John Keells Hotels (KHL) Repositioning hits the bottom line.....

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

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John Keells Hotels (KHL) recorded a net profit of LKR205.0 mn for FY10 up 197% YoY

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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Aitken Spence Hotel Holdings (AHUN) - 4QFY10 earnings rise by a sharp 28% YoY

Aitken Spence Hotel Holdings' (AHUN) has recorded a net profit of LKR523.8 mn in FY2010, whilst its 4QFY2010 earnings grew by a stronger 28% YoY owing to the turnaround performance in the local tourism sector coupled with the recovering Maldivian sector earnings. However, the 12% YoY dip in full year earnings (LKR592.6 mn in FY2009) is directly attributable to the poor performance in the Maldivian sector which suffered lower occupancy levels and deteriorating profit margins as a result of the global economic downturn.

AHUN, a 71.7% owned subsidiary of local conglomerate Aitken Spence PLC (SPEN, LKR1552.00) currently operates 9 hotels in Sri Lanka, 7 in Maldives, 5 in Oman and another 5 in India. The company operates its resort portfolio under three brands; namely "Heritance", the premier brand with 5 star luxury properties, "Adaaran", the Maldivian resorts and "Aitken Spence Hotels", comprising of all managed properties. The company is continuously searching avenues to expand its presence regionally and globally using its expertise in hotel management with minimal capital participation as part of their asset light strategy.

Gross revenue up 11% YoY to LKR7,320.5 mn in FY2010. AHUN's top line has grown by 11% YoY in FY2010 mainly on the back of revived Sri Lankan operations coupled with the improved performance in the South Asian sector. The company's local resort and hotel operations has posted a sharp increase of 19% YoY in its revenue whist the South Asian sector has grown by a slower 9% which was severely affected during the first half of the year by the tourism off season and global recession.

However, AHUN has posted a top line of LKR2,416.4 mn in 4QFY10, where Sri Lankan resort and hotel operations (23% of the total revenue) grew by an impressive 42% YoY along with a 8.5% YoY growth in South Asian operations.

Operating costs have increased by 9%YoY in FY2010. The company’s operating costs have increased by 9% YoY to LKR5,936.9 mn in FY2010 whilst the final quarter recorded a faster growth of 12% YoY due to high activity levels in the hotels.

Staff costs and direct operating costs have risen by 15% YoY during FY2010 whilst depreciation and amortization costs increased by 18% YoY owing to the increased asset base. Other indirect expenses have increased by a marginal 1% YoY in FY2010 resulted by the successful cost rationalization exercises implemented in its hotels.

Operating profit of LKR1,152.8in FY2010. AHUN has recorded an operating profit of LKR1,152.8 mn in FY2010 (dipped by 5% YoY) whilst recording a sharp rise of 20% 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.

However the year as a whole posted a dip in operating profits due to stagnant prices and pressurized margins in the South Asian operations.

Pre-tax profits grow by 36% YoY in 4QFY2010. The company has recorded a pretax profit of LKR628.8 mn (up 36% YoY) in 4QFY10, whilst its FY2010 earnings dipped by 6% YoY to LKR792.8mn. AHUN’s Sri Lankan resorts and hotels have halved its pre tax losses to LKR135.3 mn (dipped 52% YoY) in FY2010 whilst the contribution from associates (Hotel Hill Top and Browns Beach Hotel) posted a profit of LKR4.6 mn from a loss of LKR3.2 mn an year ago.

However, South Asian sector which comprises of Maldivian properties recorded a dip of 26% YoY in its pre tax profits on the back of slower recovery of global economy (where the occupancy is
still at 80%) and the downward pressure on the rates. With the recovery of the global economy coupled with the company’s world class hotel chain we believe the sector will rebound and get back to its lucrative ways in the near future.

AHUN recorded a net profit of LKR523.8mn for FY2010. Backed by the booming local leisure industry and recovering Maldivian tourism, AHUN has recorded a net profit of LKR523.8mn despite the first half of the year falling into tourism off season.

However when comparing the bottom line with the result quarter ago, AHUN has narrowed its dip to 12% YoY from 60% YoY. It should be noted that the previous years net earnings includes the profit of LKR219 mn (included in Other operating income) which was gained from the disposal of Bathala Island Resort in FY2009.

Therefore, looking at the numbers excluding the capital gain AHUN has posted a staggering 40% YoY growth in its net earnings for FY2010.

Future outlook
With the end to the 3 decade long terrorist conflict coupled with the positive macro economic outlook, AHUN is positive on strong growth in local tourism. As part of their expansion strategy the company is planning to build one or more hotels in Trincomalee (where they have 100 acres) whilst seeking prospects in Jaffna and Kalpitiya.

In March 2009, AHUN announced a right issue at LKR260 per share (1 for 4 ordinary shares held) to raise LKR2.5 bn to fund its expansion strategies, which was successfully subscribed (Post to Balance Sheet date). Also, the company acquired Golden Sun Resorts (Pvt) Ltd ("Ramada Resort, Kalutara") which is a managed property of AHUN for a purchase consideration of LKR350 mn during the year in concern.

In addition, AHUN is currently refurbishing Neptune Hotel, one of its beach properties in the south to be rebranded under its premier brand "Heritance". Once refurbished, it will be a wellness resort and a spa specialising in ayurvedic treatments which will be opened in winter 2010. Plans have also been finalised to build a new up market hotel in Ahungalla (down south) which would be a venture with world renowned Six Senses spa.

According to their regional expansion strategies, plans have been finalised to add more properties in India (Under Heritance Brand) which would be operational in the coming years.

Forecast FY11 earnings revised up to LKR901.8 mn. Backed by the recovering South Asian sector where occupancies are improving, coupled with the booming local leisure industry, we revise up our forecast net profit to LKR965 mn (up by 72.2% YoY) in FY11E and LKR1,250 mn (up by 38.7% YoY) in FY12E.

Share is fairly valued on 37.7X forecast FY10E earnings. The share has gained two fold since the end of war in May 2009 whilst we believe further upside possible with growing earnings materialising in the coming quarters. The share is fairly valued on 22.1X forecast FY11E net profit and 15.9X projected FY12E earnings.

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