCKs hotels in top locations would be worth more than $76m alone, yet they have more than a dozen hotels.

[percy]

I think Snoopy's post is one of the best posts ever posted on Sharetrader.
I am in total agreement with it.
I would add that MCK's hotels seem to have relied too heavily on Chinese/Asian tourist groups..