Sri Lanka Equities CORPORATE UPDATE November 2009 john Keells Stock Brokers (Pvt) ltd. A JKSB Research Publication Jeewanthi Malagala jeewanthi@jkstock.keells.com Aitken Spence Hotel Holdings PLC (AHUN) Rs.235.00 AHUN Reuters Code AHUN.CM Bloomberg Code AHUN.SL Share Price LKR 235.00 Issued Share Capital (Shares) Voting 38,433,144 12 mth High/Low (Rs.) 239.00 / 90.00 Average Daily Volume (Shares) 20,527 Market Capitalisation Rs.Mn. 9,032 Price Performance (%) 1 mth 6 mth 12 mth ASPI 5.92 73.43 62.21 AHUN 13.53 128.16 135.00 BUY Earnings EPS Price / Financial Revenue PAT to Equity EPS Growth PER Book Year (Mar) (Rs.Mn.) (Rs.Mn.) (Rs.)* (Rs.) (%) (x) Value (x) 2008 6,413 789.57 497.80 12.95 165.42 18.14 2.40 2009 6,612 824.35 577.73 15.03 16.06 15.63 1.91 2010E 9,083 1,049.20 673.32 17.52 16.55 13.41 1.68 2011E 10,346 1,436.92 930.28 24.21 38.16 9.71 1.44 2012E 11,668 1,785.11 1,215.04 31.61 30.61 7.43 1.21 2013E 13,046 2,094.95 1,480.65 38.53 21.86 6.10 1.01 * Earnings to Equity after Preference Dividend Profile >> Aitken Spence Hotel Holdings PLC (AHUN) has a well diversified portfolio of hotels in Sri Lanka, as well as operations spanning across both Asian plus Middle Eastern regions. e company owns and operates 5 hotels offering 465 rooms in Sri Lanka along with 2 hotels as associate companies and a further 2 hotels which are under the management of AHUN. In the Maldives, it owns 7 hotels possessing 591 rooms. AHUN also manages 5 hotels each in India and Oman. >> e company is one of the best performing hoteliers listed on the Colombo bourse with an average growth in PAT of 8% during the last 5 years amidst turbulent economic conditions both locally and globally, as well as the civil war. Sri Lanka >> AHUN under its premier Heritance brand operates 304 rooms in Sri Lanka while its total room strength in the country (excluding those under management only) extends to 681 rooms including those belonging to the associate companies. >> In FY2009, Heritance Kandalama was recognised as the best 5 star resort in Sri Lanka for the second consecutive year at the Presidential Awards for Travel and Tourism, while Tea Factory hotel was adjudged the best 4 star resort hotel in the country. >> e average room occupancy for its local chain has been around 55% due to lower tourist arrivals in FY2009 during which the Sri Lankan segment reported a loss of Rs.54.4 million in FY2009 against a loss of Rs.58 million in FY2008. e Average Room Rate (ARR) hovered around US $ 58-60 for the Sri Lankan segment. e ARR for Sri Lanka stood at Rs.4,284 or US $ 37 in CY2008. >> Over the years, the Sri Lankan segment has suffered heavily from volatility in earnings due to lower tourist arrivals which we believe is likely to change with the end of the war. Despite this, in FY2009 all Sri Lankan hotels under AHUN have managed to generate positive operating profits but due to higher finance costs, most excluding Heritance Kandalama and Neptune Ayurveda Village, ended the year on losses. is document is published by John Keells Stock Brokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation and JKSB s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.
John Keells Stock Brokers (Pvt) Limited Corporate Update >> AHUN s parent company Aitken Spence PLC (SPEN), currently owns a 105-acre beach frontage land in Nilaveli on the East coast of the island and is looking for possible developments. >> AHUN is also drawing up plans to develop the 10.86 acres of freehold land adjacent to Heritance Ahungalla. Discussions are underway with Six Senses Resorts & Spas - a resort and spa management and development company operating in countries including Oman and Maldives, to develop another 27 acre island situated in Ahungalla on the Madhu River. >> e company s 1Q2010 PAT from the Sri Lankan segment continued to remain in the red with a loss of Rs.79 million compared to Rs.80 million during the comparative quarter, due in large to low tourist arrivals. e Maldives >> Tourism in the Maldives saw a marginal decline of 3.62% with 660,983 tourists visiting the islands in FY2009. Occupancy rate in resorts and hotels averaged at 78% during CY2008 with bed nights and average duration of stay increasing by 3% and 2.3% respectively. e global recession continued to adversely impact the tourism industry in Maldives in 2009 with 1HCY2009 and 1QFY2010 tourist arrivals showing a decline of 10.5% and 10% respectively, over the comparative period in 2008. >> e company s Maldivian operations which include 591 rooms, enjoyed room occupancies ranging from 75% to 80% during FY2009. e 1HFY2009 was operationally difficult as higher commodity prices narrowed margins. Although the impact of this lessened during the 2HFY2009, the global financial crisis hampered growth opportunities in the Maldives as demand for tourism declined. During the year, AHUN completed the addition of 73 water bungalows in the Maldives. >> e South Asian segment which includes the Maldivian operations, contributed Rs.907 million in FY2009 in PBT, a growth of 4% from 2008. However, during the year, AHUN strategically divested Adaaran Club Bathala, the first island resort in the Maldives set up by AHUN, from which the company earned Rs 219 million. Normalized profit (excluding one-off gains) for the Group indicates a drop of 23% in profitability for FY2009. >> e Maldivian operations have suffered a decline in ARR during 1H2010 on lower tourist arrivals and higher price competition among hotel operators to increase occupancy. Operations in India and Oman >> India s tourist sector grew by 5.7% with 5.37 million tourists in 2008 despite the global economic downturn and terrorist attacks in various parts of the country. However, tourist arrivals during the first 5 months of 2009 have seen an 11% decline over the same period in 2008.
