Aitken Spence Hotel Holdings PLC (AHUN.N0000)

Transcription

1 Sri Lanka Hotels and Travels EQUITY RESEARCH Initiation of coverage 11 October 2013 Aitken Spence Hotel Holdings PLC (AHUN.N0000) Check-in for growth Aitken Spence Hotel Holdings PLC (AHUN) is the second-largest company in the hotels and travels sector on the Colombo Stock Exchange (CSE) by market capitalization. Its parent company is Aitken Spence PLC (SPEN) the third-largest diversified company listed on the CSE. AHUN is a leading operator in the tourism resort sector, owning resorts in Sri Lanka (24% of FY13 revenue) and the Maldives (70%, according to our estimates), where it is the largest Sri Lankan operator. AHUN also manages several hotels in Oman and India. The company currently has a room inventory of almost 2,000 rooms across these four countries, growing to about 2,300 in FY16E. We expect AHUN to post a revenue CAGR of 11.5% over FY14E-FY16E and its earnings before tax (EBT) margin to expand 131bps to 29.0% in FY16E. We believe the company s top line and profit growth should originate primarily from Maldivian resorts, which post higher occupancies and average daily rates (ADRs), and thereby higher margins, than the other countries AHUN operates in. Growth in Sri Lanka could be tempered by lower-than-expected occupancy levels at beachside resorts. We arrive at a valuation range of LKR62-81, compared with the current share price of LKR69 as of 10 October 2013, using DCF and P/E analyses. We estimate AHUN s revenue to grow at an 11.5% CAGR over FY14E-FY16E. This revenue growth should be driven primarily by continuing strong performance from AHUN s Maldivian resorts, the largest contributor to AHUN s top-line with just over 70% in FY13, according to our estimates. The business as a whole would benefit from a 405bps increase in blended occupancy rates, a 15.3% rise in room inventory and a CAGR of 4.3% in blended ADRs. Occupancy rates in all four countries should be driven by growing tourist arrivals, although sluggish occupancy levels at its Sri Lankan beach resorts remains a concern. EBT margin should expand 131bps through FY16E. Driven once again by the higher-margin Maldivian operations, we forecast AHUN s EBT margin to increase to 29.0% in FY16E from 27.7% in FY13. Increased revenue inflow as well as efficient cost management efforts on the part of AHUN should drive this margin expansion. Margins should, however, face some pressure from rising electricity, labor and food costs. AHUN s low gearing and net cash position should allow for expansion. When compared to a sample of its closest local peers, AHUN appears to be more stable, with a net cash position in 1QFY14, and cash and cash equivalents making up 20% of total assets in the same period. The company has also maintained a relatively low gearing level over the past few years 19% in 1QFY14 which, together with its steady free cash flow (FCF) generation, bodes well for AHUN to take on and finance future projects, without negatively impacting its financial position. However, apart from current projects underway, no further expansion plans have been reported yet, although the company does own suitable land resources to do so. We establish a share price range of LKR62-81, compared with the current share price of LKR69. We have used DCF and scenario analysis as one method in valuing AHUN. Our bull- and bear-case scenarios consider the effect of potential upside and downside to our base-case forecast levels of occupancy and ADR growth, yielding a valuation range of LKR We have also used P/E analysis to determine that AHUN currently trades at an FY14E P/E of 13.0x, a 5% discount to its historical 12- month forward P/E of 13.6x. We have also considered several optimistic and negative factors that could affect our valuation estimates. Key statistics CSE/Bloomberg tickers Share price (10 Oct 2013) No. of issued shares (m) Market cap (USDm) Enterprise value (USDm) Free float (%) 52-week range (H/L) Avg. daily vol. (shares,1yr) Avg. daily turnover (USD 000) AHUN.N0000/AHUN SL LKR % LKR80/64 20, Source: CSE, Bloomberg Note: USD/LKR=128.8 (average for the one year ended 10 October 2013) Share price movement 120% 100% 80% Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 AHUN ASPI S&P SL 20 Source: CSE, Bloomberg Share price performance 3m 6m 12m AHUN -4% -14% -8% SPEN -9% -15% -13% S&P SL 20-3% -7% 6% All Share Price Index -2% -5% 4% Summary financials LKRm (year end 31 March) E 2015E Revenue 11,567 12,099 14,199 EBITDA 3,900 4,091 4,837 EBT 3,201 3,393 4,067 Net profit 2,736 2,841 3,457 Recurrent EPS ROE (%) P/E (x) Source: AHUN, Amba estimates 1

2 Table of Contents AHUN s revenue to grow at an 11.5% CAGR over FY14E-FY16E... 3 Revenue growth driven primarily by robust Maldivian operations... 3 Upside and downside risks to AHUN s estimated revenue... 6 EBT margin to expand 131bps to 29.0% in FY16E... 7 We anticipate strong occupancy levels at higher-margin Maldivian resorts to drive EBT growth... 7 Downside risks to margins... 8 Low gearing and net cash position could support future expansion... 9 We establish a valuation range of LKR62-81 for AHUN shares DCF analysis yields a valuation range of LKR62-81 per share P/E analysis yields a fair value range of LKR65-80 per share Sources of potential upside/downside Relative valuation data used as a measure of comparison Share price performance Earnings release focus areas Appendix 1: AHUN s position in the resort hotel sector AHUN s expansion activities aim to benefit from growing tourism industries in the Maldives and Sri Lanka Sri Lankan resorts appear expensive compared with regional peers Appendix 2: Company overview AHUN s key business regions Management strategy, transparency and governance Shareholding structure Board of directors Appendix 3: Key financial data Appendix 4: SWOT analysis Fact Sheet

3 AHUN s revenue to grow at an 11.5% CAGR over FY14E-FY16E We expect AHUN s top line to benefit from its continuing strong performance in the Maldives, resulting in an 11.5% revenue CAGR through FY16E to reach LKR16.0bn. AHUN s Sri Lankan operations are likely to improve over our explicit forecast period, driven by the opening of Heritance Negombo (formerly Browns Beach Hotel in a beach town 40km north of Colombo) as well as the 90-room expansion of The Sands in Kalutara (a sea front property about 44km south of Colombo) and the addition of 30 rooms at Earl s Regency (roughly 100km from Colombo, in the central region of the country), in time for the start of the peak tourist season in FY15E, contributing to a 15.3% increase in total room inventory, and steadily increasing occupancy rates. In addition, operations in both countries should benefit from increasing average daily rates (ADRs). The company s managed operations in Oman and India should also continue to contribute to revenue growth, although these countries account for only a modest portion of total revenue. Maldivian resorts are likely to be the main driver of revenue growth Figure 1: AHUN s top line should grow at an 11.5% CAGR over FY14E-FY16E LKRm 18,000 13,500 9,000 4,500 YoY growth 30% 25% 20% 15% 10% 5% - FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E 0% Revenue (LHS) YoY growth (RHS) Source: AHUN, Amba estimates Revenue growth driven primarily by robust Maldivian operations AHUN s Maldivian operations account for the majority of its total revenue although the company does not disclose the exact figure, we estimate this to be slightly over 70% in FY13. AHUN s resorts in the Maldives are able to charge significantly higher ADRs, in line with rates at other large luxury resorts in the islands and reflecting the upmarket, affluent clientele these resorts cater to. Revenue from the Maldives should additionally receive a boost from the opening of 34 new villas and the restoration of the 17 villas damaged in a fire in July 2013, all of which are scheduled to commence operations in FY15E, bringing the company s total Maldivian room inventory to 644 in FY16E. In the absence of other concrete plans, we conservatively assume that the room count of 191 in India and 441 in Oman will remain flat over the forecast period. We expect blended occupancy levels for the entire South Asian segment to rise to 78.0% in FY16E from 73.5% in FY13 due to continuing strong performances, primarily in the Maldives and Oman. While making only a modest contribution to total revenue, AHUN s Omani and Indian operations are likely to see an improvement in both occupancy rates and ADRs due to the uptake in the tourism industries in both countries. Maldives revenue driven by 8.1% CAGR in tourist arrivals over FY14E-FY16E The Maldivian government expects tourist arrivals in the country, where tourism accounts for roughly 27% of the GDP and generates roughly USD1.9bn in tourism receipts, to reach 1m in 2013 and to post a CAGR of 8.1% over FY14E-FY16E. Tourism growth should also be supported by rising investment levels in the travel and tourism sector the World Travel and Tourism Council (WTTC) forecasts a CAGR of 3

