MCK - Millennium & Copthorne Hotels.

[LaserEyeKiwi]

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..

MCK hotels were back to being cashflow positive in First quarter (before Aussie travel bubble opened), and needless to say there were zero Chinese/Asian tourist groups. MCK management says bulk of pre-covid bookings have always been domestic travelers (either domestic tourists or business travelers), next biggest was Australian inbound tourists, so no they weren’t overly reliant on Asian tourist groups.

[LaserEyeKiwi]

I find the notion that someone could describe all hotel business as somehow bad investments as quite frankly idiotic.

for the record, before the current covid inspired drop in market value, long term MCK investors had almost 1000% gain over the last decade, from 34c to $3.40 share price, due to superb management.

[thebdogg]

I don't think anyone is investing in MCK because they are so incredibly bullish on the hotel business, because MCK's hotels outperform, or because their property development business is so superior to anyone else's. The thesis for every buyer seems only that it's a reasonably sound business trading at 50% NTA (if it was trading today at book value, $4.70-$5, would there be buyers? Market obviously is saying no).

Under most circumstances the discount would be compelling, but when you add in the fact this company ALWAYS trades at 30-50% of NTA, consistently for 10 years, it's reasonable to assume market may never realise book value. Hence the perceived upside from such a big discount is probably not there.

[percy]

I don't think anyone is investing in MCK because they are so incredibly bullish on the hotel business, because MCK's hotels outperform, or because their property development business is so superior to anyone else's. The thesis for every buyer seems only that it's a reasonably sound business trading at 50% NTA (if it was trading today at book value, $4.70-$5, would there be buyers? Market obviously is saying no).

Under most circumstances the discount would be compelling, but when you add in the fact this company ALWAYS trades at 30-50% of NTA, consistently for 10 years, it's reasonable to assume market may never realise book value. Hence the perceived upside from such a big discount is probably not there.

Agree...................................

[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.

What NZ listed hotel groups trade above NTA?

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.

Despite my 'downbeat post' on hotels in general, at some point the price of hotel shares will get so low that value is there - I grant you that. I don't count myself, these days, as a student of hotels, for the very reasons I espoused in the post of mine you have quoted. However, in case you haven't figured it out LEK, we are still very much in the 'Covid crisis' particularly as far as tourism is concerned. I think there is still a lot of uncertainty around when the NZ border will open to overseas tourists from further away than Australia, and what the hotel demand take up will be like when that happens. Some of the older hotels may yet end up as 'stranded assets', producing no income and unable to be sold for anything approaching their book value. That and Covid-19 era capex catch up for the hotels that remain operational are two very good reasons why the MCK hotels should be valued at a good discount to asset backing. The Zenith property development in Sydney is really a reflection of what can go wrong when an old hotel falls below today's consumer expectations. You may yet find this apartment development model being put to use in New Zealand next. In the interim that would be another drain on cash. Incidentally I don't consider MCK short of cash. Given the uncertainty of the timing of future CDI development sales, I would argue there is some uncertainty on the timing of future cashflows though.

I take your point about backing out the CDI property development shareholding to get a better grasp of the hotel part of the MCK group. And if the calculated discount to hotel asset value is, as you say, with the share price valuing two hotels for the price of twelve, we may very well be at enough of a discounted value to make MCK a good investment at today's market price.

My original response was in answer to the question from 'thebdog' on the general low value of hotel groups in relation to their asset backing over long periods of time. I wasn't challenging the thesis that the price of MCK may indeed have got so low that it offers value on the market today.

SNOOPY

[Sideshow Bob]

Under most circumstances the discount would be compelling, but when you add in the fact this company ALWAYS trades at 30-50% of NTA, consistently for 10 years, it's reasonable to assume market may never realise book value. Hence the perceived upside from such a big discount is probably not there.

Back 10 years ago, share price was approximately 44c. If said always traded at 30-50% discount to NTA, then while same in % terms, as the share-price in the mid $2's, the difference in $ terms becomes much more significant.

With CDL owning over 70%, float of only about 30m shares/$75m - can ask why not have it rolled into CDL.

Anyway, some interesting posts by a number of posters on this and the CDL thread and good discussion.

[LaserEyeKiwi]

What NZ listed hotel groups trade above NTA?



Despite my 'downbeat post' on hotels in general, at some point the price of hotel shares will get so low that value is there - I grant you that. I don't count myself, these days, as a student of hotels, for the very reasons I espoused in the post of mine you have quoted. However, in case you haven't figured it out LEK, we are still very much in the 'Covid crisis' particularly as far as tourism is concerned. I think there is still a lot of uncertainty around when the NZ border will open to overseas tourists from further away than Australia, and what the hotel demand take up will be like when that happens. Some of the older hotels may yet end up as 'stranded assets', producing no income and unable to be sold for anything approaching their book value. That and Covid-19 era capex catch up for the hotels that remain operational are two very good reasons why the MCK hotels should be valued at a good discount to asset backing. The Zenith property development in Sydney is really a reflection of what can go wrong when an old hotel falls below today's consumer expectations. You may yet find this apartment development model being put to use in New Zealand next. In the interim that would be another drain on cash. Incidentally I don't consider MCK short of cash. Given the uncertainty of the timing of future CDI development sales, I would argue there is some uncertainty on the timing of future cashflows though.