John Keells Stock Brokers (Pvt) Limited Corporate Update >> In India, AHUN manages 5 hotels with one hotel under the Heritance brand. Given the depressed status in Indian tourism, the company has postponed its plans previously scheduled for the freehold property in Cochin. e hotels under AHUN s management witnessed a drastic decline in occupancy in FY2009 as average room occupancy declined to nearly 50% from 60% in FY2008. >> In September 2009, AHUN announced the latest addition to its portfolio of hotels in India with the opening of Tamara in Coimbatore. >> Oman s tourism industry enjoyed a growth of 26% in 2008 over the 1.8 million tourists in 2007. e country is well placed to be successful in the industry as it has been both politically stable and physically safe for tourists. >> During the year, AHUN completed its first year of operations in Oman where it manages 5 hotels with a room capacity of 455. e investment in Oman proved to be successful with almost all hotels enjoying average room occupancy in excess of 70% during the year. Outlook >> Cessation of hostilities in Sri Lanka has given the local tourism industry new life. Total tourist arrivals during the period June - September 2009 grew by approximately 25% over the comparative period in 2008. With most countries removing / relaxing their travel advisories to Sri Lanka and a recovery in the global economy, we expect tourism to pick up in the medium term. At a post war growth of 25% in tourist arrivals, we expect Sri Lanka to achieve 1 million tourists in approximately 4 years from 2008. >> e Tea Factory Hotel, recognised as the best 4 star resort hotel in Sri Lanka at the Presidential Awards for Travel and Tourism, is currently being revamped with a view of rebranding the hotel under the premier Heritance brand. Further, the Neptune Hotel, located in Beruwela, is also to be brought under the Heritance chain of hotels towards the next Winter season in FY2011 post refurbishment costing approximately 300-350 million. We expect the rebranding exercise to enhance earnings from the local segment. >> We believe that with positive growth in tourism in FY2011E coupled together with an increase in average room occupancy to 72% and Average Room Rates (ARR) to US$ 82, the local resorts and hotels are likely to generate an operating profit of Rs.1,138 million. >> AHUN suffered from a decline in GP margins with the ratio declining to 14% in FY2009 from 18% in FY2008, on the back of double digit inflation, mainly locally. However, with inflation reaching low levels, AHUN is likely to face fewer cost pressures thereby enabling the company to enjoy better margins. >> High finance costs which eroded profitability of almost all hotels locally, are likely improve with the steep fall in interest rates. However, as much as 71% of group interest bearing borrowings were USD denominated at the end of FY2009.
John Keells Stock Brokers (Pvt) Limited Corporate Update >> Maldives operations have been steady as room occupancies on average have remained above 80% during the last 3 years. Nevertheless, the segment has suffered badly from the global economic downturn as approximately 73% of its tourism is generated from the Europe. With the hope of recovery in the global economy towards CY2011, we expect tourism to kick back with at least 85% room occupancy enabling AHUN to generate approximately Rs.930 million in Operating profit for FY2011E. >> e company s operations in India as well as in Oman are also likely to be affected adversely by the global recession. Earnings from these segments which come in the form of management fees and a share of revenue and profits are expected to be lower given lower occupancy. However, as global economic recession eases off we expect to see a higher contribution from this segment as well. Earnings & Valuations >> On the expectation of an improvement in tourist arrivals during Winter 2009, we expect AHUN to post earnings to equity (after Preference Dividend of Rs.14.85 million) amounting to Rs.673 million for FY2010E. However, earnings (both Management fees and PAT) from its foreign operations are likely to remain subdued given the global scenario. >> In FY2011E, with tourists levels expected to grow by at least 25%, we believe AHUN will generate PAT of Rs.1,437 million supported by greater contribution from its foreign hotels. >> e above earnings estimates have been made excluding possible future developments which if commenced in FY2011E, could further enhance group profitability in the long term. Any further large scale expansions in the immediate term may have to be funded through borrowings as the company may not have sufficient funds generated internally. is too has not been included in our forecasts. However, we have assumed that AHUN will spend approximately Rs.1,000 million per annum during the next 4 years in upgrading or refurbishing its existing portfolio of hotels. >> Our forecasts indicate a strong cash inflow which could be used to partly fund expansions, therefore the possible interest income on these funds have been excluded from our forecasts. >> At a price of Rs.235.00, the counter is currently trading at 13.4x FY2010E earnings and 9.71x FY2011E earnings while its PBV is at 1.68x. e company stands to gain heavily from its expansion into South Asian and Middle Eastern markets once the global economy recovers. Additionally, there is significant upward potential in the local market with rebranding and refurbishment along with the future expansions in the country. We recommend BUY.