4 4.1% over to account for 31.5% of total investment in the country. Occupancy rates at AHUN s Maldivian resorts (at almost 90%) in FY13 are significantly higher than the average group level blended rate (69%). Occupancy levels in the Maldives do not generally fluctuate significantly from quarter to quarter, reflecting the island destination s year-round popularity. This trend is further aided by increasing numbers of Chinese tourists, who are now the largest arrival group to the country and flock to the Maldives throughout the year. The Maldivian Ministry Of Tourism, Arts And Culture (MOTAC) expects a sharp rise in occupancy levels to 81.6% in 2013 from 70.4% in 2012, which we believe may be slightly too optimistic, while total tourist bed nights are forecasted to increase 9.1% YoY in With three new resorts scheduled to open in 2013, bed capacity is expected to rise only 1.6% for the year (refer to Appendix 1 for further details on the Maldivian tourism sector). We anticipate AHUN s Maldivian resorts to continue to enjoy almost 90% occupancy over our forecast period. Figure 21 also illustrates that AHUN s occupancy rates in the Maldives in the recent past have been higher than the average of all other resorts in the country reflecting AHUN s strong position in a highly competitive environment. We forecast blended ADRs in AHUN s South Asian segment to grow at a 5.6% CAGR through FY16E, which we believe is sustainable, due primarily to the increasing popularity of the Maldives as a premier long-haul destination and the country s growth in tourist arrivals. We expect this segment s operations, which also include AHUN s Omani and Indian managed hotels, to post an 8.7% revenue CAGR over FY14E-FY16E, driven by growing occupancy rates, rising ADRs and a 2.7% increase in room inventory, with the addition of 34 new villas. Occupancy levels at AHUN s Maldivian resorts were 89% in FY13 Figure 2: Blended occupancy in South Asia to grow to 78.0% from 73.5% in FY13, while blended ADRs post a 5.6% CAGR over FY14E-FY16E LKR 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - FY10 FY11 FY12 FY13 FY14E FY15E FY16E ADRs (LHS) Occupancy (RHS) 100% 80% 60% 40% 20% 0% Source: AHUN, Amba estimates Oman s growing tourism industry should contribute to revenue growth at AHUN s managed hotels Oman s emergence as a tourist destination the country saw a record 2.6m inbound tourists in 2012 and new infrastructure in the form of an international airport and a large-scale convention and exhibition center, bode well for AHUN s 441-room operations in the country. On the back of improved occupancy rates and higher room rates, the company reported 34% YoY revenue growth in Oman in FY13. We expect this trend to continue owing to the country s growing popularity as a tourist destination and the Omani government s ambitious target of 12m tourist arrivals by 2020, as well as growth in disposable income in the region. AHUN s parent Aitken Spence PLC (SPEN) has indicated that the company may consider restructuring its Indian operations, as its investments in the country have not been performing as well as expected. 4

5 Occupancy rates at Sri Lankan resorts to increase 5.5ppt, while ADRs should increase 4.9% annually through FY16E AHUN s Sri Lankan resorts, which account for about 24% of net revenue, should also contribute to the company s revenue growth. We believe occupancy rates at the local properties will rise to 66.7% in FY16E from about 61.2% in FY13, driven by the country s rapid growth in tourist arrivals (forecast to rise at a 28.0% CAGR through 2016E). However, occupancy at AHUN s beach resorts remains a concern, with only a sluggish pick-up in rates reported in the recent past. Revenue growth would be supported further by increasing ADRs, which we expect to post a 4.9% CAGR over FY14E-FY16E. We also factor in a 36.3% increase in AHUN s Sri Lankan room inventory by FY16E to a total of 1,013 rooms, with the additions of the 150-room Heritance Negombo, 90 rooms at The Sands and 30 rooms at the Earl s Regency Hotel in Kandy, all in FY15E. Occupancy in Sri Lanka may be affected by lower-thanexpected levels at the beach resorts Figure 3: Occupancy levels at Sri Lankan resorts to rise to 66.7%, while ADRs post a 4.9% CAGR over FY14E-FY16E LKR 20,000 70% 15,000 10,000 35% 5,000 - FY10 FY11 FY12 FY13 FY14E FY15E FY16E 0% ADRs (LHS) Occupancy (RHS) Source: AHUN, Amba estimates Figure 4: AHUN s room inventory to increase 15.3% by FY16E across all countries No. of hotel rooms 2,500 2,000 1,500 1, YoY growth 20% 15% 10% 5% 0% 0 FY12 FY13 FY14E FY15E FY16E Sr Lanka Maldives Oman India YoY growth -5% Source: AHUN, Amba estimates 5

6 Upside and downside risks to AHUN s estimated revenue New resort projects. We believe that AHUN is keen to expand its resort portfolio, and has suitable land and funding resources to take on new projects in the medium term. The company has identified several specific properties, such as lands in Ahungalla (adjoining its existing resort), within the Galle fort (a large city roughly 100km south of Colombo) and in Trincomalee (250km from Colombo on the island s eastern coast), which could be utilized for new resorts and are owned by either AHUN or its parent company Aitken Spence PLC (SPEN). While these properties fit in with the company s strategy of operating resorts in scenic locations, we believe that AHUN will go ahead with new developments only if it believes that the projects can achieve returns that meet its expectations. AHUN disclosed that it is also exploring the possibility of expanding to new islands in the Maldives, again subject to meeting the company s investment cost and return targets. Expansion of current resorts. Although AHUN has not disclosed any new expansion plans at its existing resorts, other than the ones that are already underway, we believe the company may choose to increase the room count at certain hotels in order to meet the expected increase in tourist traffic. Again, any plans would be subject to meeting the company s expected level of returns. Appeal to the growing MICE market. With Sri Lanka witnessing increasing traffic from the MICE (meetings, incentives, conferences and exhibitions) market, AHUN has recently made a concerted effort to equip some of its premier resorts with facilities to attract such visitors. Heritance Ahungalla already has banquet/conference facilies and a new, modern conference hall was completed at Heritance Kandalama in FY13 which can accomodate 300 heads. AHUN is particularly keen to attract regional MICE traffic to its hotels, primarily from India. Since the MICE market typically generates higher revenue than leisure visitors, its ability to attract more business travellers should provide further momentum to AHUN s revenue growth. Increasing threat from competitors. AHUN s closest rivals in the Sri Lankan resort market are large local operators such as Jetwing Hotels and John Keells Hotels, which also run several resorts in similar locations and often offer lower, discounted rates in order to attract higher visitor traffic. The company is also facing intensifying competition from standalone boutique hotels and informal lodging establishments such as guest houses and home stays the latter is most often a cheaper form of accommodation that appeals to increasingly cost-conscious travellers. Several international hotel chains including Shangri-La and Centara are also set to enter or expand their presence in the local market in the short term (2014E), which may possibly impact AHUN s occupancy levels and ADRs if tourists choose to stay at a resort with a global brand name due to the assurance of a high-quality experience at these hotels. Macro-level industry challenges. The numerous challenges facing Sri Lanka s tourism industry may limit AHUN s growth in the tourism segment and may stand in the way of the government s target to increase total tourist arrivals in the country to 2.5m in 2016 from 1.0m in 2012 (up 17% YoY). Tourist visits to Sri Lanka substantially lag those to other countries in Southeast Asia. In 2012, the Philippines recorded 4.3m tourist arrivals (up 9% YoY), Vietnam received 6.8m arrivals (up 13% YoY) and Indonesia reported 8.0m visitors (up 11% YoY). Sri Lanka s tourism infrastructure in terms of airports, roads and transportation, and services while developing at a rapid pace, still lags that in other countries in the region. Higher ADRs than regional peers. AHUN and its Sri Lankan peers may be losing out to several other tourism hotspots in the region due to the higher ADRs charged on average. This may affect the company, as more travellers, particularly from economically troubled developed countries, seek value-for-money holidays. Refer to Figure 25 for a more detailed comparison of AHUN s ADRs with those of its peers from regional countries. Potential new hotels and increasing MICE traffic may provide potential upside to revenue 6

