Threats. Sub-optimal DPM villa sales. Drop in local demand for real estate. Market capitalisation: Rs 13.4bn Tapping into emerging clientele

Transcription

1 Executive Summary Overview (NMHL), an industry pioneer, runs eight resorts (4 to Luxury 5 Star) in Mauritius, an island resort (5 Star) in the Seychelles and opened its flagship Royal Palm Marrakech (Luxury 5 Star) in Morocco in Dec-13. The hotel group's foray into real-estate development has been difficult and has driven its indebtedness to high levels, while its tourism business has faced turbulent times. Performance: Review & Prospects Like other hoteliers, NMHL has struggled in a different post crisis operating conditions. Hotel revenue grew at an annualised rate of 3.9% between FY10 and FY13, but op. costs rose at 7.7% over the same period; subsequently EBITDA margins shrank from 26% to 19%. The re-building of Trou-aux-Biches and NMHL s entry into property development (both in Mauritius & Morocco) have been hindered by setbacks, delays and cost overruns. These have resulted in surging interest charges as Debt per Share climbed to Rs Consequently, NMHL s recurrent EPS has plummeted to Rs1.72 in FY13 which is the lowest in over a decade. NMHL forward bottomline growth relies heavily on the success of Domaine Palm Marrakech (DPM) villa sales to alleviate debt and trigger DPM phase II which would in turn bring down its DER to more comfortable levels. The opening of RPM in Marrakech is expected to boost revenue and accelerate sales of DPM villas; however, as in all new hotels, RPM is not expected to boost PAT until FY15. Prospects for NMHL s domestic operations difficult to assess given that room rates are stagnating and the group has lagged behind in terms of capturing burgeoening Asian markets; on the bright side, occupancy rates have improved. Although we expect this situation to persist, the re-opening of a smaller renovated Royal Palm bodes well for both room rates and margins. Valuation: Upgraded to Hold Assuming RPM does not reach optimal levels before FY15 and tabulating villa sales proceeds as Rs 61.5 VWAP Rs 91 exceptional items, we forecast NMHL s FY14 PER to stand at 53.6x then 35.0x in FY15. While these PER figures are below the Industry PER of 89.3x, it does stand above the ALEX-20 PER (16.3x) and Total Market PER (14.5x). NMHL s PEG Ratios remain negative until FY15. Although we would have preferred dividends be used to reduce gearing, DY is estimated to reach 1.2% in FY15. DER which stood at 113% in FY13 is CDS Code: ISIN Code: NMHL.N0000 MU0036N00007 unlikely to fall below 100% until FY15. Assuming NMHL pays down borrowings at Rs1bn per year over the Bloomberg Code: NMH MP next two years using DPM proceeds, Debt per Share then declines to Rs86. In spite of the above metrics, Reuters Code: NMH.MZ in anticipation by year end of positive real-estate cash inflows stemming from Marrakech, we upgrade NMHL s rating from Reduce to Hold. Opportunities Threats Trading data 30-May-14 Successful launch of RPM Sub-optimal DPM villa sales No of Shares: 161.4M Development at DLH & DPM Phase 2 Drop in local demand for real estate Market capitalisation: Rs 13.4bn Tapping into emerging clientele Continued decline in core tourist market Weight on SEM: Weight in ALEX-20: 4.9% 7.3% Highlights E 2015F Weight in ALCAPEX-12: 9.9% Revenue [RsM] 6,833 7,622 8,110 7,819 8,469 9,527 Med. daily value traded: Rs 1.27M EBITDA [RsM] 1,766 1,492 1,726 1,471 1,495 1,542 Med. daily volume traded 15,100 PAT [RsM] YoY Total Return: 20.4% R/Occ. Room [Rs] 12,440 12,440 13,445 13,455 13,685 15,325 All time high: Rs Adj EPS [Rs] (09-Jan-08) NAV [Rs] Debt/Share [Rs] Key P&L Trends DPS [Rs] Valuations E EBITDA Marg. [%] PER [x] PEG [x] PBV [x] EV/Room [RsM] ROE [%] DY [%] DER [%] F Indices = 100 on 15-Apr-11 Low Rating NMHL 17.7% NMHL ALEX-20 TRI HOLD PER DY PBV FP 52-Wk Range x 2.40% 0.97x 37.9% High E 2015F Revenue [Rs bn] EBITDA Marg. [%] EBITDA Marg. [%] 1

