John Keells Hotels (KHL), a 82% owned subsidiary of local conglomerate John Keells Holdings (JKH: LKR188.00) currently operates 7 hotels in Sri Lanka and 4 in Maldives. Company operates its resort portfolio under three brands; namely the premier brand Cinnamon (2 hotels under this brand), the resort hotel brand Chaya (6 hotels) and John Keells Hotels (3 hotels).
The share has out-performed the market by circa 21% since the end of war on 18th May 2009 albeit has underperformed the sector index by 68%, therefore we believe further upside is possible with growing earnings materialising in the coming quarters. Furthermore KHL would be one of the prime beneficiaries of the revival of local tourism industry, opening up of the previously war torn Northern and Eastern coasts, having 07 properties in strategic locations in the island which are upgraded and ready to cater the surge in demand. Further KHL will be adding another three hotel properties to their portfolio during the coming three years.
Financial Performance
Net revenue up 18% YoY to LKR6,038.1 mn in FY10. KHL’s top line has grown by 18% YoY in FY10 mainly on the back of revived Sri Lankan operations coupled with the improved performance in the Maldivian operations. The company’s Sri Lankan resort and hotel operations has posted a sharp increase of 32% YoY in its revenue whilst the Maldivian segment has grown by a 15% YoY despite the recessionary pressure on the Maldivian Tourism Industry during the first half of the year.
Operating costs have increased by 7%YoY in FY10. The company’s operating costs have increased by 7% YoY to LKR3,623.9 mn in FY10 whilst the final quarter recorded a relatively faster growth of 15% YoY due to high activity levels in the hotels since it is the best quarter in terms of operations. However depreciation and amortization costs dipped by 2% YoY despite the increased asset base.
EBITDA has increased 62% YoY to LKR1,284.2 mn in FY10. KHL has recorded an EBITDA of LKR1,284.2 mn in FY10 (up 62% YoY) whilst recording a slower rise of 15% YoY in 4QFY10. The company’s healthy results in the last quarter is mainly attributable to the revived local tourism which generated better margins coupled with the Maldives earnings which were above expectations.
Pre-tax profits grew two folds YoY in FY10. The company has recorded a pre-tax profit of LKR208.2 mn (up 194% YoY) in FY10, whilst its 4QFY10 earnings also increased 33% YoY to LKR479.7 mn. KHL’s Sri Lankan resorts and hotels have reduced its pre-tax losses by 91% YoY to LKR19.7 mn in FY10. Further the Maldivian segment which comprises of four properties recorded a tremendous improvement in pre-tax profits to LKR227.8 mn (vs. a loss of LKR11.9 mn)on the back of all four hotels being operational following the completion of the breakwater construction at Cinnamon Island Alhidoo.
KHL recorded a net profit of LKR205.0 mn for FY10. Backed by the booming local leisure industry and recovering Maldivian tourism, KHL has recorded a net profit of LKR205 mn in FY10 up 197% YoY despite the first half of the year falling into tourism off season. Further KHL’s earnings improved by circa 36% YoY to LKR480.5 mn in 4QFY10 supported by improved ARRs and occupancy levels.
4QFY10 Geographical Segmental Performance at a Glance
4QFY10 which is the best quarter for KHL has recorded a sharp increase in revenue supported by the 52% YoY increase in the Sri Lankan contribution to LKR463.8 mn and 10% YoY increase in the Maldivian contribution to LKR1,611.9 mn. Subsequently the Direct costs and other operating costs of SL resort operations have increased by a slower 22% YoY compared to the revenue growth, improving the operating profits by an impressive ten folds to LKR104.9 mn in 4QFY10. Further the pre-tax profit has increased eight fold YoY to LKR90.9 mn in 4QFY10 and the profit for the year has surged by a whopping pace to LKR91.7 mn during the same period.
Maldivian operations have been lagging during the quarter on the backdrop of the recessionary pressure on the tourism industry in Maldives. However the profits at all levels have grown in line with the growth in revenue.
Ready to reap the benefits
KHL the second largest hotel chain in Sri Lanka invests heavily to refurbish and reposition the existing hotels and put up new hotel facilities to cater the growing demand with the revival of the local tourism industry. According to the plans KHL would reposition 133 roomed Benthota Beach Hotel and rebrand it with its premier brand "Cinnamon" with an investment of circa LKR800 mn. The repositioning process would uplift the grading of the hotel to 4+ star whilst reducing the accommodation capacity to 115 rooms. Further KHL plans to invest another LKR800 mn in repositioning and refurbishing the Coral Gardens Hotel in the South Coast. The KHL presence in the southern coastal belt would be further strengthened by the addition of two hotels, one in Ahungalla and the other in Beruwala. The new construction at Ahungalla would be a 5 star hotel with an investment of LKR1.6 bn which is to be completed by the end 2013. KHL plans investing LKR1.7 bn in constructing a 190 roomed 3 star hotel in Beruwala which would be operational by the end of 2011.
KHL rebranded Club Oceanic Hotel as Chaya Blue in May '10 after an intensive refurbishing exercise. A near LKR400 mn was spent on rebranding the hotel and increasing the accommodation capacity to 80 rooms. Further a 120 roomed 3+ star hotel is to be built in Nilaveli at a total consideration of LKR1.3 bn where the construction would be completed by end 2012.
With the completion of the proposed hotel developments and expansions by 2014 KHL would account for 12% of the room capacity in the Southern Coast and +40% in the Eastern Coast expanding the country portfolio to 8% of total room capacity of the country from 5% in 2010.
Since the FY10 earnings are broadly in line with our forecasts, we maintain our FY10E forecast earnings at LKR687.6 mn and FY11E forecast earnings at LKR930.6 mn. KHL would be one of the prime beneficiaries of the revival of local tourism, opening up of the previously war torn Northern and Eastern coasts, having 07 properties in all strategic locations in the island which are upgraded and ready to cater the surge in demand. Further KHL plans to add three new hotel properties to their portfolio during the coming three years. The improved ARRs and occupancy rates coupled with the organizational synergies have boosted KHL’s FY10 earnings which are broadly in line with our forecasts. Therefore we maintain our FY10E forecast earnings at LKR687.6 mn and FY11E forecast earnings at LKR930.6 mn (up 35% YoY).
KHL is fairly valued at 41.3X forecast FY11E net profit and 30.5X projected FY12E earnings whilst it is trading on a PBV of 3.5X FY11E and 3.2X FY12E. Nonetheless the counter is trading at a 20% discount to the EVPS and a discount of 53% to our estimates. Further the share has out-performed the market by circa 21% since the end of war on 18th May 2009 albeit has underperformed the sector index by 68%. KHL the second largest hotel chain will expand its portfolio in the coming three years to account for 8% of the total room availability in Sri Lanka. With the said high earnings potential with the expected revival in the tourism industry and increase in occupancy coupled with expected increase in ARRs, KHL would sustain an earnings growth of 15-20% in the forth coming period. Therefore in-view of the brighter future, we believe further upside is possible and we maintain - BUY
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