ONLY World Group Holdings Bhd’s (OWG) share price has leapt 17.5% in just one month — from RM1.89 on Aug 23 to RM2.22 last Friday. The stock also outperformed the FBM KLCI, which slipped 0.7% to 1,670.99 in the same period.
So, what’s brewing at the leisure and hospitality service provider? At its current level, does the stock have any upside potential?
The views are mixed. A fund manager with an European fund sees OWG as a long-term play while the only analyst covering the stock — Marcus Chan of CIMB Research — believes the stock deserves a re-rating soon.
“It is a leap of faith. There aren’t much earnings yet. So, investors who believe in the stock are buying into a concept and they have to wait for it to become a reality. In this case, the concept is Komtar Tower [in George Town, Penang] becoming an integrated tourism centre and retail play for the locals, possibly driving earnings from there,” the fund manager tells The Edge, adding that it boils down to how much an investor believes the concept will translate into earnings.
OWG was tasked with revitalising Komtar Tower in December 2012, which Chan believes could be a catalyst for the stock’s re-rating. The project involves the transformation of five levels in the tower into a high-end commercial space for retail and F&B outlets and a tourist observation deck that offers panoramic views of the city day and night.
OWG was granted a 45-year lease at an attractive rental rate with the option to extend for another 15 years.
“With improved clarity on Komtar’s opening timeline, we believe the stock is poised for a significant re-rating. OWG is trading at a forward FY2017 price-earnings ratio (PER) of only 13.2 times, which is at a more than 40% discount to the F&B sector’s average. This is unjustified, in our view, as the delay in Komtar’s opening is merely a timing issue,” Chan says in a Sept 4 note to clients.
Although there has been no official announcement on when the project will open its doors to the public, it is understood that this could happen in a couple of months.
“The plan is to open by the fourth quarter of the year … we are looking at November or December. We have pre-sold tickets for it already,” says a staff member of The Top Komtar Penang, who declined to be named. Under the plan, The Top will be home to retail and F&B outlets and a plethora of activities.
When asked how much the tickets would cost, the staff member says it is likely to be more than RM50 each.
In his note, Chan says OWG sold tickets for Komtar’s themed attractions and interactive lifts at the recent MATTA fair.
“Tickets for the themed attractions were packaged and sold separately from tickets for the interactive lifts. The promotional rates for the lifts are RM80 for adults and RM52 for children. Outside these promotional rates, the Komtar tickets will have a two-tier pricing — foreigners and locals (c.20% cheaper). Given the advance ticket sales, we believe Komtar will finally open in late-November.
“In our new EPS forecast, we now assume Komtar’s interactive lifts to contribute to revenue from December (seven months to end-FY6/17) at a blended ticket rate of RM50 versus RM30 previously. This is still conservative as the promotional rates are RM80 for adults but exclude the travel agents’ commission.”
When contacted, Chan tells The Edge that the Komtar project’s potential lies in tourist visits. “I am assuming one million visitors a year, which I think is realistic as Penang Hill sees 1.4 million visitors a year.”
The Ministry of Tourism and Culture is targeting 30.5 million tourist arrivals this year, which could translate into tourism receipts of RM103 billion. There is no official estimated breakdown of tourist arrivals for specific states but news reports note that figures released by Penang Global Tourism show that the island state recorded passenger traffic of 6.03 million in 2014.
In his note, Chan states that he has not imputed any revenue or profit contributions from Komtar’s themed attractions. “We have also not imputed additional profit contribution from the additional space that OWG will be securing since it is still finalising the amount of additional space in Sky Plaza at Genting Highlands. We estimate that OWG’s total space in Genting could be up to 50% more than its current space.”
OWG’s main businesses are food services and amusement and recreational services. Its F&B business includes QiQi Taiwan Cuisine, QiQi Taiwan Snacks and Only Mee. The bulk of its food outlets are located in Genting Highlands and its operations there contribute more than half to the group’s revenue.
In its Komtar Tower project, OWG opened its first fine dining restaurant on Level 59 in June last year. Its amusement and recreational games business includes indoor playground for children Jungle Gym, Escape Room and STARship Galactica.
Rising borrowings
While OWG’s earnings have yet to pick up, the group saw a noticeable uptick in its borrowings in its financial year ended June 30, 2016 (FY2016).
As at June 30, its long-term borrowings had doubled to RM51 million from RM24.9 million a year earlier while its short-term borrowings had risen to RM4.8 million from RM2.1 million in the same period.
On this, Chan tells The Edge the rise in borrowings was due to the additional capital expenditure that OWG incurred for its Komtar Tower project. “They have about 300,000 sq ft now compared with 130,000 sq ft before. The capital expenditure was estimated at RM60 million but that has risen to RM180 million.”
In FY2016, OWG’s revenue rose 12.7% year on year to RM97.7 million but its net profit dropped 10.6% to RM12.3 million due to higher cost of sales and administrative expenses. In FY2015, revenue rose 5% y-o-y to RM86.9 million while net profit dropped 3% to RM14.1 million.
“OWG is still one of our top small-cap picks for 2016/17. We raise our target price by 11% (to RM4.36) after our FY2018F EPS upgrade, still pegged to 21.2 times CY2017F PER, a 10% small-cap and liquidity discount to the F&B sector average. Potential re-rating catalysts include the launch of Komtar’s lifts in October or November and higher-than-expected visitation numbers. A key risk is further delay in Komtar’s opening,” says Chan in his note, adding that he has cut its FY2017 EPS by 6% to 16 sen.
CIMB Research has an “add” recommendation on OWG and a target price of RM4.36.
The stock’s 52-week closing high was RM2.68 on Jan 15, 2016, while its 52-week closing low was 71.8 sen on Jan 23, 2015. OWG was listed on Dec 14, 2014, at an initial public offering price of 88 sen.
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