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Malayan United Industries (MUI Group): An Asset Rich, Undervalued Opportunity?

Bar chart showing domestic holidays in Great Britain during 2008-2017 (in millions of trips). In 2017, there were a total of 59.149 million recorded domestic holiday trips made in Great Britain, the highest since 2008.

Wielding a collection of renowned brands such as Laura Ashley and Metrojaya in the retail sector, Corus Hotels in the hospitality sector, Kandos and Tudor in the food sector, and Bandar Springhill in the property development sector, could asset-rich Malaysian conglomerate Malayan United Industries prove to be a diamond in the rough?

Malayan United Industries (KLSE:MUIIND) once a corporate powerhouse has under-performed over the past several years and has consequently lost its charm among investors. However, with MUI founder Tan Sri Khoo Kay Peng relinquishing his role as Chief Executive Officer in December last year, and paving the way for his son Andew Khoo Boo Yeow to take over the reins, changes are already underway with the new CEO spearheading a restructuring exercise aimed at building a sustainable business in the long run.

Key restructuring initiatives include corporate restructuring, business transformation (which involves transforming MUI’s key brands such as Laura Ashley into a lifestyle brand) and deleveraging (which will see the company’s debt burden being reduced through divestitures among other options). With such measures to unlock shareholder value being implemented, can the asset-rich long-time laggard turn its fortunes around, and regain its former glory?

Laura Ashley (LON:ALY)

Plans are underway to transform Britain’s iconic Laura Ashley brand (and one of MUI’s crown jewels) into a lifestyle concept by expanding from the current fashion, accessories and home furnishings business into other areas such as hotels (currently the company owns two hotels – Laura Ashley The Manor, and Laura Ashley The Belsfield – both located in the UK) and cafés (the company’s opened its first café – Laura Ashley The Tea Room – in June 2017). Future plans will see the brand expand into the spa business as well. The idea of transforming a brand into a lifestyle concept is nothing new and while some brands such as Missoni and Moschino have fallen off the runway (the fashion houses checked out of the hotel business a few years ago) a number of others, such as Bulgari, Mercedes Benz, Armani, Fendi, and Versace are still continuing the show. Buglari extended their famous jewelry brand into the now famous Bulgari Hotels and Resorts; Mercedes Benz steered their automobile brand into perfumes; Armani elevated the fashion brand towards luxury hotels and luxury furnishings; Versace strutted their fashion brand into fashion hotels; Jaguar took the auto brand up a notch with its lifestyle products ranging from clothing to accessories; Godiva sweetened their chocolate brand with its chain of lifestyle chocolatier cafés; and Fendi took the fashion brand to new heights with their hotel venture.

So can ailing Laura Ashley, which is struggling financially (profits have been falling over the past few years) as well on the stock market (its languishing share price has been a long time under-performer and is currently trading at a fraction of its value during its heyday decades ago in the mid-1990s), get back in vogue with a similar push?

While much would depend on strategy and execution, fundamentally, the idea holds potential. And if history is any guide, Laura Ashley appears to have had a reasonably fair track record in extending the brand beyond its core products. Starting out as a clothing brand, famous for its floral, billowy dresses typical of English fashion in the 1970s, which were in vogue up until the 1990s, Laura Ashley subsequently stumbled due to a combination of factors such as an ill-executed overseas expansion and a failure to adapt appropriately to changing fashions. The failed expansion dented the company’s finances while the failure to evolve meant the brand’s classic style gradually became more and more classic, which later on ended up looking completely outdated altogether. And although years later Laura Ashley made an effort to update its chintzy image, customer perceptions are hard to change, contributing to flagging financials.

Despite these setbacks, it is noteworthy that the company successfully made great strides in transforming the brand’s product offering from one limited to just clothing to one spanning furniture, decorating items and home accessories. A few years ago clothing accounted for 50% of sales, but now it accounts for just 17% and is the smallest revenue generator of all of Laura Ashley’s four business segments according to its latest annual report. The biggest revenue earner, Home Accessories (which includes products such as lighting, gifts, bed linen, rugs, cushions, and children’s accessories), accounts for 34% of UK sales followed by the Furniture segment (cabinets, beds, and mirrors) which accounts for 29%. The balance 20% comes from the Decorating segment (fabric, curtains, wallpaper, paint and decorative accessories).

