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

SEP 27, 2018, LD Investments

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.

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.

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.

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