7 EBT margin to expand 131bps to 29.0% in FY16E We expect AHUN s EBT to grow at a 13.3% CAGR over FY14-FY16E and the margin to expand 131bps to 29.0% in FY16E. This growth should be supported by the steadily growing operations at its resorts, especially in the Maldives, which records higher-than-group-level margins, primarily due to the higher rates charged. While most players in the hotel industry have to contend with a high fixed-cost base, which is incurred even during periods of low occupancy, AHUN s Sri Lankan hotels are currently grappling with increasing electricity, labor and food costs in particular. Figure 5: AHUN to post an EBT CAGR of 13.3% over FY14E-FY16E LKRm 5,000 4,000 3,000 2,000 1,000 EBT margin 30% 20% 10% 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Sri Lanka South Asia EBT margin 0% Source: AHUN, Amba estimates We anticipate strong occupancy levels at higher-margin Maldivian resorts to drive EBT growth We expect AHUN s EBT margin expansion to 29.0% in FY16E from 27.7% in FY13 to be driven mainly by the higher revenue inflows from its hotel operations in the Maldives and Sri Lanka. While the cost base of the Maldivian resorts is also on the rise, led by growing transport and food expenses, this is mitigated by the much higher ADRs charged. AHUN has so far been able to avoid any significant drop in margins, which we believe could be due to the noteworthy performances at its Kandalama, Tea Factory and Maha Gedara hotels in particular; the latter is based on a wellness concept and is frequented mainly by German tourists who stay for longer periods compared with conventional hotels. Some of the most significant costs facing AHUN and other players in the Sri Lankan industry are listed below. Electricity cost. Although AHUN does not disclose what portion of its cost base is accounted for by electricity costs, we believe this should be a sizeable portion, as it would be for all other large hotels. With the 40% hike in electricity tariffs imposed in April 2013, we believe there could be additional pressure on margins. AHUN may be able to pass on this increased cost to visitors by revising its current ADRs, which are already higher than close regional peers. Labor cost. The increasing shortage of qualified labor resources is a growing concern for the leisure industry as a whole, particularly as several new hotel projects are scheduled to enter the market over the next few years. In addition, there are also ongoing discussions over imposing a 40% increase in the current minimum wage for employees in the industry, which we believe would certainly affect margins in the local leisure industry. Food cost. This is another cost that accounts for a modest portion of total cost, primarily due to the high taxes on imported food. This is unavoidable however, since for hotels of AHUN s repute, such food items are a necessity in their restaurants. EBT margin expansion is likely to be driven mainly by the Maldivian operations 7

8 In an attempt to bring down its energy and water costs, AHUN has implemented several environment-friendly, energy management systems such as bio-mass gasifiers, sewage treatment plants water for irrigation, energy-efficient lighting (CFL bulbs) and solar systems at several of its properties. Although these measures currently yield only minimal energy cost savings for AHUN, we believe that their use will increase at the company s hotels and could lead to modest cost savings, thereby supporting the expansion of the EBT margin. Downside risks to margins Further hikes in electricity costs. Energy costs in Sri Lanka could rise further and put an even bigger strain on AHUN s current margin levels. As the company still relies on conventional power sources for the majority of its energy needs, such increases may have a sizeable impact on profitability. Shortage of labor. This is not a significant problem for AHUN yet, according to its management, but it may prove to be a worry if the company decides to expand its operations. An industry labor shortage may also drive up wage costs, thereby pressuring margin levels. Rising electricity and labor costs may restrict EBT margin expansion 8

9 Low gearing and net cash position could support future expansion In comparison to a sample of its local peers, AHUN is the only company that enjoys a net cash position, with cash and cash equivalents, including short-term investments, making up approximately 19% of market capitalization and 20% of total assets as of 1QFY14. AHUN currently enjoys a net cash position and low levels of gearing compared with local peers Figure 6: AHUN has maintained a strong net cash position relative to its peers LKRm 1,000 (1,000) (3,000) (5,000) (7,000) Aitken Spence Hotel Holdings PLC Keells Hotels Plc Kandy Hotels Plc Taj Lanka Plc Amaya Leisure Plc Source: AHUN, Bloomberg Note: Data as of 1QFY14 AHUN s gearing levels (debt to total capital) are also fairly low, at 19% in 1QFY14, having remained below 30% over the past three years. We believe that the company s net cash position and relatively low gearing levels would allow it to take on new investments, in the form of constructing new resorts or expanding existing ones, without burdening its financial position to the point of concern. AHUN s management has indicated that the source of funding for any new investment will be decided based on the size of the investment required. AHUN s free cash flow (FCF) generation should also provide further support for new investments; almost LKR4bn was generated over the past two years, at an average FCF yield of 8.1% over the period, compared with an average of 1.7% generated by local peers (refer to Figure 12). Figure 7: AHUN s debt levels have declined over the past four years LKRm 1,000-1,000 Source: AHUN FY10 FY11 FY12 FY13 1QFY14 Net (debt)/cash Gearing 40% 35% 30% 25% 20% 15% 10% 5% 0% 9

10 The above considerations place AHUN in a relatively steady position, enabling it to finance any further additions to its hotel portfolio. The company could use a combination of internally generated funds and external debt funding for such investments. Being a subsidiary of SPEN, and with its own formidable presence in the country, AHUN is in a favorable position to borrow at more attractive rates and with greater ease than others. 10

11 We establish a valuation range of LKR62-81 for AHUN shares We establish a 12-month price range for AHUN shares of LKR62-81, compared with the current share price of LKR69, based on our current earnings outlook. Our valuation range analysis is based on DCF and P/E-based relative valuation techniques, and we set out the most important factors that could provide an upside/downside to our valuation range. For comparison, we also assess AHUN s valuation levels relative to a group of peers. Figure 8: Valuation range analysis provides a range of LKR62-81 per share (current share price LKR69) DCF P/E analysis week range Source: AHUN, Bloomberg, Amba estimates 0 DCF analysis yields a valuation range of LKR62-81 per share In valuing AHUN shares, we applied a DCF approach and made explicit EBIT forecasts for the company as a whole. Our base-case assumption of a risk-free rate of 10.7% and a market risk premium of 5.0% yield a value per share of LKR68. We have also adjusted these assumptions to further consider for bull- and bear-case scenarios, yielding a valuation range of LKR Other elements of our valuation approach include the following: AHUN s current capital structure comprises 14% debt and 86% equity. We have assumed a 20% debt and 80% equity target capital structure, and a terminal growth rate of 1.5%. Figure 9 sets out our DCF assumptions in detail. We have estimated the following: EBIT and FCF figures throughout the explicit and fade periods Terminal value at FY23E, calculated by applying a terminal growth rate to unleveraged FCF, as of FY23E Finally, we arrived at our enterprise value (EV) by discounting the unleveraged FCF values over the explicit and fade periods at WACC. Our base-case assumptions include a risk-free rate of 10.7% and a market risk premium of 5.0% 11

