Hotel Properties Limited – Hospitality business still challenging

HPL reported a worse-than-expected 2Q09 net profit, which slumped by 72% yoy to $4.4m, despite its revenue declining by a relatively smaller 27%. Not only was the hospitality business affected by the global financial crisis, HPL has to share losses suffered by its associate, mainly due to interest expenses for the Farrer Court site. The effective tax rate was also higher-than- expected.

Due to the global financial crisis, political instability in Thailand and the H1N1 pandemic, HPL’s hospitality business suffered. HPL also owns several luxury resorts, such as the Four Seasons Jimbaran Bay in Bali and the resorts in the Maldives. We believe that they are less resilient in the downturn vis-à-vis hotels, which could still attract corporate clients.

Based on the STB’s statistics, visitor arrivals in Jun declined by 8.9% yoy to 750,000. Competition remains keen amongst hoteliers, with the average RevPar for upscale hotels declining by 31% yoy. HPL’s three hotels in Singapore are the Four Seasons Hotel, the Hilton Hotel and the Concorde Hotel. Outlook for these hotels, which contribute to about 30% of HPL’s topline, could be challenging in the short-term.

Via its stakes in Farrer Court and Gillman Heights, as well as its wholly-owned Beverly Mai, HPL’s future earnings are likely to be boosted by development profits from these projects. The 1000-unit Gillman Heights project could be launched in 2H09, with CapitaLand leading the project. If launched this year, profits are likely to be recognized only next year.

Besides the potential earnings kicker from the residential projects, we are still cautious on the hospitality sector, which is HPL’s core business. We have reduced our FY09-10 forecasts by 28% and 1.6%, respectively. Maintain HOLD at a target price of $2.25, pegged at a 20%-discount to its RNAV of $2.82.

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