2 FINANCIAL PERFORMANCE I. Revenue Core Business: Hotels A decline in raw core market tourist arrivals coupled with the increase in hotel park triggered a drop in overall occupancy rates at NMHL from 64% in FY12 to 61% in FY13. The group nonetheless commendably maintained its RevPOR 1 at Rs13,500 in a highly competitive environment rampant with rate discounting but the shortfall in occupancy resulted in a decline in hotel revenue to Rs6.2bn (-4.6%), and operating margins down to 14% from 17%. On a brighter note, H1-FY14 turnover edged higher albeit boosted by the soft opening of Royal Palm Marrakech (RPM) to Rs4.92bn (+3.7%). Operating margins held steady at 24% because although domestic occupancy rates improved, average room rates decreased. revenue from newly operational RPM should help grow FY-14 revenue 3, but is unlikely to also boost PAT this year because new hotels typically become profitable during or after the 2 nd year of operations. We therefore expect hotel revenue to grow at the accelerated pace of 13% in FY14 and FY15. Non-Core Business: Tour Operations & Catering NMHL s non-core business consists of tour operations and catering. Both segments plateaued in FY-14; however, following a substantial reduction in losses in catering, combined PAT for the two clusters improved to Rs71M (+29%). Tour operations business might experience a pick-up due to the emergence of excursioncrazed Chinese tourists, while the group s re-engineered catering business appears to be stabilising and returning to profitability. Non-Core Business: Real Estate Development NMHL real estate development projects both modelled after the Integrated Resort Scheme include Domaine de l Harmonie 4 (DLH) on the west coast of Mauritius and Domaine Palm Marrakech (DPM), south of Marrakech, Morocco. Fig 1. NMHL s sales revenue split between core and non-core businesses Domestic forward visibility remains murky. Q1-14 tourist arrivals somewhat expectedly 2 slipped by 0.8%; but core markets shrank by a steeper 4.6%. NMHL has only recently begun to tap into the Chinese market now a Top 5 market and could therefore grow at a slower pace. We expect NMHL will maintain RevPAR or improve marginally given the trade-off between occupancies and room rate volatilities. The closure of Royal Palm this winter will also affect FY14 revenue. On a brighter note, the slashing of number of rooms at the Royal Palm would make the property easier to manage and represents potential for increased margins. In addition to the above, the hotel group is poised to benefit from the increased capacity of Emirates on Mauritius. In Morocco, 1 Revenue per Occupied Room as calculated by AXYS, please consult Appendix A for complete equation 2 Easter fell in Mid-Apr rather than Late-Mar/Early-Apr DPM is now nearing completion. Of the 86 villas on sale in Phase I, 51 have been sold, a number which management expects to reach by FY14 end. On average, each villa costs a little less than 1M, and expected to generate about 225k in net income. We estimate the proceeds from the sale of all 86 villas will generate a little more than Rs3bn which would be used to pay down part of NMHL s Rs16bn in borrowings. A debt pay down would alleviate interest charges and result in incremental EPS improvements. The construction of and sales of DPM Phases II and III would accelerate NMHL s debt pay down, and result in substantial reduction in gearing over the next three to five years. No revenue from DPM has been booked to date which AXYS will treat them as nonrecurrent items. II. Risk Assessment The tourism industry is experiencing a difficult spell for a plethora of reasons which we delved into in our industry deep dive: poor connectivity, large supply of hotel rooms, decrease in core markets, but principally because of the absence of a coherent industry strategy at national level. NMHL as a pioneer and local giant in the field has been able to ride out these disruptions fairly well. Hotel revenue per occupied room at Rs13,450 has remained 3 Should RPM manage to sell rooms at > 600 per night, and operate at decent occupancy rates; then by itself, RPM would generate an additional EPS of Rs1 to Rs2 per share. 4 On hold pending litigation surrounding the purchase of land in Jul-08 2