12 Figure 9: Amba DCF assumptions (base case) Explicit forecast period 3 years Fade period 7 years WACC 15.0% Effective tax rate 15.0% Terminal growth rate 1.5% Risk-free rate 10.7% Equity risk premium 5.0% Beta 1.1 Cost of equity 16.2% Cost of debt 12.0% Debt/capital 20.0% Equity/capital 80.0% Source: Amba estimates We have also constructed bull- and bear-case scenarios to supplement our base-case DCF valuation, mainly based on our projections for AHUN s occupancy and ADRs in both segments. The key distinguishing factors of these are as follows: Bull-case scenario: Under this scenario, we assume that both AHUN s segments will perform better than our expectations, with blended occupancy rates rising to 74.1% (vs. our base case assumption of 73.0%) by FY16E. Further, we assume that blended ADRs will grow at a CAGR of 4.9% (vs. our base case of 4.3%) over FY14E-FY16E. These factors would likely push the revenue CAGR to 12.8% through FY16E, compared with our base-case projection of 11.5%, leading us to a share price of LKR81. Bear-case scenario: The potential downside we estimate for the explicit forecast period assumes a 1% decline in occupancy levels in Sri Lankan resorts, compared with our base case, due to lower-than-expected traffic at AHUN s local resorts. Blended occupancy levels under this scenario would reach 72.0% in FY16E (vs. our base-case assumption of 73.0%) and blended ADRs would grow at a 3.3% CAGR (vs. our basecase assumption of 4.3%). This would lead to a revenue CAGR of 10.1% (compared with 11.5% in our base case), yielding a share price of LKR62. Figure 10: Bull- and bear-case scenario analysis assumptions Base case Bull case Bear case FY13 FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E Net revenue 11,567 12,099 14,199 16,049 12,234 14,495 16,592 11,876 13,772 15,420 YoY growth 25.8% 4.6% 17.4% 13.0% 5.8% 18.5% 14.5% 2.7% 16.0% 12.0% Blended occupancy rate 68.9% 69.4% 67.5% 73.0% 70.0% 68.2% 74.1% 68.6% 66.6% 72.0% Blended ADR (LKR/day) 23,893 24,990 25,926 27,086 25,068 26,176 27,570 24,798 25,487 26,372 YoY growth 25.1% 4.6% 3.7% 4.5% 4.9% 4.4% 5.3% 3.8% 2.8% 3.5% Source: AHUN, Amba estimates 12

13 P/E analysis yields a fair value range of LKR65-80 per share AHPL s 12-month forward P/E has ranged between roughly 7x and 35x since FY10. The share s 12-month historical forward P/E stands at 13.6x. The stock currently trades at 13.0x its 12-month FY14E forward EPS (based on our forecasts) a 5% discount to its 12-month historical average. Figure 11: AHUN has traded at a P/E of between 7x and 35x over the past three years LKR Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Source: AHUN, Bloomberg 7x 14x 21x 28x 35x MPS In determining a P/E valuation range, we apply two scenarios: Optimistic scenario: In this scenario, we applied an improved valuation outlook that could stem from a number of positive developments, such as continued strength in tourist arrivals and improvements in occupancy rates and ADRs. Further, the continuing level of EPS growth could justify this premium. We applied a 10% premium to the 12-month historical P/E average and arrived at a forward multiple of 15.0x. Applied to our forecast FY14E EPS figure of LKR5.33, this yields a share price of LKR80 per share. Conservative scenario: Here we assume a 10% discount to AHUN s current 12-month average, implying a forward multiple of 12.3x. This could be driven mainly by lower tourist arrivals than the government estimates and a decline in occupancy rates at AHUN s resorts, especially beachside properties due to a lower number of guests patronizing these hotels in favour of lower-priced accomodation. Applying this multiple to our FY14E EPS estimate gives us a value of LKR65 per share. Our optimistic scenario applies a 10% premium for continuing rapid tourist arrival growth and rising occupancy levels, while our conservative scenario assumes a 10% discount to account for lower-thanexpected tourism growth and continuing weakness in beach resort occupancy levels Sources of potential upside/downside Tourist arrivals: If the local tourism authority s forecasts of tourist arrivals are achieved, demand for hotel rooms would increase sharply, driving up occupancy rates and ADRs, benefiting AHUN s hotel assets in Sri Lanka. Additionally, given the extremely competitive environment in the resort sector, even a modest improvement in tourist arrivals could result in overall outperformance of the industry. Domestic tourism: According to the World Trade Organization (WTO) research on domestic tourism in 2012, Sri Lanka has over 7m domestic tourists travelling to all parts of the island. Coupled with the ongoing efforts of the local tourism authority, the Sri Lanka Tourism Development Authority (SLTDA), such as the launch of domestic airline carriers, increasing disposable income levels of consumers should contribute to growth in the domestic tourism market. Land bank: Although no specific details have been disclosed, AHUN and its parent SPEN do hold a sizeable land bank, including several properties that could potentially be used to build new resorts in some of the most scenic locations in Sri Lanka. While no concrete plans for new developments have been formed as yet and would entail a lengthy planning phase and obtaining several approvals, we anticipate that AHUN would look to develop on these properties once it proves financially and operationally feasible to do so. 13

14 Relative valuation data used as a measure of comparison Figure 12 presents AHUN s valuation metrics relative to its peers. Figure 12: AHUN trades at an FY14E P/E of 13.0x P/E EPS CAGR FCF yield Company name E 2015E FY14E-FY15E Aitken Spence Hotel Holdings PLC 32.3x 17.3x 14.1x 13.0x 10.6x 11.5% 7.6% 8.7% Domestic peers Keells Hotels PLC 33.4x 16.6x 17.1x 12.6x 9.7x 19.5% -4.4% 1.0% Kandy Hotels PLC 80.9x 49.3x 37.1x NA NA NA 1.1% 0.3% Taj Lanka PLC 84.5x 34.0x 15.8x NA NA NA 3.4% 8.0% Amaya Leisure PLC 12.3x 12.6x 9.8x 6.9x NA NA 3.0% 3.9% Serendib Hotels 24.5x 65.3x 9.8x NA NA NA -16.1% 17.3% International peers ITC Ltd 27.9x 28.2x 31.9x 30.0x 25.3x 18.6% 2.5% 2.0% Indian Hotels Co Ltd NA 1,573.9x NA 56.7x 32.5x NM 0.8% -1.7% Shangri-La Asia Ltd 21.1x 17.3x 40.3x 28.8x 23.7x -32.6% 10% NA Mean 40.6x 31.9x 23.1x 27.0x 22.8x 1.9% 0.1% 4.4% Median 27.9x 28.2x 17.1x 28.8x 24.5x 18.6% 1.8% 2.0% High 84.5x 65.3x 40.3x 56.7x 32.5x 19.5% 10.5% 17.3% Low 12.3x 12.6x 9.8x 6.9x 9.7x -32.6% -16.1% -1.7% Source: AHUN, Bloomberg, Amba estimates *Note: We have excluded Indian Hotels Co Ltd from our P/E calculations in 2012 and the EPS CAGR calculation as it is an outlier No potential peer has an identical set of business segments. The companies listed in Figure 12 are largely resort operators, but may include a few with city hotel operations as well (e.g., Taj Lanka PLC). However, while the companies in the peer set are not a perfect match and lack financial data in the forecast period, they provide some measure of comparison with other regional players in the resort sector. 14

