Global Premium Hotels

UOBKayhian on 25 Jan 2013

Valuation

·      We initiate coverage on Global Premium Hotels (GPH) with a BUY recommendation and a target price of S$0.34, pegged to our dividend discounted cashflow model (DDM). Currently, the stock is trading at 14.2x 2012F consensus earnings with a dividend yield of 5.5%.

Investment Highlights

·      Buoyant tourism to drive hotels demandSingapore experienced a strong growth in tourist arrivals and tourism receipts between 2004 and 2011, registering a CAGR of 6.8% and 12.4% respectively. This was driven by new attractions such as the Integrated Resorts (IR), F1 Grand Prix and major MICE events. We have assumed tourist arrivals CAGR at 6% in 2013-15. For the longer term, the Singapore Tourism Board (STB) has set a tourist visitor arrival goal of 17m and tourism receipts of S$30b by 2015. This is likely to drive demand for hotel rooms.

·      LCC carrier to bring in a new segment of tourists Low-cost carriers (LCC) have gained much popularity in Singapore and we expect these airlines to bring in a new group of budget travellers, in particular from neighbouring countries such asMalaysia and Indonesia. We think GPH’s portfolio of economic hotels will also complement the sector and cater to budget travelers in the region.

·      Resilient portfolio with strong track record.We view that the economy-tier hotels are more resilient in any downturn. For example, during the global financial crisis, we saw average room rate and occupancy levels decline 22.3% and 10% respectively to S$191 per night and 77%, as travellers became more cost-conscious in terms of accommodation. GPH’s group of hotels’ average room rates only declined 18.6% to S$87.50, outperforming the general market in 2009.

Financial Highlights

·      GPH’s net profit after tax grew at a CAGR of 11.9% over 2008-11 to S$22.6m in 2011 as the group added Fragrance Hotel-Bugis, Royal in 2010, and Parc Sovereign and Fragrance Hotel- Riverside in 2011. We expect GPH to report a net profit of S$19.9m in 2013, backed largely by improvement in average room rates and occupancy rates, but eroded by higher interest expenses.

Risks

·      Largely dependent on the Singaporehospitality industry As GPH runs a chain of hotels, financial performance will be dependent on demand of rooms and the average occupancy rate. Some of the risks pertaining to the hospitality sector mainly include changes in the domestic, regional and global economies, environmental conditions and viral epidemics threat of terrorism and natural disasters etc.

·      High debt financing for its hotels The current net debt to equity remains high at 1.42X with interest cover at 4.7X. As GPH is able to obtain bank financing secured by its properties, interest rates remain low ranging from 2-3% p.a.. However, any increase in the interest rate and interest payment is likely to erode their profits. We estimate that a 0.5 ppt rise in interest rate will reduce profit by 10%. However, we do expect any rate increase till 2015.