Sri Lanka Equity Analytics Markets 8 February 2010 259 views No Comment  Print This Post  Email This Post

Aitken Spence Hotel Holdings’ (AHUN) has recorded a net profit of LKR210.5 mn in 3QFY10 from a loss of LKR105.8 mn in 1HFY10, which is directly attributable to the reviving domestic tourism with higher occupancies and earnings from Maldivian hotels.

AHUN, a 71.7% owned subsidiary of local conglomerate Aitken Spence PLC (SPEN, LKR1379.00) currently operates 9 hotels in Sri Lanka, 7 in Maldives, 5 in Oman and another 5 in India. 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. As a part of their asset light strategy, the company is continuously searching avenues to expand its presence regionally and globally using its expertise in hotel management with minimal capital participation .

Gross revenue up 20% YoY to LKR1,985.5 mn in 3QFY10. AHUN’s top line has grown by a sharp 20% YoY in 3QFY10 and the result for cumulative 1-3QFY10 is also up by 8.8% YoY despite 6 months of the year falling into the off season of the tourism industry. The Sri Lankan sector recorded an improvement of 10.2% YoY whilst the South Asian sector has grown by a sharp 21.7% YoY during the quarter in concern,
mainly on the back of reviving domestic tourism and Maldivian contributions which were above expectations.

Operating costs have increased by 16.1%YoY in 3QFY10. The company’s operating costs have increased by 16.1% YoY to LKR1,541.6 mn in 3QFY10 where as the cumulative growth for 1-3QFY10 was a slower 8.3% YoY. Staff costs and direct operating costs have risen by 7% and 33% YoY respectively during the quarter, on the back of increased activity in hotels whilst depreciation and amortization costs increased by 35% YoY owing to the increased asset base. Other indirect expenses has increased by a marginal 5% YoY in 3QFY10 resulting a dip of 0.8% YoY for the first nine months of the year as a result of the successful cost rationalization exercises implemented in its hotels .

Operating profit of LKR385 mn in 3QFY10. AHUN has converted its marginal profit of LKR69.8 mn in 1HFY10 into a profit of LKR385 mn just in three months due to the reviving local tourism which has shown signs of turnaround in the near future. This was further supported by the Maldivian sector earnings where the occupancy of AHUN’s properties has gone up to 70% – 80% except a few resorts catering to niche up market segments.

Pre-tax losses year ago, converted into a profit in 3QFY10. AHUN’s Sri Lankan resorts and hotels has posted a pre tax profit of LKR5.32 mn in 3QFY10 from a loss of LKR44.34 mn year ago, reducing the cumulative 9 months loss to LKR154.5 mn (vs a loss of LKR243.3 mn last year, down 36.5% YoY) mainly driven by the growing domestic tourism.

Furthermore, AHUN’s associate earnings (Hotel Hill top and Browns Beach hotel) have also grown by stunning 106.5% YoY during the quarter in concern. However, the South Asian sector which comprises of Maldivian properties recorded a 39.3% YoY dip in its pre tax profits on the back of a slower recovery of the 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 LKR210.5mn for 3QFY10. Backed by the local and Maldivian tourism which have already created signals of turnaround, AHUN has recorded a net profit of LKR210.5 mn (against the loss of LKR105.8 mn in 1HFY10) despite 6 months out of 9 months falling into the tourism off season.

However when comparing the bottom line with the same period in the previous year, AHUN has posted a significant dip of 41%. (Profit of LKR210.5 mn in 3QFY10 Vs profit of LKR357.8 mn in 3QFY09). 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 FY09. Therefore, looking at the numbers excluding the capital gain, AHUN has posted a bottom line growth of a staggering 52% YoY for 3QFY10.

Future outlook
With the complete end to the 3 decade long terrorist conflict coupled with the positive macro economic outlook, tourism sector would be one of the first sectors to rebound. AHUN is positive on strong growth in local tourism, and as a 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. Also they are looking in to fill in its long lasting need for a City hotel in Colombo through acquisition or development of a new property.

Furthermore AHUN is refurbishing Neptune Hotel, one of its beach properties down 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.

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 FY10 earnings revised down to LKR350 mn. Backed by the slower recovery of the South Asian sector which accounts to a plus 80% of the top line, we revised down our forecast net profit to LKR423.5 mn (down by 28.5% YOY) in FY10E and LKR851.8 mn (up by 101% YoY) in FY11E.

Share is fairly valued on 37.7X forecast FY10E earnings. The share has gained three fold (246%) since the end of war on 18th May 2009 whilst we believe further upside possible with growing earnings materialising in the coming quarters. Furthermore AHUN would be one of the prime beneficiaries of the revival of local tourism (with the complete end to the 3 decade long terrorist conflict and opening of the eastern coast which is rich of tourist hotspots such as Arugam bay, Nilaveli beach etc) which has 09 properties in all strategic locations in the island which are upgraded and ready for the boom (It would need 2-3 years to develop a new hotel).

AHUN is fairly valued on 37.7X forecast FY10E net profit and 18.7X projected FY11E earnings whilst it is trading on a PBV of 3.2X, we maintain – BUY

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