I take your point about backing out the CDI property development shareholding to get a better grasp of the hotel part of the MCK group. And if the calculated discount to hotel asset value is, as you say, with the share price valuing two hotels for the price of twelve, we may very well be at enough of a discounted value to make MCK a good investment at today's market price.

My original response was in answer to the question from 'thebdog' on the general low value of hotel groups in relation to their asset backing over long periods of time. I wasn't challenging the thesis that the price of MCK may indeed have got so low that it offers value on the market today.

SNOOPY

apologies at the dismissive tone of my previous post.

As to hotel chains trading above NTA, was referring to the large international chains listed overseas, there are no other hotel operators listed listed on NZX.

[LaserEyeKiwi]

Some stats on long term performance B05B067B-FB5D-4290-82A1-0D6E8E09D461.jpg

[LaserEyeKiwi]

I don't think anyone is investing in MCK because they are so incredibly bullish on the hotel business, because MCK's hotels outperform, or because their property development business is so superior to anyone else's. The thesis for every buyer seems only that it's a reasonably sound business trading at 50% NTA (if it was trading today at book value, $4.70-$5, would there be buyers? Market obviously is saying no).

Under most circumstances the discount would be compelling, but when you add in the fact this company ALWAYS trades at 30-50% of NTA, consistently for 10 years, it's reasonable to assume market may never realise book value. Hence the perceived upside from such a big discount is probably not there.

you are incorrect here - MCK traded at 80%+ of NTA a couple of times over last few years. Hitting that same level today would reasonably put it over $4.

Plus this company is a very different beast today compared to even just 5 years ago, with residential land development now accounting for a large portion of its revenue & profits now (even pre covid).

also worth reminding for those that are unaware, back in 2015 MCK spun off its China operations and shareholders received shares in a new Singapore listed company (or were paid for their shares if they did not want to Hold them) - that is not reflected in the share price history.

I also don’t know why people malign the Sydney Zenith operations - MCK has had a handsome return from this operation in the form of consistent rent and also frequently selling off units at large margins compared to their initial cost.

[Snoopy]

apologies at the dismissive tone of my previous post.

No worries. I think it is by product of having 'skin in the game' and a natural reaction defensive reaction to interpreted criticisim. Anyone who has been in the market for a while suffers from this syndrome, including me.

As to hotel chains trading above NTA, was referring to the large international chains listed overseas, there are no other hotel operators listed listed on NZX.

There is at least one other NZX listed hotel chain trading well above NTA. I know because I hold it. It is called 'Sky City'. Of course most SKC shareholders do not think of it like that. I myself, think of SKC as a casino operator that has strategically placed some hotels nearby for the convenience of punters. I think equally important to the accommodation is the hospitality side of the business too. I mention this, because I think there is a lesson here regarding strategic placement of hotels.

If you can build your hotel next to an iconic asset you are likely to do well. In the case of SKC they own the 'iconic asset' (the casino and in the case of Auckland the to be completed National Convention Centre), so they get to clip the ticket twice. I also think that going after the business market, not just tourism, spreads the risk. Post Covid-19, I do feel both the business market and the tourism markets may end up being permanently weakened. But as long as you don't overpay for assets, and I was happy helping SKC out with their $2.50 share issue last year, I think it is still a class of asset that is worth retaining a presence in. I will be watching to see to what extent domestic tourism in local hotels is able to fill the gap left by the decline in the overseas visitor tourist market. My impression, so far, is that iconic destinations like Queenstown, Rotorua and dare I say it Auckland will do O.K. . But secondary stops on the tourism trails will suffer. Do you have any thoughts on how MCK will 'benefit' / 'tough it out' if such a paradigm unfolds? I also wonder about how hotels will 'recover' from being quarantine units. I know it is irrational because coming out of the worst of the pandemic, all hotels will be thoroughly cleaned. But will tourists be lining up to go there, when there are plenty of untainted hotels to stay in? The earnings breakdown graph in your post 308 is pretty damning. It is showing hotel profits halving, and property development holding steady but in proportion now starting to dominate MCK earnings. That looks like a good reason to maintain that big discount to NTA to me.

On the subject of overseas hotel chains trading above NTA. There is probably greater opportunity to stay near iconic assets in carefully selected overseas locations (see my comments earlier in this post) as one explanation. But how many of those chains own their hotels and how many are franchise holders that collect franchise fees from other hotel owners? I expect the franchise model is more profitable than ownership.

SNOOPY