John Keells Hotels (KHL), an 82% owned subsidiary of local conglomerate John Keells Holdings (JKH) 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).
Keells hotels are positioned in all key tourist hot spots in the country and experienced a strong spurt of growth in earnings with the revival of the industry. Further KHL is the hotel chain with highest number of beach hotels located in beaches which are among the top ten in the Asian Continent. Further the company is placing more emphasis on these beach hotels and would complete the repositioning of them in the next couple of years. Nonetheless the company is keen on strengthening their presence in the same area where they are planning to add three more beach hotels to their portfolio by FY13 (In Ahungalla, Beruwala and Trinco).
Financial Performance
KHL's top line has dipped 5% YoY in 1QFY11 mainly on the back of closure of three hotels during the quarter for renovation and repositioning and of the off-peak seasonality effect. Further 60% of the quarterly revenue has been generated by the Tour Operators and Travel Agents according to the rates agreed upon an year before. Hence the real increase in ARRs are not fully reflected in 1QFY11 performance. Closure of Chaya Lagoon Hakuraa in Maldives was the major hit on revenue which has eroded the consolidated revenue by circa 13% YoY in 1QFY11.
However the Sri Lankan resorts have exhibited a sharp increase of 50% YoY to LKR272.6 mn in 1QFY11 on the back of the sharp increase in occupancy rates during the year, despite the closure of Cinnamon Lodge Habarana and Corral Gardens Hikkaduwa.
The dip in revenue has been out paced by the dip in Cost of Sales (down 15% YoY in 1QFY11) leading the company to improve the Gross Profit marginally to LKR758.6 mn in 1QFY11. Subsequently the gross margin has increased 3% YoY to 67% in 1QFY11.
The EBITDA has dipped 28% YoY to LKR64.4 mn on the back of the 12% YoY increase in Operating expenses. However the increase in operating costs have been somewhat weathered by the two fold increase in other income. Other income constitutes the interest received from banking the proceeds from the rights issue during the quarter (The company raised LKR3.6 bn via the rights issue of one ordinary share for every three shares held in order to support the expansion process).
Following the 28% YoY dip in EBITDA and the sharp increase in the tax bill the net profit for the period has dipped 12% YoY to LKR167.1 mn in 1QFY11. Further it is noteworthy that the interest expenses have seen a 21% YoY dip following the tailing off of circa LKR217 mn of debt during the quarter and the slide in interest rates.
The Sri Lankan segment has reduced its losses by 83% YoY supported by the increased arrivals, occupancies and ARRs despite the closure of two hotels for renovation and repositioning. Although the Maldivian segment has seen 128% YoY increase in their losses to LKR153.4 mn mainly due to the closure of Chaya Lagoon Hakuraa in 1QFY11.
Recommendation
KHL passed the break even occupancy level during 4QFY10 and has managed to maintain the occupancies at reasonable levels up to date. During FY10 KHL achieved an overall occupancy of 55% as opposed to 31% in FY09, thus we expect it to reach +65% in FY11. Further with growing occupancy levels KHL is expected to increase their ARRs above the industry expectations. With improvements in ARRs and Occupancies with KHL’s brand image and positioning we saw a complete turnaround in 4QFY10, where the company posted a profit of LKR477.5 mn up 35% YoY. Further the company recorded a 197% YoY increase in cumulative earnings during FY10.
Maldivian segment which hedged the negative earnings of the Sri Lankan segment all throughout, faced severe problems due to the recessionary pressure on the Maldivian tourism industry following the world economic and financial crisis.
However we saw record high arrivals of +200 k per month (up circa 20% YoY) and occupancy levels of 60-70% during 4QFY10 indicating the end of the tourism lull in Maldives. With the revival of the industry in 4QFY10 the Maldivian segment of KHL saw a 10% YoY increase in the bottom line to LKR1.6 bn. Going forward we believe the increase in occupancy coupled with the increase in ARRs would further uplift the contribution from theMaldivian sector.
Therefore we expect KHL to defy industry trends and report a strong earnings growth of 223% YoY to LKR661.8 mn in FY11E and 96% YoY to LKR1,294.2 mn in FY12E. Profit growth is driven by higher occupancy and ARRs, savings on Finance costs and accommodation capacity expansions. Further refurbishment projects carried out in most of the hotels has paid off during 4QFY10 itself and KHL is placing more emphasis on Chaya Blu, Coral Gardens and Benthota Beach Hotel as they are located in beaches which are among the top ten in the Asian Continent. Further they will be constructing three more hotels in the same coastal belt to strengthen their presence.
KHL is fairly valued at 45.3X forecast FY11E net profit and 23.2X projected FY12E earnings whilst it is trading on a PBV of 2.5X FY11E and 2.3X FY12E. Nonetheless the counter is trading at a 8% discount to the EVPS. Further the share has outperformed 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 and the planned expansion of accommodation capacity, KHL would sustain an impressive earnings growth during the next couple of years. Therefore in-view of strong performance, we believe further upside is possible and we maintain – BUY
0 comments:
Post a Comment