Hotel Grand Central: Gains from forex

Once again, its bottlomline performance was boosted by forex gains. Hotel Grand Central (HGC) posted a muted set of results, but its net performance was significantly boosted by strong foreign exchange gains which amounted to S$7.57m in 2Q, bringing half-year gains to a total of S$10.52m, or half of the reported pretax profit of S$23.0m in 1H09. Stripping out these gains, operating profits fell 49% YoY and 18% QoQ to S$4.5m.

Revenue in 2Q09 fell 25% YoY, but was flat QoQ. For 1H09, operating profit plunged 49% to S$10.0m. This was seen from the decline in operating margins which slipped from close to 30% in 1H08 to around 20.7% in 1H09. Acquisition of holiday Inn in Adelaide. This month, the group also announced the purchase of the Holiday Inn at Adelaide for A$34.9m. This comprised of a 181-room hotel located within the Central Business District in Adelaide. Management expects this acquisition to add abut 0.27 cents to its EPS.

Better global prospects, but tourism likely to remain muted. Economic outlook looks better now compared to a quarter ago, and we expect tourism activities to pick up, albeit from a low base. However, with still-cautious consumer demand, we expect the operating environment for hotels to remain challenging. While occupancy rates could possibly edge up in its core markets (Singapore and Australia), room rates have limited potential for upward adjustments. This was similarly reflected in the management's brief statement that "the hotel market conditions in the countries where the group operates in, are not expected to recover in 2009 compared to last year."

Maintain HOLD and fair value estimate of S$0.58. While we are maintaining a decline in FY09 operating profits, we are raising our bottomline estimates to take into account the strong foreign exchange gains seen in 2Q09, which look unlikely to be repeated in the 2H of this year. With this key adjustment, our FY09 net profit has been raised to S$29.6m, up from S$14.4m. However, at the operating level, we expect operating profits to decline 38% YoY to S$19.5m in FY09. We are also maintaining our fair value estimate at S$0.58. After our previous report in May 2009, the stock has moved up 19% to the current price of S$0.635. We see limited price drivers ahead and are maintaining our HOLD rating.

Sponsored Links

Hotel Grand Central: Tough environment

Weak set of 1Q09 results. Hotel Grand Central (HGC) posted a 30% YoY decline in 1Q09 revenue to S$24m, and with only a 21% drop in expenses to S$18.5m, operating profit plunged 49% to S$5.5m. The decline in revenue was due to lower occupancy and room rates in all countries. With the decline in profitability, this meant that gross margin eased from 31.6% in 1Q08 to 22.9% in 1Q09. However, pretax profit fell a smaller 19% YoY to S$9.7m due to foreign exchange gains of S$2.96m in 1Q09 versus losses of S$1.04m in 1Q08. As a result of this, pretax profit margin improved from 34.8% to 40.2%, giving net profit of S$7.6m (down only 11% YoY).

Drop in occupancy and room rates. Tourism activities remained subdued, not helped by the current swine flu fear which has further aggravated the decline in tourism receipts. As a result of this, we expect room rate and occupancy levels to remain weak, further supported by weak tourist arrivals at its flagship Singapore hotel (based on data from the Singapore Tourism Board). Based on our last discussion with management, room rates for its Singapore hotel fell by as much as 30%, while occupancy rates have eased by about 10-15 ppt to around 70%. The delay of the Little India project, its second hotel in Singapore, is not expected to have any material impact in light of current low occupancy rate. This scenario is likely to be similarly replayed at its New Zealand and Australian operations, and we have accordingly lowered our estimates for FY09 and FY10.

Maintain HOLD, raised fair value estimate to 58 cents. While the worst appears to be over for the global economy, tourism remains frail brought on by concern over the swine flu. This has pushed back our expectation of a recovery for the hotel and tourism industry. We have lowered FY09 net profit from S$15.5m to S$14.4m and also revised down FY10 earnings from S$16.4m to S$14.8m. However, we have raised our discount to NAV to 50%, upping our fair value estimate from S$0.48 to S$0.58. Given the current price of S$0.535, we are maintaining our HOLD rating. Do note that we have also reduced our DPS expectation to 2.0 S cents (giving yield of 3.7% based on current price) as we expect management to conserve cash to ride out the current challenging conditions.