John Keells Stock Brokers (Pvt) Limited Corporate Update Profit and Loss Account 2008 2009 2010E 2011E 2012E 2013E For the year end 31st March (Rs.Mn.) Revenue (Net of bed tax) 6,091 6,311 8,629 9,828 11,085 12,394 Other Operating Income 45 323 114 126 138 152 Operating costs (4,995) (5,427) (7,282) (8,179) (9,157) (10,222) Operating Profit 1,141 1,207 1,461 1,775 2,066 2,323 Share of Associate Earnings 6 (3) 23 46 68 88 Finance Income 27 10 8 9 11 12 Finance Expenses (363) (369) (417) (361) (325) (293) Profit Before Tax 811 845 1,076 1,468 1,819 2,131 Taxation (21) (21) (26) (36) (34) (36) Profit After Tax 790 824 1,049 1,440 1,785 2,095 Minority Interest (277) (232) (361) (492) (555) (600) Profit Attributable to the equity holders 513 593 688 945 1,230 1,496 Balance Sheet 2008 2009 2010E 2011E 2012E 2013E As at 31st March (Rs.Mn.) ASSETS Non - Current Assets Property Plant & Equipment 6,665 8,687 8,954 9,055 9,047 8,923 Leasehold Property 1,408 1,555 1,605 1,655 1,705 1,755 Others 278 405 426 472 540 628 8,351 10,646 10,985 11,181 11,292 11,305 Current Assets Trade & Other Receivables 1,093 983 1,335 1,521 1,715 1,918 Short term deposits 389 342 325 373 430 494 Cash and cash equivalents 119 117 521 1,652 2,948 4,726 Others 616 624 722 786 853 925 2,218 2,065 2,903 4,332 5,946 8,063 TOTAL ASSETS 10,568 12,711 13,888 15,513 17,238 19,368 EQUITY AND LIABILITIES Equity Stated capital 1,056 1,056 1,056 1,056 1,056 1,056 Reserves 1,035 1,463 1,463 1,463 1,463 1,463 Retained Earnings 1,666 2,206 2,860 3,771 4,967 6,428 Minority Interest 1,220 1,346 1,692 2,169 2,709 3,294 4,977 6,070 7,070 8,458 10,194 12,240 Non - Current Liabilities Interest - Bearing borrowings 2,930 3,746 3,863 3,863 3,608 3,381 Others 117 114 106 113 121 131 3,048 3,861 3,969 3,977 3,730 3,512 Current Liabilities Other Provisions and Payables 872 799 728 818 916 1,022 Amounts due to Ultimate Holding company 527 779 896 1,030 1,185 1,363 Interest - Bearing borrowings 498 676 682 682 637 597 Short term Bank borrowings 333 217 163 130 117 129 Others 314 310 380 418 460 505 2,544 2,781 2,849 3,078 3,314 3,616 TOTAL EQUITY & LIABILITIES 10,568 12,711 13,888 15,513 17,238 19,368
John Keells Stock Brokers (Pvt) Limited Corporate Update Cashflow Statement 2008 2009 2010E 2011E 2012E 2013E For the year end 31st March (Rs.Mn.) Profit before Tax 811 845 1,076 1,468 1,819 2,131 Net Cashflow from Operating Activities 777 1,495 1,527 2,311 2,765 3,197 Cashflow from Investing Activities Purchase of Property, Plant & Equipment (731) (2,166) (1,000) (1,000) (1,000) (1,000) Others (1,470) 149 (50) (50) (50) (50) Net cash used in Investing Activities (2,201) (2,017) (1,050) (1,050) (1,050) (1,050) Cashflow from Financing Activities Net borrowings 1,417 844 14 0 (300) (267) Others (39) (238) (49) (49) (49) (49) Net cash used in Financing Activities 1,377 606 (36) (49) (349) (316) Net increase in cash & cash equivalents (47) 83 441 1,212 1,366 1,831 Balance at the beginning of the year 205 158 242 683 1,895 3,261 Balance at the end of the year 158 242 683 1,895 3,261 5,091 John Keells Stock Brokers (Pvt) Ltd. 130 Glennie Street Colombo 2 Sri Lanka T. 9411 2306 250, 9411 2342 066-7 F. 9411 2342 068 www.jksb.keells.lk Company No. PV 89