15 Share price performance AHUN shares closed at LKR69 on 10 October 2013, LKR6 lower than 12 months earlier, a decline of 8%, compared to a 6% increase in the S&P SL 20, a 4% increase in the All Share Price Index (ASPI) and a 13% decline in parent company SPEN over the period. Figure 13: In the last year, AHUN has underperformed the main indices, but fared better than SPEN Share price (LKR) Index values 250 8,000 7, , ,000 4, , Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 2,000 AHUN SPEN ASPI S&P SL 20 Source: CSE, Bloomberg As shown in Figure 14, over the past three years, AHUN has declined less than its parent SPEN, but much more than the two main indices on the CSE. Its more recent performance (over the past six months) indicates the same pattern. Figure 14: AHUN vs. key indices 3m 6m 1 year 2 years 3 years AHUN -4% -14% -8% 1% -40% SPEN -9% -15% -13% -14% -47% S&P SL 20-3% -7% 6% -3% -14% ASPI -2% -5% 4% -10% -13% Source: CSE, Bloomberg 15

16 Earnings release focus areas Here is a checklist of items that investors should track in the next and subsequent quarterly earnings releases. We will closely track AHUN s performance across these key areas, and revise our forecasts and update our valuation range in the earnings update notes. For the firm as a whole 1. Have any new developments been announced in any of the four countries? 2. Has there been an increase in debt levels? Is AHUN still maintaining a net cash position? Maldives 1. How have occupancy levels progressed during the period? 2. Is the construction of the 34 new villas and the repair of the 17 damaged villas on track? 3. Have any plans been announced to build or expand the current operations? Sri Lanka 1. What was Sri Lanka s occupancy level during the period? 2. Is there any indication of how occupancy levels at the beach resorts have fared? 3. Is the completion of Heritance Negombo and The Sands on track for 3QFY15E? 4. Has AHUN announced any plans to build new hotels on its existing land resources? 5. Has there been a decision on the imposition of the increase in the minimum wage for the leisure industry? Oman and India 1. Has AHUN reported any new management contracts in either country? 2. How have occupancy levels in Oman performed? 16

17 Appendix 1: AHUN s position in the resort hotel sector AHUN currently holds a portfolio of eight hotels in Sri Lanka, with a ninth opening in 2014, and six in the Maldives; the company also manages five hotels in Oman and five in India, which make only modest contributions to revenue. AHUN s properties in the Sri Lankan and Maldivian leisure sectors are currently focused on locations away from city centers in scenic or culturally-rich areas (many on beachside properties). Sri Lanka AHUN s current operations in Sri Lanka comprise three beachfront resorts, all of which are on the southern coast and a fourth to open in 2014, and five hotels in the central hill country. Its hotels currently contribute 8% of total room inventory on the southern coast up to Galle (roughly 100km from Colombo and the most popular region for resorts in the country) and 36% in the hill country, while its Heritance Kandalama hotel accounts for 16% of rooms in the ancient city region. In terms of occupancy levels (no breakdown is provided for each hotel), the beach resorts in particular have not performed as well as management expected. These resorts face stiff competition from smaller, standalone luxury boutique hotels, as well as lower-priced, no-frills establishments that appeal to budget travelers and backpackers who constitute a large portion of Sri Lanka s tourist arrivals. AHUN s occupancy rates in Sri Lanka are particularly affected by seasonality, as its main visitors are leisure tourists; occupancy rates are highest in its January-March quarter. Figure 15: AHUN is the second-largest room provider* in Sri Lanka, with a room inventory of 743 Figure 16: Growth of AHUN s occupancy rates for Sri Lankan resorts lags tourist arrivals Other 33% Aman Resorts 1% Hayleys Hotels 13% Source: AHUN, Amba estimates *Out of the major room providers Aitken Spence Hotels 17% Jetwing Hotels 13% John Keells Hotels 23% LKRm YoY growth 2,500,000 60% 2,000,000 40% 20% 1,500,000 0% 1,000,000-20% 500,000 FY10 FY11 FY12 FY13EFY14EFY15EFY16E -40% Arrivals (LHS) YoY growth - arrivals YoY growth - occupancy Source: AHUN, Sri Lanka Tourism Development Authority (SLTDA) In terms of tourist arrivals to the island, the largest number of visitors by continent of residence is from Europe and the Asia Pacific region, each accounting for 44% of total arrivals. The main individual countries are India (18% of arrivals), the UK (11%) and Germany (7%). As illustrated in Figure 17, the primary tourism markets have remained fairly constant over the past five years. Sri Lanka s tourism sector is growing at a much faster rate when compared with regional peers such as Thailand and Indonesia. However, these two countries see much higher tourist arrivals in absolute terms and have a more developed tourism industry in terms of infrastructure, particularly. AHUN s group revenue from rooms occupied accounted for 46% of revenue in FY13, while food revenue contributed 26% and beverage revenue made up 8%. 17

18 Figure 17: Arrivals have remained constant in terms of nationality Figure 18: Sri Lankan arrivals recorded a 23.1% CAGR over FY09-FY12, compared with the Thai CAGR of 11.3% and Indonesian CAGR of 6.6% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12 Europe Asia Pacific Middle East & Africa Americas YoY growth 50% 40% 30% 20% 10% 0% FY09 FY10 FY11 FY12-10% YoY growth (Sri Lanka) YoY growth (Thailand) YoY growth (Indonesia) Source: AHUN Source: SLTDA, Tourism Authority of Thailand, Indonesia Tourism Board In 2012, Sri Lanka recorded 1m arrivals to the island, which should have translated into a boost for AHUN and the rest of the hospitality industry. However, occupancy rates at AHUN s hotels in Sri Lanka increased only minutely to approximately 62% in FY13, according to management, from 56% in FY10. This may be due in part to the increasing influence of informal hospitality establishments, which are becoming more favorable with tourists. As these smaller hotels do not report their findings, it is difficult to say how much market share they are capturing from the larger hotel chains. However, data from the SLTDA shows that growth in foreign guest nights (FGNs) in graded establishments declined 2% YoY in 2012; total FGNs for 2012 were up 2%. Figure 19: Star class establishments are losing market share to informal accommodation options 100% 80% 21% 25% 60% 40% 79% 75% 20% 0% Star class Unclassified Source: SLTDA AHUN s Sri Lankan resorts have enjoyed favorable revenue growth in the recent past, with a 22.9% CAGR over FY09-FY13. After failing to be profitable in FY08 and FY09, the company experienced a turnaround and earnings before tax (EBT) rose at a 134.8% CAGR over FY11-FY13. We believe both revenue and profit would have been aided by the 18% depreciation in the LKR against the USD since FY08. 18

19 Maldives AHUN owns six resort properties in the Maldives under its Adaaran brand, accounting for 5% of resort room capacity in the islands, based on our estimates. AHUN is among the top-five largest resort operators in the Maldives, and is the largest foreign player in the country based on the number of rooms available. Occupancy rates in the island nation are higher than AHUN s average group rates 89.0% for FY13 vs. a blended rate of 68.9% for the group and higher than the 74% recorded for all resorts and hotels in the Maldives and experience higher levels of occupancy during November-April. The country is seen as an up-market destination and attracts high-spending tourists in search of a luxury holiday experience. Figure 20: Maldives AHUN is the largest foreign room provider in the Figure 21: Occupancy rates at AHUN s Maldivian resorts are higher than the national average Other 55% Aitken Spence Hotels 15% John Keells Hotels 9% Holiday Inn 8% Club Med 6% Anantara 7% Occupancy rate 100% 90% 80% 70% 60% 50% AHUN Maldives Source: AHUN, Maldivian Ministry of Tourism, Arts and Culture (MOTAC), Amba estimates Source: AHUN, MOTAC, Amba estimates Note: Figures for AHUN are for FY09-FY13 Tourist arrivals to the Maldives have been growing rapidly over the past two years; arrivals rose 15% YoY in 2012 (despite a brief period of political unrest in the country) and 17% in 1H13. European tourists make up the largest and most profitable tourist group in the Maldives. However, the number of tourists from North and South Europe has declined over the past few years, reflecting the troubled economic situation in these regions. Compensating for this, Asian arrivals have increased rapidly to account for 40% of all arrivals in FY13 compared with 25% in FY10, driven by their increasing number of affluent citizens with a growing penchant for travelling overseas. In particular, Chinese tourists now make up the largest tourist arrivals group holding a 24% market share and up 16% YoY in 2012 propelled by increasing disposable income, with the islands in the Indian Ocean increasingly seen as an elite destination among the country s rapidly expanding wealthy population. The Maldives is also benefitting from being given the approved destination status by the Chinese government and being promoted in China s media. In terms of accommodation, the Maldives has a large number of single independent resorts, in addition to the numerous group-owned resort chains. There has also been an increasing number of guesthouses that provide low-cost accommodation for visitors, which now account for 4% of all available beds in the Maldives, compared with just 2% in

