Fragrance Holdings (S$0.485) Singapore's very own niche hotelier

People who know me well, will know I love dogs and that is why I put a daily dog tag on this blog to allow my readers to share the joy of looking at these adorable creatures. Today has been a tough day because my dog of 9 years has passed away and I would like to dedicate this day to my numero uno dog of all time. Thanks for all the great memories and loyalty you have shown to me.

I was away for the whole of last week and was not able to find the time to post anything on the blog. Even though I did not have the time to follow the market closely, it did give me the opportunity to think carefully about where I should place my money next and I did come out with a couple of ideas which I will be sharing down the road.

While I was away, the market improved quite drastically bringing a little reprieve to investors and tempting some punters back to the market. To be honest, I am skeptical about this recovery because the volumes are still pretty thin but we should be glad that the global sell down has somewhat slowed down. The thin volumes could be attributed to the world cup fever, with more traders and remisiers sleeping at home rather than being at their terminals trading.

While I was on my flight back, I read an article on the Business Times addressing the possible sale of IBIs hotel in Bencoolen and the tenders were coming fast and furious for this 3 star hotel. It got me thinking and I realised that there were just too much talk about 5 star hotels and how well they are doing and very little has been said about the lower rated hotels. Being a person who gets to stay in 5 star hotels very often, I have to admit that it is really amazing how much money is incurred in running such hotels. But 3 star hotels and budget hotels are a different proposition altogether.

The "no-frills" manner that these hotels are set up gives them a leaner and more flexible cost structure. It is also targeting a totally different segment altogether. Occupancy is normally higher and more stable with 3 star and budget hotels because the demand is stronger and the fact that hourly charges can be implemented helps significantly. These hotels tend to generate regular cash flows and helps is a cash business because people tend to pay in cash at these hotels. Partly because it is cheaper and more affordable and also its more discretionary nature of business. Heh heh.

By now, I believe by now you can guess which stock I am referring to in this post. I know for a fact that one of my readers is one of the largest shareholders for this stock and also an anchor tenant for it. Apparently, he has a habit of staring at air-conditions installed in the hotel rooms. Private joke. You know who you are.

Fragrance Group comprises of 2 core business operations, hotel operations and property development.

Fragrance Chain of Hotels is one of the leading chain of tourist class hotels in Singapore. Founded in 1996, it started its debut in hotel management with one hotel, but rapidly expanded and currently managing 21 hotels in Singapore.

Their property division has successfully launched more than 50 projects and consistent with their strategy in their hotel business, focusing on smaller and lower priced developments to create a niche for themselves.

I will not be expanding too much on the property division because it is too volatile and hard to value. The value of this stock lies in their hotel operations because the margins are large, very profitable and also stable. They currently have 1373 hotel rooms which makes them one of the largest budget hotels in Singapore, second only to Hotel 81.

Market watchers are expecting IBIs Hotel Bencoolen will be sold for more than S$200 million for the 528 room hotel. This works out to S$378k per room. This is very impressive because it is just a 3 star hotel. There are some older 5 star hotels that are valued at only S$500k per room, therefore you can see it is really not cheap. If we use this pricing as a guide to translate back to Fragrance's hotel rooms, we will arrive at a very nice number I am sure. Lets use the assumption that each room is valued at S$200k, that would mean their hotels are worth S$274 million. The current market capitalization of the company is S$407 million and the book value of the hotels carried on their balance sheet is only S$140 million. This means that the balance sheet is not reflecting accurately the value of the hotels.

On the macro side, I believe tourism is going to be one of the main key drivers for the Singapore economy going forward and hotels will start to rise in terms of valuations. With the casinos fully operational, we can also expect vice to rise and this will mean prostitution to become even more rampant and demand for "lovers" hotels such as this to grow strongly. It is true that the integrated resorts have added many rooms to Singapore's hotel sector but this is mainly in the 4-5 star categories and also the growth in tourism is going to be more than sufficient to take up the new capacity.

I totally expect hotels to become expensive commodities in Singapore because of the demand for them and also for the ever appreciating land that they sit on top of.

Fragrance's hotels are all built on very choice and central locations which is one of the key reasons to why I believe this stock will be re-rated eventually when investors realise that the land the hotels are sitting on are worth a ton more than what they are valued currently.

The company is paying around 2.5 cents dividend which translates to more than 5% per year. A very attractive payout which I personally think is sustainable for the company. You are paid to wait for it to be re-rated. This is definitely one that I am rooting for and will be allocating part of my assets into as time passes. Fragrance at $0.485 looks like a bargain to me and I like it for its defensive qualities because of its high dividend and strong balance sheet.

I am glad to say that in one and a half weeks, my last call on Asia Food and Properties have delivered 10% returns and I do think that there is still further upside for it. Do keep it in your sights.

Thats all I have for today and its time for me to get back to my mourning for my beloved dog.

Best,

SVI