This article first appeared in The Edge Malaysia Weekly, on December 7 - 13, 2015.

SIME Darby Bhd is making a second attempt in six years at disposing of its hospitality asset Hotel Equatorial Melaka for an estimated RM180 million, which would also involve assuming the hotel’s debt.

When contacted for details about the proposed disposal, Sime Darby Property Bhd acting managing director Datuk Ir Jauhari Hamidi tells The Edge: “Sime Darby Property is open to business opportunities, including divestments that capture the desired value [which he does not reveal] of its portfolio. However, to date, we have not officially concluded any transaction on Equatorial Melaka.”

Two weeks ago, Sime Darby president and CEO Tan Sri Mohd Bakke Salleh told a press conference that the group was weighing several options to pare down its borrowings, including the possibility of monetising its assets. It intends to reduce its gearing level to 0.5 times from 0.6 times now.

It is learnt that several interested parties have viewed the 18-year-old, 496-room hotel, which is located in Bandar Hilir Melaka, not far from the popular historical sites of A’Famosa and The Stadthuys.

According to an executive in the hotel industry, the asking price for the leasehold asset is around RM180 million, of which RM100 million is for the property and the remaining RM80 million to assume the debt of Syarikat Malacca Straits Inn Sdn Bhd, which owns the hotel.

Sime Darby (fundamental: 0.80; valuation: 1.40) holds the majority stake in Syarikat Malacca Straits Inn through wholly owned Sime Darby Property. According to the conglomerate’s FY2015 annual report, Sime Darby Property’s stake in Syarikat Malacca Straits Inn is 55%. However, a search on the Companies Commission of Malaysia (CCM) website shows the stake to be 61.15%.

Perbadanan Melaka Holdings, which is wholly owned by Perbadanan Kemajuan Negeri Melaka, holds 22.17% equity interest in the asset while Hotel Equatorial (M) Sdn Bhd has 16.67%.

The largest shareholder of Hotel Equatorial (M) is Twintrees Hotels Sdn Bhd. Incidentally, Hotel Equatorial (M) is rebuilding Hotel Equatorial Kuala Lumpur in Jalan Sultan Ismail, next to the Kenanga International building. The hotel is making way for Equatorial Plaza, which will comprise a 52-storey block with a podium, office tower and hotel, and is expected to be ready in three years.

In Sime Darby’s annual report for its financial year ended June 30, 2015 (FY2015), the net book value of the 22-storey Hotel Equatorial Melaka stands at RM81.4 million and the lease on the property expires between 2072 and 2075.

According to filings with CCM, Syarikat Malacca Straits Inn’s revenue in FY2014 dropped to RM42.66 million from RM44.17 million in the previous year. Net profit, however, was higher at RM7.09 million compared with RM6.94 million. Since FY2010, the highest net profit achieved by Hotel Equatorial Melaka was RM12.59 million in FY2012.

Total liabilities in FY2014 stood at RM85.19 million, of which RM10.36 million’s worth were current, while accumulated losses amounted to RM20.36 million.

In 2009, Sime Darby had appointed an exclusive agent to handle the sale of the hotel for around the same price. However, no deal was signed. It is unclear if the company has hired an agent this time around.

Hotel Equatorial Melaka has seen better days. It was built as a five-star hotel but has lost some of its edge over the years. In fact, The Edge understands that in addition to the purchase price, the new owner would have to spend another RM25 million to RM50 million on refurbishment to upgrade the hotel’s facilities in order to maintain its five-star status.

“The facilities are five-star but the condition is three-star, so it would need some RM50 million for refurbishment,” says a hotel operator.

Other than the hotel in Melaka, Sime Darby’s hospitality properties include Harvard Golf & Country Club and Hotel in Kedah, Darby Park Executive Suites in Singapore and Karri Valley Resort in Western Australia.

Its hospitality involvement is also through its 21.8% stake, as at Aug 6, in Eastern & Oriental Bhd (fundamental: 1.10; valuation: 1.10). E&O owns and operates the E&O Hotel and Lone Pine Hotel in Penang.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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