20 Figure 22: In 2013, the proportion of European arrivals declined 23%, while Asian arrivals increased 60% since FY10 Figure 23: During FY09-FY12, Maldivian arrivals grew at an 8.8% CAGR, compared with the Thai CAGR of 11.3% and Indonesian CAGR of 6.6% Majority feeder countries 100% 80% 60% 40% 20% 0% Source: AHUN FY10 FY11 FY12 FY13 Europe Asia Other YoY growth 21% 16% 11% 6% 1% FY09-4% FY10 FY11 FY12-9% YoY growth (Maldives) YoY growth (Indonesia) YoY growth (Thailand) Source: MOTAC, Tourism Authority of Thailand, Indonesia Tourism Board AHUN s expansion activities aim to benefit from growing tourism industries in the Maldives and Sri Lanka According to the Maldivian Ministry of Tourism, Arts and Culture (MOTAC), around 3,000 new resort rooms are due to be completed by the end of 2016; 5,000 more resort rooms are planned with no expected completion date or progress disclosed. The ministry forecasts 11.8% growth in tourist arrivals to the Maldives in 2013, with occupancy rates to rise significantly to 81.6% from 70.4% in While we believe that this increase in occupancy levels may be slightly optimistic, arrivals may well reach the target forecast, potentially boding well for AHUN s resorts in the country. AHUN itself plans to add 34 villas at Hudhuranfushi by As for its Sri Lankan resorts, AHUN has no concrete plans to expand its operations over the near term. However, management has indicated that the company may develop its land base specifically in the popular tourist cities of Trincomalee, Ahungalla, Galle (Fort) and Beruwela, all coastal locations across the island. However, no concrete plans have been disclosed as of yet. AHUN s resorts in the country may stand to benefit from growth in tourist arrivals (local tourism authority forecasts a 28.0% CAGR through 2016E). Facilitating this expected growth is the rapid development of infrastructure in the country, including the construction of a second airport, a Southern express highway and the upcoming airport highway. Further, the government has also tried to appeal to tourists by simplifying the visa procedure by allowing visitors to apply for visas online, and processing these requests in a much shorter time span. AHUN s resorts also benefit from the lack of a prominent international player in the sector. Such large chains tend to focus more on the city hotel sector, with only two operators, Centara and Taj, having a presence (albeit limited) in the local resort sector, and Shangri-La expected to enter the market in Tourists tend to choose to stay at a resort with a well-known global name due to the assurance of high standards offered by these hotels. Therefore, this dearth in well-known foreign chains would have allowed AHUN to cement its position in the market and establish a strong reputation. 20

21 Figure 24: Foreign resort operators currently provide 395 rooms, growing to 936 by 2014 Name of hotel Estimated commencement of operations No. of rooms Vivanta by Taj, Bentota In operation 160 The Gateway Hotel (Taj) In operation 110 Centara Passikudah Resort & Spa Centara Ceysands Resort & Spa, Bentota 2014E (soft opening) 166 Shangri-La Hambantota 2014E 375 Source: Centara Hotels & Resorts, Shangri-La, Vivanta by Taj, Gateway Hotels & Resorts Sri Lankan resorts appear expensive compared with regional peers A pertinent reason that may explain why AHUN and most other resort operators are experiencing lower-than-expected occupancy rates, especially at their beach properties, may be their price strategy. Figure 25 illustrates that room rates at four and five star Sri Lankan resorts in the popular beachside city of Negombo are much higher than similar star-graded resorts in various popular regional resort cities. Prices at AHUN s own resorts are also higher than this regional average ADR figure. Combined with the relatively lagging state of infrastructure in Sri Lanka (although developing at a sound pace), and the more varied leisure activities and nightlife offered in the other cities (which may be lacking in Sri Lanka), such high prices may be discouraging to potential tourists, causing them to consider other regional cities more favorably. Figure 25: AHUN s average ADR is higher than the regional average of similar cities USD AHUN Goa, India Phuket, Thailand Average ADR per city Phu Quoc, Vietnam Boracay, Philippines Langkawi, Malaysia Average regional ADR Kuta, Indonesia Negombo, Sri Lanka Source: AHUN website, Asia Web Direct Note: Rates are including taxes for a double room for one night obtained on 26 th September

22 Appendix 2: Company overview Aitken Spence Hotels PLC (AHUN) is the tourism arm of Aitken Spence PLC (SPEN). It operates hotels in four countries: Sri Lanka, the Maldives, Oman and India, with a total room inventory of just under 2,000 rooms, which is set to grow to almost 2,300 by FY16E. Some of these hotels are owned by AHUN, while others are run under a management license. In total, AHUN runs 24 hotels and resorts across these four locations, with one new Sri Lankan resort set to open in After originally being an integral subsidiary of SPEN, AHUN was floated on the Colombo Stock Exchange (CSE) in 1992 and is currently the second-largest listed company (by market capitalization) in the hotels and travels sector on the CSE, with a market capitalization of LKR23bn (USD180m) as on 10 October SPEN owns a controlling interest in the group with a 71.2% stake. Figure 26: 76% of AHUN s revenue in FY13 comes from operations outside Sri Lanka Figure 27: South Asian operations account for 68% of EBT in FY13 LKRm 14,000 10,500 7,000 3,500 LKRm 3,000 2,000 1,000 - FY09 FY10 FY11 FY12 FY13 Sri Lanka South Asia - FY09 FY10 FY11 FY12 FY13 Sri Lanka South Asia Source: AHUN Source: AHUN AHUN recorded LKR12.0bn in revenue for FY13, with a 13.7% CAGR over FY09-FY13. The group generated earnings before tax (EBT) of LKR3.2bn in FY13, representing a 31.6% CAGR over FY09-FY13. Figure 28: AHUN s revenue grew at a 13.7% CAGR over FY09-FY13 Figure 29: AHUN s EBT grew at a 31.6% CAGR over FY09-FY13 LKRm 12,000 8,000 4,000 YoY growth 30% 25% 20% 15% 10% 5% LKRm 3,500 2,800 2,100 1, YoY growth 100% 80% 60% 40% 20% 0% - FY09 FY10 FY11 FY12 FY13 Revenue YoY Growth 0% - FY09 FY10 FY11 FY12 FY13 EBT YoY Growth -20% Source: AHUN Source: AHUN 22