So could the new hotel venture be the key to unlock the brand’s value and reverse the company’s sagging financials?

Laura Ashley is an upscale brand synonymous with British heritage and the company’s new hotel and café brands are clearly positioned in similar fashion with all three Laura Ashley hotels (Laura Ashley The Manor Elstree, Laura Ashley Belsfield Hotel, and the upcoming Laura Ashley Burnham Beeches) and its two cafés (Laura Ashley The Tea Room in Solihull and Buckinghamshire) offering quintessentially British experiences to their well-heeled guests.

Britain has no shortage of hotels offering “quintessentially British” experiences such as The Savoy, and The Langham London. However, Laura Ashley hotels differentiated themselves by offering their upscale iconic British-style getaways in some of England’s endeared countryside locations. Laura Ashley Hotel The Belsfield for instance, is located along Lake Windermere in Lake District which is a World Heritage Site in North West England. Although plenty of travellers visit to enjoy the lake’s shimmering water and picturesque surroundings, there is little traveller spend in the area. Sensing an opportunity, in 2014 Laura Ashley acquired a Victorian-era mansion (it was built in 1845) overlooking Lake Windermere, and spent millions of pounds on refurbishment (with décor and furnishings from Laura Ashley of course) to offer a classic English-style countryside retreat, ideal for corporate events and weddings (in fact winter weddings bookings were reportedly up 75% during 2017). The strategy seems to be working with revenues and operating profits at the hotel reportedly increasing three-fold since being converted to a Laura Ashley hotel.

Banking on the success of this approach, plans are underway to convert Corus Hotels’ Burnham Beeches hotel which is located in the rolling Buckinghamshire countryside, into a Laura Ashley Hotel, which could potentially emerge as a promising top-line contributor going forward.

Yet, with Laura Ashley’s hotel segment accounting for just a fraction of group revenue (revenues from Laura Ashley’s hotel segment made up about 1% of total group sales according to Laura Ashley’s latest annual report), the rosy numbers may not be enough to move the needle at Laura Ashley in the near term.

The long view seems more promising. With Laura Ashley hotels being located in England’s countryside which tend to draw local travellers (as opposed to locations such as London, Manchester and Birmingham which are among UK’s most popular tourist destinations), the company is positioned to tap the UK’s domestic travel market which accounted for 80% of the UK visitor economy according to data from VisitBritain’s 2016/2017 annual review.

In 2017, Brits took 59 million domestic holidays in Great Britain, a 6% increase from the previous year, spending £14.1billion on domestic holidays in Great Britain, also a 6% increase over the previous year according to VisitEngland’s Trip-Tracker Survey.

Bar chart showing domestic holidays in Great Britain during 2008-2017 (in millions of trips). In 2017, there were a total of 59.149 million recorded domestic holiday trips made in Great Britain, the highest since 2008.

Furthermore, there is considerable potential for the Laura Ashley hotel brand to expand internationally, and the management seems keen to exploit this opportunity having announced plans to increase the number of domestic and international hotels to 100 over the next five years through licensing agreements.

There exists clear demand for British heritage brands outside the UK, particularly in countries such as Japan, South Korea, Hong Kong, South Asia and Southeast Asia with British-style brands Burberry, Church’s and Harrod’s cashing in on enthusiastic customers in these regions. This market could be an opportunity for Laura Ashley and with the brand’s planned hotels serving as a showcase for Laura Ashley products, they could potentially draw shoppers to Laura Ashley’s product offering.

Towards this end, Laura Ashley is taking steps to export the brand worldwide; Laura Ashley derives much of its sales from the UK and with international sales making up just 7.4% of group revenue according to the company’s latest annual report, the Laura Ashley brand is strongest among UK customers and appears to have relatively little recognition outside the UK. Laura Ashley has expanded into India with a signing of a licensing deal with India’s leading fashion retailer, Future Group. The company has also tied up with a partner in Thailand to tackle the Southeast Asian market.