3 stable YoY although it does stand below 2009 levels. EBITDA margins on the other hand have plunged from near 30% in 2009 to under 19% in 2013 which illustrates the difficulty in effectively managing costs when the Rupee does not depreciate. NMHL like others has found it difficult to simultaneously grow both average room and occupancy rates. This situation is likely to persist for a little longer because of a slow growth in domestic arrivals coupled with increased competition. Finally having been slow at diversifying its clientele, NMHL may lag behind competitors in tapping into burgeoning markets. Although NMHL s revenue is expected to grow at an accelerated pace in coming years following the opening of RPM, its EBITDA margins is expected to slide further to 17.7% then 16.2% in FY15. This reflects our thinking that NMHL will have greater costs associated with RPM which will generate sub-optimal revenue in the short term thus affecting the EBITDA margins; and therefore PAT. We expect NMHL s recurrent PAT to dip to Rs264M (-4.1%) before rebounding to Rs438M (+64%) in FY15. Beyond Mauritian borders, NMHL partially opened its top-of-theline luxury hotel, Royal Palm Marrakech, in Dec-13. Since opening the hotel has been sold at a discounted rate of 300 per night but management intends to double to 600 by FY-14 end. The fact that RPM a relatively unknown small player will have to complete against major global brands could result in a lengthier period required to get the luxurious establishment operating at optimal levels. Only a handful of hotels operate north of 500 with The Four Seasons starting at ~ 350 and Mamounia starting at ~ 425. NMHL s greatest risk arises not from its core business but from its property developments. Sales of DPM villas in Marrakech have been slow, although it is expected that with RPM operational and the slight pick-up in European economies, villa sales could accelerate. However, DPM s Phase II and Phase III developments for which no concrete timeline has been made public are the ones that would generate sufficient revenue to realistically reduce NMHL s Debt:Equity Ratio down to comfortable levels from the current 113%. In Mauritius, development of DLH has stalled because to ongoing litigation. Given the pace of a slow legal system, this situation is likely to drag on for some time. Further lukewarm demand for real estate and rental market, would likely result in a scaled back development, for instance without the originally planned 5-Star resort. Further, neighbouring plots of land are available around Rs15M per Arpent which is below NMHL s target sales price. Therefore DLH could produce smaller revenue than initially expected. III. Earnings In spite of a relatively steady growth in turnover, NMHL s profitability declined at an annualised rate of 22.6% from an EPS of Rs3.71 in FY10 to Rs1.72 in FY13. Increasing operational costs coupled with surging interest charges are the principal culprits. The group s EBITDA margins shrank from 26% in FY10 to 19% in FY13. Fig 2. NMHL s recurrent PAT evolution & key ratios against the industry CORPORATE STRUCTURE I. Overview NMHL built its first beach resort in Mauritius in Today the group owns and operates eight (8) resorts mid-market (4-Star) to luxury (5-Star +) in Mauritius, a 5-Star island resort in the Seychelles, and recently opened a luxury hotel, the Royal Palm Marrakech (RPM), in Morocco. The group has diversified from its core hotel ownership-cum-management operations into catering, tour operations, and property development. II. Lines of Business Hotels NMHL s Mauritian hotels are well located: the majority are concentrated along the balmier north-west coastline and thus also shielded from the trade wind blowing from the south-east. Two other up-segment hotels lie on the exquisite Morne peninsula a prime location for kite surfing share a golf course, while the Shandrani adjacent to the Blue-Bay marine park is close to the airport. In Seychelles, Ste Anne is next to Mahé; and in Morocco, the Royal Palm is located on the outskirts of Marrakech facing the Atlas Mountains. 3