23 AHUN s key business regions Sri Lanka AHUN s room portfolio in Sri Lanka consists of 743 rooms over eight properties which are either owned or run under a management license. AHUN directly owns four properties under its Heritance brand; a fifth resort Heritance Negombo, is scheduled to commence operations in 2014 with 150 rooms in addition to the Sands and Hotel Hill Top properties. The other two properties were secured as part of management contracts; as such, AHUN does not own the properties, but is responsible for running and managing the hotels for a predetermined period. The contract includes the power to make large, structural changes and modifications to interior decorations. In return for these services, AHUN is paid a management fee. Maldives Currently, AHUN owns six properties under its Adaaran brand in the Maldives, accounting for 610 rooms. The Maldivian resorts are the largest revenue and profit generators for AHUN, although the exact figures are not disclosed. Occupancy levels in AHUN s Maldivian hotels are typically high (almost 90%) year-round, while margins are also higher compared with its other operations. Oman AHUN s hotels in Oman are also under a management license from their respective owners and range from city hotels to a large Bedouin tent resort. AHUN s operations in Oman total 441 rooms across five hotels. India AHUN s Indian properties range from island resorts to ayurvedic centers in remote village areas. AHUN does not own any hotels in India, but instead operates five properties under a management license from their owners. The Indian resorts consist of 191 rooms in total. Management strategy, transparency and governance AHUN holds a strong position in Sri Lanka s resort sector, running several scenically located properties. It also operates luxury resorts in the Maldives, which makes the largest contribution to the company s top line and profits. The company aims to provide an up-market experience to its visitors in both locations; its ADRs are typically towards the higher range when compared with close peers. We believe that a more detailed level of disclosure in AHUN s financial reports would be more beneficial to both investors (particularly institutional investors) and analysts to better understand the company and its operations. This could ultimately benefit AHUN in the form of enhanced capital raising opportunities should the company decide to approach equity investors to raise funds for future large investments. We believe that the following areas could be improved: There is no breakdown currently provided on AHUN s Maldivian hotels in terms of revenue or profits. Since this is the largest component of the company s revenue and margins, a detailed breakdown would better highlight the performance of its operations in the country. Details on the performance of the resorts, such as occupancy rates, and food and beverage breakdowns, are disclosed only annually. We believe providing these additional details on a quarterly basis would be of greater value to current and potential investors. The management discussion section of the annual report does not list AHUN s specific financial and operational targets. Disclosing these details would allow investors and analysts to have a clearer idea regarding AHUN s future direction. Currently, the company s quarterly reports do not include any management commentary. Including this would shed light on the results achieved and help investors gain a clearer picture of AHUN s performance during the period. 23

24 Shareholding structure AHUN s parent company, SPEN holds a majority stake of 71.2% in AHUN, while its other subsidiaries hold 3.3%. The directors own a negligible share (<0.1%), while individual investors hold a 19% share. Figure 30: AHUN s domestic investor base accounts for 97% of its shares Figure 31: Individual investors make up 19% of AHUN s shareholder base International 3% Individual 19% Other institutions 7% Domestic 97% SPEN & subsidiaries 74% Source: AHUN, as of March 2013 Source: AHUN, as of March

25 The top-five shareholders as of June 2013 are presented below: Name of shareholder Description Stake Aitken Spence PLC Domestic diversified holding company 71.2% Employees Provident Fund Largest pension fund in Sri Lanka 8.8% Sri Lanka Insurance Corporation Ltd Life Largest government-owned insurance company in Sri Lanka 2.2% Fund HSBC INTL Nominees Ltd. JPMCB- Scottish International fund 1.7% ORL SML TR G Ace Cargo (Pvt) Ltd Freight forwarding company owned by SPEN 1.3% Source: AHUN Board of directors As of March 2013, AHUN s board comprised nine directors. Their details are provided below: Name of Director Mr. Harry Jayawardena Mr. Rajan Brito Mr. Malin Hapugoda Mr. Susith Jayawickrama Mr. Gemunu Goonewardena Mr. Ranjan Casie Chetty Mr. Niranjan Deva Aditya Mr. Charles Gomez Mr. Rajan Asirwatham Description Chairman. He is also the chairman of SPEN and is one of Sri Lanka s most successful businessmen, with interests in distilleries, tea, banking and telecommunications companies, among others. Managing director. He is also the deputy chairman and managing director of SPEN, as well as the current chairman of DFCC Bank and DFCC Vardhana Bank. Head of AHUN s Hotel sector. He is a former president of the Tourist Hotels Association of Sri Lanka (THASL) and an experienced hotelier holding many senior positions in the hotel industry. Deputy managing director of Aitken Spence Hotel Managements (Pvt) Ltd. He has worked in SPEN s hotel sector for almost two decades and is also the vice president of THASL. Director. He is also the vice president of AHUN responsible for resource planning and development, food and beverage services and facilities, and the director of AS Resources (Pvt) Ltd. He is a graduate of the Ceylon Hotel School and the culinary institute of America. Director. He is also SPEN s company secretary and a director of several other SPEN subsidiaries. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka, a Fellow of the Chartered Institute of Management Accountants of UK, a Fellow of the Certified Management Accountants of Lanka and a member of the Chartered Management Institute of UK. Non-executive director. He is a Conservative Member of the European Parliament, the first Asian-born MP to hold this position. He was also a UN Secretary General nominee. Non-executive director. He was appointed to AHUN s board in July He is a former investment banker with 30 years of experience in the industry. He is on the boards of a number of foreign investment companies. Non-executive director. He was appointed to the board of AHUN in September He is a former senior partner and country head of KPMG in Sri Lanka, in addition to being the chairman of the Financial Services Stability Committee at the Central Bank of Sri Lanka. Source: AHUN 25

26 Figure 32: AHUN s hotel portfolio Heritance Kandalama (152 rooms) Heritance Ahungalla (152 rooms) Heritance Tea Factory (54 rooms) Sri Lanka Heritance Ayurveda Maha Gedara (64 rooms) Heritance Negombo (150 rooms)* Others (321 rooms) ** Adaaran Prestige Ocean Villas, HudhuRan Fushi (36 rooms) Adaaran Prestige Vadoo (50 rooms) Maldives Adaaran Prestige Water Villas (20 rooms) Adaaran Select Meedhupparu (235 rooms) Aitken Spence Hotel Holdings PLC Adaaran Select Hudhuran Fushi (120 rooms)*** Adaaran Club Rannalhi (132 rooms) Barefoot at Havelock (25 rooms) India Poovar Island Resort (78 rooms) Hotel Atithi (60 rooms) Tamara Resort (8 rooms) Poovar Ayurveda Village, Kerala (20 rooms) Al Falaj Hotel (140 rooms) Oman Ruwi Hotel (100 rooms) Sur Plaza Hotel (92 rooms) Al Wadi Hotel (79 rooms) Desert Nights Camp (30 rooms) Source: AHUN * The hotel will only commence operations in 2014 ** Consists of The Sands (110 rooms; will expand to 200 rooms), Hotel Hill Top (74 rooms), Earl s Regency (104 rooms; will expand to 134 rooms) and Bandarawela Hotel (33 rooms) *** 17 villas were destroyed in a fire in July

27 Appendix 3: Key financial data Summary group financials (LKRm) INCOME STATEMENT E 2015E 2016E (For the year ended 31 March) Revenues 7,706 9,193 11,567 12,099 14,199 16,049 EBITDA 2,100 2,791 3,900 4,091 4,837 5,467 EBIT 1,340 2,309 3,168 3,313 4,030 4,626 EBT 1,395 2,428 3,201 3,393 4,067 4,651 Net profit 1,358 2,081 2,736 2,841 3,457 3,954 BALANCE SHEET E 2015E 2016E (As at 31 March) Current assets Cash and cash equivalents ,241 1,359 1,884 2,484 Short-term investments 2,011 2,422 3,059 3,991 3,991 3,991 Accounts receivable 851 1, ,036 1,093 1,236 Inventories Total current assets 4,264 4,597 6,229 7,672 8,382 9,244 Non-current assets Property, plant and equipment 8,879 11,088 11,962 12,457 12,980 13,642 Intangible assets Total non-current assets 11,511 15,294 16,130 17,691 20,728 24,154 Total assets 15,776 19,891 22,360 25,363 29,110 33,398 Current liabilities Short-term debt 830 1,366 1,114 1,408 1,724 2,041 Accounts payable Income tax payable Total current liabilities 2,224 3,455 3,436 4,084 4,440 4,814 Non-current liabilities Long-term debt 3,008 2,790 2,790 2,831 3,180 3,615 Postretirement benefit obligation Total non-current liabilities 3,155 3,078 3,095 3,152 3,500 3,935 Equity Common share capital 3,555 3,555 3,555 3,555 3,555 3,555 Retained profit 3,747 4,936 6,457 7,556 9,337 11,371 Minority interest 1,373 2,189 2,904 4,002 5,263 6,708 Total equity 10,396 13,359 15,829 18,127 21,170 24,649 Total liabilities and equity 15,776 19,891 22,360 25,363 29,110 33,398 27