Growing its international customer base could help the brand reduce reliance on sales from the UK, its primary market, insulating its financials from geographical shocks and thereby smoothening out revenues over the longer term. According to the company’s latest financial data, all business segments except Fashion suffered revenue declines, partly due to the impact of Brexit which saw UK consumers reigning in on big-ticket purchases. And with UK consumer spending not expected to recover as the uncertainty of Brexit’s impact on jobs and income hit hard on consumer confidence, British brands with a heavy reliance on the UK market such as Laura Ashley may find themselves in challenging conditions in the coming years. Keeping a long term view in mind, an international expansion could Laura Ashley minimize such geographical risks.

Since Laura Ashley was thrown a lifeline by MUI about two decades ago, MUI has yet to see a return on its investment, with Laura Ashley trading at just a fraction of its market value in the mid-1990s when it was looking its prettiest. Will this time be different? Only time will tell, but the company could be worth watching.

Corus Hotels

MUI Group’s hotel subsidiary Corus Hotels which operates a portfolio of hotels across the UK and Malaysia and is also the owner and operator of Laura Ashley Hotels has returned to profitability in its latest financial year with pre-tax profit of £1.7m on a turnover of £27.8m in the year to 30 June 2017 which is a 5.7% increase from the £26.3 million turnover recorded the previous year.

Having disposed of two “non-core” hotels in the UK (namely The Old Golfhouse Hotel in Huddersfield, and The Imperial Crown hotel in Halifax), Corus Hotels’ UK portfolio comprises Corus Hyde Park in London, Burnham Beeches in Buckinghamshire, The Chace Hotel in Coventry, The Hillcrest Hotel in Widnes, Grimsby’s The St James Hotel and The Regency Hotel in Solihull. Corus Hotels also operates two Laura Ashley Hotels namely The Belsfield and The Manor Elstree, while a third hotel will be added to the Laura Ashley Hotel portfolio soon with the rebranding of Corus Hotels’ Burnham Beeches in Buckinghamshire.

Corus Hotels’ flagship hotel Corus Hotel Hyde Park (in London) which generated revenue of £11.9 million (accounting for over 40% of Corus Hotels’ revenue) recorded an average room occupancy of 75.8% for the year ended 30 June 2017. Although this is lower than the 2017 average room occupancy rate of 81.7% in London according to data from Colliers International, it is reportedly an improvement over the hotel’s average room occupancy rate last year according to its latest annual report.

Bar chart showing the top 5 cities with the highest hotel occupancy rates in the UK, 2017 (%). At 83.7%, Edinburgh had the highest hotel occupancy rate in the UK in 2017, followed by Oxford (82.6%), Glasgow (82.1%), London (81.7%) and Belfast (81.6%)

Over in Malaysia, for the year ended 30 June 2017, Corus Hotels Kuala Lumpur, which is strategically located within walking distance to Malaysia’s major tourist attraction KLCC, recorded an average room occupancy rate of 61% (lower than the 66.1% hotel occupancy rate recorded for Kuala Lumpur in 2017 according to data from CEIC) while Corus Hotels Port Dickson recorded an average room occupancy of 64.1% (considerably higher than the 55.7% hotel occupancy rate recorded for Negeri Sembilan in 2017 according to data from CEIC).

It is not clear how well the other hotels in Corus Hotels’ portfolio performed, however, what is known is that business has reportedly improved since two hotels, The Belsfield and The Manor Elstree were converted into Laura Ashley-themed hotels. The conversion of Burnham Beeches into a Laura Ashley Hotel is a continuation of this strategy and with more hotels under the Corus Hotels umbrella likely to follow the same path, Corus Hotels’ bottom line could get a much needed lift, benefiting MUI Group as well; Laura Ashley hotels target upper middle class travelers and are positioned as boutique hotels with fewer rooms (often less than 100, compared to Corus Hotel Hyde Park which has over 300 rooms) and higher room rates (for instance room rates at Laura Ashley The Belsfield is almost double that of Corus Hotel Hyde Park), which makes Laura Ashley Hotels a higher-margin and less capital-intensive business.