4 NMHL Fig 3. NMHL s business segments Property Fig 4. Geographical distribution of NMHL hotels in Mauritius NMHL engaged into property development as early as 2006 when it acquired land near Marrakech in Morocco, followed by the III. Shareholding acquisition of land at Les Salines Pilot on the west coast of NMHL s shareholding has a high free-float with only two very large Mauritius in NMHL intent was to follow the Integrated shareholders: ROGE and Mr Couacaud. During the ENL Group s re- Resort Scheme (IRS) promoted by the Government of Mauritius, organisation process, ENL Investment (ENIT) had emerged as the i.e. the development of luxury gated residences aimed at high net- 3 shareholder with a 5.5% stake in FY-12. Since, ENIT has brought worth persons which would be annexed to a golf course and/or the figure down to 2.3%. Given the high level of free-float shares, marina and/or up-market hotel. NMHL after the two blue-chip banks is the most traded rd company on the Stock Exchange of Mauritius (SEM). The group s Mauritian development is on hold due to litigation. In Morocco, the Domaine Palm Marrakech project is coming to fruition. The group overcame set-backs which included a dispute with their original partner and difficulty securing bank financing to complete the stalled site. Tour Operations After acquiring, White Sand Tours, which had been placed under administration in 2010, NMHL proceeded with the consolidation of its tour operations business by taking over control of Mautourco & Hertz car rental from Rogers Co Ltd (ROGE). This cluster generates ~17% of group revenue. Catering Catering NMHL s smallest business segment produces ready-to- Fig 5. NMHL s shareholding structure eat frozen packaged meals as well as hot meals for the workplace. This business which was re-engineered following the loss of inflight catering contracts. 4

5 MARKET PERFORMANCE I. Share Price The Travel & Leisure (T&L) industry outperformed the market in The sector rocketed by 57% thus making it 2013 s best performing sector. Improved tourist arrivals figures turned investor sentiment around, thus propelling hotel counters up from multiyear lows. On a Year-on-Year (YoY) basis, NMHL (+20.4%) beat the SEMTRI (+10.6%) and the ALEX-20 (+10.8%); but scurried less than peers SUN (+43.6%) and LUX (+108%). On a Year-to-Date (YTD) basis, the picture is slightly different: the sector has underperformed the broader market. Profit taking in the wake of 2013 s strong rally was inevitable, and investor sentiment cooled after Q1-14 arrivals growth figures turned out to be below expectations. NMHL gave up 4.9% in contrast to the SEMTRI lost 0.02% while the ALEX-20 edged up by +1.2%. NMHL also underperformed compared to peers SUN (-2.6%) and LUX (+9.4%). Fig 7. Probability distribution function of day-to-day changes (measured in tick-sizes instead of Rs or %). Data: 279 sessions prior to and post split. Fig 6. NMHL s stock price performance against peers and benchmark Tick-size change A change in the minimum step-size for price changes was precipitated by SBM s out-of-the-ordinary share split in Feb-12. The smaller 25-cent movement on NMHL has given investors greater wiggle room and led to increased 5 execution frequencies. Prior to the change, NMHL closed within ±1 ticks 70% of the time, since, closed with movements > ±1 ticks 43% of the time. I. Foreign Participation The Travel & Leisure (T&L) sector has seen its market share of foreign investor trades half from 21% in 2010 to 10% in This relegation to 3 rd spot is not reflective of a lack of interest for the sector, but because of the listing of foreign owned companies investing in REITs and/or Real-Estate. Overseas funds investing in African & Frontier markets have continued to seek Financial stocks (blue chip banks) followed by T&L counters. Within the sector, NMHL 6 has consistently dominated Foreign Investor Participation (FP) with a share exceeding 80%. Fig 8. Share of foreign activity within T&L sector 5 No. of untraded sessions halved in the period since the split compared to the corresponding period prior to the split 6 3 rd most traded stock by foreign investors 5