28 CASH FLOW STATEMENT E 2015E 2016E (For the year ended 31st March) Operating activities Net cash flow from operating activities 663 3,157 3,528 3,188 4,065 4,526 Investing activities Purchase of PPE and intangible assets (490) (1,374) (1,369) (1,133) (1,330) (1,503) Net cash flow from investing activities (1,023) (2,533) (1,050) (1,894) (3,511) (3,901) Financing activities Debt issuance/(repayment) (138) (432) Interest paid (229) (209) (247) (243) (280) (301) Dividends paid to common shareholders (87) (183) (250) (341) (415) (474) Dividends paid to minority interests (289) (151) (210) Net cash flow from financing activities 1,965 (766) (390) (315) (30) (24) Net increase/(decrease) in cash and cash equivalents 1,605 (143) 2, Key ratios E 2015E 2016E Growth Revenue growth (%) EBIT growth (%) EBT growth (%) Net profit growth (%) Recurrent diluted EPS growth (%) Margins EBIT margin (%) EBT margin (%) Net profit margin (%) ROE (%) Liquidity and efficiency Current ratio (x) Total asset turnover (x) Gearing and cash flow Debt/Capital (%) Interest cover Free cash flow (FCF) yield (%) Net debt/fcf (x) (0.2) (0.5) (0.4) (0.3) Valuation P/E (x) P/BV (x) EV/sales (x) EV/EBITDA (x) EV/EBIT (x) Per share data E 2015E 2016E Recurrent diluted EPS (LKR) Common DPS (LKR) BVPS (LKR) Net operating cash flow per share Net cash flow per share 4.8 (0.4) Source: AHUN, Amba estimates 28

29 Segmental summary (For the year ended 31 March) Sri Lanka E 2015E 2016E Revenues 1,875 2,191 2,902 3,043 4,031 4,977 EBT ,017 1,076 1,460 1,722 YoY growth Revenues 153.0% 16.8% 32.5% 4.8% 32.5% 23.5% EBT 71.8% 9.1% 45.4% 5.8% 35.7% 18.0% Margins EBT 34.2% 31.9% 35.0% 35.4% 36.2% 34.6% South Asia E 2015E 2016E Revenues 6,184 7,424 9,133 9,543 10,739 11,718 EBT 756 1,718 2,184 2,316 2,607 2,929 YoY growth Revenues 1.5% 20.1% 23.0% 4.5% 12.5% 9.1% EBT 11.3% 127.3% 27.1% 6.1% 12.5% 12.3% Margins EBT 12.2% 23.1% 23.9% 24.3% 24.3% 25.0% Source: AHUN, Amba estimates FX rates (LKR/USD): Y/E 31 March 2013 = Y/E 31 March 2012 = Y/E 31 March 2011 =

30 Appendix 4: SWOT analysis Strengths Strong position in the Sri Lankan resort sector Strong brand recognition, both in Sri Lanka and the Maldives Experienced management team backed by SPEN Relatively low debt/equity ratio Weaknesses No significant expansion plans have been discussed yet Opportunities Anticipated rapid uptake in tourist arrivals to Sri Lanka and the Maldives Holds suitable land for the potential development of new resorts Rising GDP/capita and disposable income levels in Sri Lanka Lack of large foreign competitors in the resort sector over the short term Rising numbers of Middle-Eastern arrivals Threats Higher rates may deter guests as they look for cheaper options in other hotels Legislation (focused on minimum room rates and tourism industry wages, for example) could negatively impact the growth of the leisure industry Growing popularity of informal establishments, such as guest houses and home stays, which offer significantly cheaper accommodation 30

31 E 2014E E 2014E 2015E E 2014E 2015E 2016E E Aitken Spence Hotel Holdings PLC Fact Sheet Sri Lanka investment environment overview Sri Lanka s economy has been on an upward trajectory since the end of the three-decade civil war in May Sri Lanka currently boasts South Asia s highest GDP growth, conducive fiscal and monetary policy, and favorable socio-economic conditions, which together create an attractive investment destination. Figure 33: Sri Lanka's GDP projected to increase at a 7% CAGR E Figure 34: GDP per capita to increase 33% by 2016E % USD 5,000 4,000 3,000 2,000 1,000 0 Source: Central Bank of Sri Lanka, Department of Census and Statistics Figure 35: Annual core inflation post-war has averaged 6.7%, government targeting mid-single digit levels in the medium term % Source: Department of Census and Statistics, Central Bank of Sri Lanka Source: Central Bank of Economic and Social Statistics of Sri Lanka 2012, Road Map Central Bank of Sri Lanka Figure 36: CBSL expects the rupee to stabilize in the medium term despite recent volatility Jan-07 Apr-08 Aug-09 Dec-10 Apr-12 Jul-13 Source: Bloomberg LKR/USD LKR/EUR LKR/GBP Figure 37: Fiscal deficit target of 5.2% of GDP for 2014E Figure 38: Debt-to-GDP to fall to 71% by 2015E LKRbn % 8% 4% 0% % Fiscal Deficit LKR bn As a % of GDP Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka 31

32 Banks, Finance & Insurance Beverage, Food & Tobacco Chemicals & Pharmaceuticals Construction & Engineering Diversified Hotels & travels Investment Trusts Land & Property Manufacturing Plantations Power & Energy Services Telecommunication Trading Banks, Finance & Insurance Beverage, Food & Tobacco Chemicals & Pharmaceuticals Construction & Engineering Diversified Hotels & travels Investment Trusts Land & Property Manufacturing Plantations Power & Energy Services Telecommunication Trading Aitken Spence Hotel Holdings PLC The Sri Lankan equity market offers a rare and attractive alternative to investors in an investment era impacted by economic growth worries. Backed by the country s robust economic growth, the Sri Lankan capital market is well set to offer attractive returns to investors who are keen to be a part of this emerging market success story. There are several strong incentives for entering the Sri Lankan capital market. Figure 39: Post war, the ASPI has significantly outperformed global and developed market indices Jul-09 Apr-10 Feb-11 Dec-11 Oct-12 Aug-13 ASPI Dow Jones FTSE 100 MSCI World Source: Bloomberg *Note: All figures re-based to 1 July 2009 DAX Figure 40: Post war, the ASPI has also outperformed some of the best-performing regional indices Jul-09 Mar-10 Nov-10 Jul-11 Mar-12 Dec-12 Aug-13 ASPI Bombay (BSE 500) Jakarta (JCI) Philippines (PASHR) Thailand (SET) Hanoi (VNINDEX) MSCI Emerging Market Index Source: Bloomberg *Note: All figures re-based to 1 July 2009 Figure 41: 2009 The CSE s market capitalization has doubled since Figure 42: The government anticipates FDI inflows to reach USD2bn in 2013, a 19% CAGR E LKRbn 3,000 2,500 2,000 1,500 1, ,092 2,211 2,214 2,168 2, (August) USDm 2,500 2,000 2,000 1,500 1,066 1,338 1, E Source: Bloomberg, Central Bank of Sri Lanka Source: Ministry of Finance and Planning, Board of Investment of Sri Lanka Figure 43: Most sector P/Es are below market average and historical valuations Figure 44: Trend is similar on a P/BV value Average market P/E Average market P/BV Source: Colombo Stock Exchange Source: Colombo Stock Exchange 32