While this potentially profitable strategy gives reason to be optimistic about Corus Hotels’ future valuation, there is reason to be optimistic on its present valuation as well; many of Corus Hotels’ properties have been valued decades ago and their current market values could be considerably higher than their current net book values (NBV). For instance, Corus Hotel Kuala Lumpur, which occupies prime freehold land in Jalan Ampang less than half a kilometer away from KLCC, was last valued in 1982, and its current NBV is just Malaysian Ringgit (RM) 54.5 million according to MUI Group’s latest annual report. That values the property at about RM 843 per square foot. By comparison, an empty development land also along Jalan Ampang, about 2 kilometers away from KLCC and less than 2 kilometers away from Corus Hotels is currently seeking a buyer at about RM 2,300 per square foot, nearly three times the current NBV of Corus Hotels’ Kuala Lumpur. That would suggest Corus Hotels Kuala Lumpur could command a value of at least RM 200 million (some reports have put the figure as high as RM 300 million), and this property alone would thereby make up about 40% of MUI Group’s entire market capitalization of about RM 500 million currently.

Corus Hotels’ other Malaysian property, Corus Paradise Resort in Port Dickson, currently carries a NBV of RM 24.5 million according to MUI Group’s latest annual report, equivalent to about RM 41 per square foot. By comparison, a plot of land for sale along the same road as Corus Paradise Resort, was listed at a sale price of RM 45 per square foot. Meanwhile, hotel operator Avillion Berhad’s (KLSE:AVI) Avillion Port Dickson hotel which occupies a mix of freehold and leasehold land about two kilometers away from Corus Paradise Resort, is valued at RM 236 per square foot according to the company’s latest annual report.

Part 3 of this series (Metrojaya) will be coming soon. Sign up for the newsletter to get the article delivered to your inbox.

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Optimistic Outlook For Malaysia’s Industrial Property Sector

Bar chart showing Malaysia’s property transaction volume in 2017 (in number of units). In 2017, Malaysia property transactions in number of units were as follows: Residential 194,684 units, Commercial 22,162 units, Industrial 5,725 units, Agriculture 70,290 units, and Development Land and Others 18,963 units.

Demand for Malaysian industrial real estate could rise further driven by a resilient manufacturing sector and ASEAN’s growing e-commerce market.

Accounting for just 1.8% of Malaysian property transaction volume and 8.3% of transaction value, industrial properties contribute the least to Malaysia’s property transactions by volume and value according to data from Malaysia’s National Valuation and Property Services Department’s (JPPH) Property Market Report 2017.

Bar chart showing Malaysia’s property transaction volume in 2017 (in number of units). In 2017, Malaysia property transactions in number of units were as follows: Residential 194,684 units, Commercial 22,162 units, Industrial 5,725 units, Agriculture 70,290 units, and Development Land and Others 18,963 units.

Bar chart showing Malaysia’s property transaction value in 2017 (in millions of Malaysian Ringgit). In 2017, Malaysia property transactions by value were as follows: Residential RM 68,467, Commercial RM 25,439, Industrial RM 11,642, Agriculture RM 13,501, and Development Land and Others RM 20,794.

However, with Malaysia’s residential and commercial property sectors facing oversupply issues, the country’s industrial property sector may offer better prospects; Malaysia’s manufacturing sector is resilient (contributing 23% to GDP in 2017 and accounting for 15% of 2017 FDI inflows) which suggests industrial properties for manufacturing and warehousing could offer investment potential, and the country’s ecommerce market is booming which could open opportunities for industrial real estate in areas such as logistics and warehousing. In particular, larger storage space near ports and airports, and smaller warehouses located close to urban areas could see an uptick in demand, as distributors look to establish fulfillment centers close to their customer base in an effort to shorten parcel delivery times to online shoppers.

An example of this is when real estate private equity and advisory firm Area Management Sdn Bhd announced its plan to set up an inner city distribution hub in Kuala Lumpur. The warehouse which will have 1.2 million sq ft of warehouse space will be located in Hulu Kelang, in the town of Ampang, just about 10 minutes away from KLCC.

Such investments in industrial property could be just the beginning. ASEAN’s e-commerce market is booming, yet with e-commerce accounting for just 2% of the region’s total retail sales, (this is lower than the average worldwide which saw 10.2% of total retail sales coming from online sales in 2017 according to eMarketer). Singapore has the highest e-commerce penetration with 5.4% f total retail sales being made online, followed by Malaysia at 2.7% according to a report by Maybank Kim Eng Research suggesting ample room for growth. Research by Google and Temasek forecasts the region’s e-commerce sales to grow at a CAGR of 32% from US$ 5.5 billion in 2015 to reach US$ 88 billion in 2025, when they will make up 6% of total retail sales in the region. Management consulting firm A.T. Kearney expects Malaysia’s e-commerce market to grow 23% annually until 2021 according to a 2017 report.