6 The direction of foreign flows into T&L has been dictated by both Mauritian fundamentals and global direction of flows in-and-out of asset and sub-asset classes. NMHL has historically stood above the crowd and registered substantial inflows, however 2014 has been different in that net inflows are much lower than in recent years. Nonetheless, this current spell could prove to be a transient amid profit taking in the wake of hotels stellar 2013 performance. VALUATION & RECOMMENDATION Our fragmented tourism industry is still attuning itself to the postcrisis operating environment: core markets in decline, poor connectivity and a stable currency. Revenue per Visitor has fallen to its lowest in years, and burgeoning Chinese market has made its way into the Top 5. Hoteliers that have been slow at embracing this change will continue to struggle. Further, the increasing presence of global brands in Mauritius will make a complicated operating environment even harder for local hotels. American household names such as Hilton, Four Seasons, St Regis, and Outrigger have opened shop; in addition to the above Asian behemoths The Oberoi, Angsana and Centara are also present. The Shangri-La is also expected to take over SUN s Touessrok in the near future. In our opinion, swift adaptation to change and product differentiation/mauritianisation will be key in driving survival in an increasingly competitive industry. Fig 9. Net portfolio investment on liquid hotels In recent years, foreign participation on hotel stocks other than NMHL has been on the decline. This trend has been in-line with the sector s sub-par profitability and extreme gearing levels. NMHL managed to stand above peers has experienced steadily increasing levels of foreign participation because of its high PAT in absolute terms, historical track record, and innate inclination of funds to gravitate towards liquid large caps. NMHL s forward growth will stem from its hotels while property sales proceeds 7 are expected to be used to pay down debt. Success in real estate development thus reducing indebtedness will be determining factor in bringing NMHL s bottomline to levels last seen in Domestic hotels are expected to continue experiencing stagnating rates although the occupancy improvements are a positive sign. The group s most promising domestic upside stems from the renovated smaller Royal Palm where improvements in both margins and rates should be possible. Abroad, the opening of RPM bodes well for the group and could generate an additional Rs1 to Rs2 in EPS after the initial teething period. Also experienced gained in competing against global brands in Marrakech, could help the group better compete against the increasing presence of global brands in Mauritius. Fig 10. Extent of foreign participation on liquid hotels and SEM Assuming RPM does not reach optimal levels before FY15 and tabulating villa sales proceeds as exceptional items, we forecast NMHL s FY14 PER to stand at 53.6x then 35.0x in FY15. While these PER figures are below the Industry PER of 89.3x, it does stand above the ALEX-20 PER (16.3x) and Total Market PER (14.5x). NMHL s PEG Ratios remain negative until FY15. Although we would have preferred dividends be used to reduce gearing, DY is estimated to reach 1.2% in FY15. DER which stood at 113% in FY13 is unlikely to fall below 100% until FY15. Assuming NMHL pays down borrowings at Rs1bn per year over the next two years using DPM proceeds, Debt per Share then declines to Rs86. In spite of the above metrics, in anticipation by year end of positive realestate cash inflows stemming from Marrakech, we upgrade NMHL s rating from Reduce to Hold. 7 AXYS shall treat this income as a non-recurrent item 6

7 Appendix A I. Calculations Methods Bottom-line profit figures, e.g. Profits after Tax, Attributable Earnings, and EPS have been adjusted for non-recurrent or exceptional items. All per Share metrics or calculations requiring the No. of Shares have been computed using a single constant. AXYS has used the total number of issued shares by the company excluding treasury shares as given by its latest annual report. II. Price to Earnings Growth (PEG) Ratio III. Turnover per Room PEG Ratio 0 PEG < 1 Under-valued PEG = 1 Fair-Valued PEG > 1 Over-valued III. Revenue per Occupied Room References Bank of Mauritius, Monthly Statistical Bulletin, Jul 2007 Apr 2014., Annual Report, New Mauritius Hotels Hotels Ltd, Interim Results, Q1-07 Q2-14. Disclaimer AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission. IV. Enterprise Value per Room ( ) Authors Bhavik Desai Head of Research Melvyn Chung Kai To Trader Vikash Tulsidas Manager 7