Furthermore, as intra-ASEAN trade grows and consumption increases stimulated by rising incomes among ASEAN’s 600 million plus population (larger than that of North America and the European Union), logistics demand in the region is poised to grow. Malaysia’s strategic geographical location, and its strong infrastructure network puts it in prime position to emerge as a logistics hub for the ASEAN region. Malaysia’s infrastructure is second only to Singapore among ASEAN countries according to a report by the World Economic Forum.

Bar chart showing the World Economic Forum's Global Competitiveness Index, 2017-2018 Infrastructure score for selected Southeast Asian nations. Singapore ranks highest with a score of 6.5, followed by Malaysia (5.5), Thailand (4.7), Indonesia (4.5), Brunei (4.3), Vietnam (3.9), Philippines (3.4), Laos (3.3) and Cambodia (3.1)

A number of multinationals looking to capitalize on Southeast Asia’s emerging markets have already spotted Malaysia’s logistics potential. Swedish furniture company IKEA has selected Malaysia to be its ASEAN logistics hub and the company will be investing nearly a billion Malaysian ringgit to establish a regional distribution and supply chain in the country in what would be among its 10 biggest regional distribution centers globally. E-retailer Zalora has invested RM 20 million building a regional e-fulfillment hub in Malaysia and Chinese e-commerce giant Alibaba (NYSE:BABA) has selected Malaysia’s commercial capital Kuala Lumpur as one of the company’s five global hubs with the others being Hangzhou, Dubai, Liege and Moscow. French automaker Groupe PSA has selected Malaysia to be its ASEAN hub and Chinese tech giant Tencent (HKG:0700) has selected Malaysia as its ASEAN data center hub.

West Malaysia – Central Region

Selangor, Malaysia’s most prosperous state and the top contributor to Malaysia’s GDP (accounting for 22.7% of Malaysia’s GDP), dominates Malaysia’s industrial property market, boasting about 35% (or 39,139 units) of Malaysia’s industrial properties. Selangor is followed by southern region state Johor (16,117 units) and northern region state Penang (9,057 units).

Boasting logistics hubs such as Port Klang (Malaysia’s busiest container port), Shah Alam, and the upcoming KLIA Aeropolis, the state of Selangor, Malaysia’s richest state, shows potential to be developed into a regional logistics gateway to the ASEAN region thereby supporting ASEAN international trade. For instance, Swedish furniture retailer IKEA set up a new regional distribution and supply chain center in Pulau Indah Industrial Park in Port Klang, which will serve IKEA stores throughout the ASEAN region.

Port Klang is Malaysia’s busiest port and the world’s 11th busiest port according to the World Shipping Council. Although the formation of a new global shipping alliance, the Ocean Alliance, in April 2017 saw a number of carriers shifting from Malaysian ports to Singapore ports, resulting in a 10% drop in Port Klang’s container throughput, and with the rise of competing ports in the region such as Ho Chi Minh City and Jakarta further eating into Port Klang’s share of transshipment volumes (which account for over 60% of Port Klang’s volume according to data from the Port Klang Authority), Port Klang, ASEAN’s second biggest port, is still expected to remain as a secondary transshipment hub, second only to Singapore.

Thus, the current limited supply and higher prices of industrial land in Port Klang townships such as Pulau Indah is likely to persist. Last year, a land transaction in Pulau Indah topped the list of Malaysia’s highest industrial real estate transactions by value when a 274,413 sqm vacant plot in Pulau Indah Industrial Park sold for RM 112 million according to data from the National Property Information Centre (NAPIC).

With Malaysia’s first Digital Free Trade Zone being set up in KLIA Aeropolis, Port Klang has been identified as a potential location for another new Digital Free Trade Zone, industrial real estate demand in Port Klang as well as the surrounding area could see further increases.

Companies moving in to capitalize on the opportunity include Sime Darby (KLSE:SIME) and Japan’s Mitsui (TYO:8031) which have announced a partnership that would see the development of industrial facilities on 39 acres of land at Bandar Bukit Raja in Klang (about 20 kilometers away from Port Klang) with an estimated gross development value of RM 530 million.

Malaysian aluminum products manufacturer Alcom Group Berhad (KLSE:ALCOM) has announced its plans to diversify into property development with a RM 500 million gross development value industrial park project in Sungai Buloh (a district in Selangor, about 45 kilometers away from Port Klang) which will see a 9.4 acre vacant industrial land being developed into a gated and guarded industrial park.

Selangor is among the fastest growing states in Malaysia, with much of that growth driven manufacturing, services and agriculture (this compares with Kuala Lumpur where growth is driven by services).

Bar chart Malaysia’s economic growth by state in 2017. Sabah was Malaysia’s fastest growing state with a growth rate of 8.2%. Sabah was followed by Melaka (8.1%), Pahang (7.8%), Federal Territory of Kuala Lumpur (7.4%), Selangor (7.1%), Johor (6.2%), Labuan (6.1%), Terengganu (5.9%), Perak (5.5%), Penang (5.3%), Kelantan (5.0%), Kedah (5.0%), Negeri Sembilan (4.9%), Sarawak (4.7%), and Perlis (2.3%). Malaysia as a whole registered a GDP growth rate of 5.9% in 2017.

Shah Alam, the state capital of Selangor, is a popular manufacturing hub, located about 20 kilometers away from Malaysia’s biggest container port, Port Klang, 50 kilometers away from Kuala Lumpur International Airport and about 30 kilometers away from Malaysia’s vibrant city center Kuala Lumpur. This makes Shah Alam an attractive location for manufacturing, warehousing and distribution activities, and the city already boasts a number of high profile occupants including German logistics company DHL which maintains a supply chain logistics hub in Shah Alam,

Yet, as Malaysia’s burgeoning e-commerce market continues to grow, Shah Alam could see rising industrial real estate demand as its advantage of being strategically located close to Selangor’s key airport (KLIA), sea port (Port Klang) and being located within Malaysia’s Klang Valley (one of Malaysia’s most advanced retail markets) lure multinationals and e-commerce companies looking to establish warehousing, e-fulfillment and distribution facilities to tap into ASEAN’s growing army of online shoppers.

Suggestive of this potential, Singapore-based property developer Aspen (Group) Holdings Limited (SGX:1F3), has diversified into logistics, having acquired a 71 acre industrial land in Shah Alam which will be developed into an integrated logistics, warehousing and e-commerce hub.

FM Global Logistics (M) Sdn Bhd, a subsidiary of Malaysian freight services provider Freight Management Holdings Bhd (KLSE:FREIGHT) is developing an e-commerce fulfillment hub in Shah Alam.

Axis Real Estate Investment Trust (REIT) has acquired two parcels of industrial land in Shah Alam, for RM87 million.

Meanwhile DRB-HICOM (KLSE:DRBHCOM) has disposed of its non-industrial real estate assets in an effort to focus on industrial property development.

Fashion e-retailer Zalora selected Shah Alam to establish its e-fulfillment hub, fancying the industrial city’s merits of being close to the airport, the seaport and close to Kuala Lumpur where it has a large customer base.

Volvo, the Sweden-based subsidiary of China’s emerging automotive giant Geely (HKG:0175) announced that it is looking at making Shah Alam its export hub to serve the ASEAN market.

Malaysia’s KL International Airport is a 45 minute drive away from Malaysia’s leading container port, Port Klang, a 45 minute flight away from Singapore, a one and a half hour flight away from Bankok, Jakarta and Ho Chi Minh City.

Malaysian airport operator Malaysia Airports Holdings Berhad (KLSE:AIRPORT) is developing an air logistics hub, named KLIA Aeropolis, in a 404.7 hectare site surrounding the Kuala Lumpur International Airport. The airport city project is expected to attract RM 7 billion in foreign and domestic investments.

Having selected Kuala Lumpur to be its global hub along with five other cities, namely Hangzhou, Dubai, Liege and Moscow, Cainiao Network, the logistics arm of Chinese ecommerce giant Alibaba, is constructing the company’s first regional e-fulfillment hub outside China – a new distribution center in KLIA Aeropolis near the KL International Airport, as part of a wider agreement to build a Digital Free Trade Zone (DFTZ) which aims to facilitate SMEs to engage in cross-border trade. The DFTZ is scheduled to begin operations in 2020.