Result Analysis: Change in operating models to boost room revenue
- 1H22 distributable income more than tripled to HK$125m, ahead of our expectations
- Hotel RevPAR more than quadrupled following changes to operating model
- F&B business, however, remained under pressure
- Upgrade to BUY with DDM-based TP raised to HK$1.28
Despite the fifth wave of the pandemic, Langham Hospitality Investment’s 1H22 distributable income more than tripled to HK$125m, above our expectations, because of stronger-than-expected rental growth. Yet, as in 1H21, no interim dividend was declared.
Langham, Cordis, and Eaton changed their operating mode amid the COVID resurgence. Langham and Cordis participated in the government’s Community Isolation Facility Hotel Scheme from mid-March to provide accommodation to COVID-19 patients with mild symptoms, and operate as designated quarantine hotels to serve those overseas travelers and returning residents from May till end-Oct. Eaton provided accommodation for Hospital Authority’s staff between mid-March and mid-June before resuming normal operations to focus on domestic staycation and long-stay markets.
This resulted in sharp improvement in occupancies and room rates. Occupancies at Langham, Cordis and Eaton rose 50ppts, 44.9ppts and 40.4ppts to 70.6%, 71.1% and 76.3% in 1H22 respectively. Langham and Cordis saw respective room rates climb by 44.6% and 48.9%. Eaton fared even better with room rate more than doubling. Therefore, revenue per available room (RevPAR) and room revenue of Langham, Cordis and Eaton more than quadrupled in 1H22.
But the COVID resurgence delivered a severe blow to its F&B business. With temporary closure of various F&B outlets at different times, F&B income plunged 48% to HK$104m in 1H22, partially offsetting the growth in room revenue.
With total hotel revenue rising 50%, these hotels returned to profitability in 1H22 with adjusted operating profit of HK$130m (1H21: loss of HK$18m). Hence, LHI earned variable rental income of HK$91m in 1H22. (1H21: nil)
As of Jun-22, total debt remained at HK$6.32bn. With higher hotel valuation, gearing Improved slightly to 41.7% from Dec-21’s 43.2%. Following the expiry of a HK$500m interest rate swap in Jun-22, interest cost for HK$2.7bn bank loan (or 42.7% of total) remained hedged at a weighted average swap rate of 1.08% p.a. This should help mitigate the interest rate risk.
We have raised our distributable income forecast for FY22 by 147% to reflect better-than-expected interim results.
Langham Hospitality Investments offers distribution yield of 7.2% for FY22 and 8.7% for FY23. The government has been relaxing the quarantine requirement for incoming international travelers and returning residents gradually, which is crucial to the recovery of inbound tourism as well as hotel sector. Upgrade to BUY with DDM-based TP of HK$1.28. A full-fledged recovery, however, would hinge on the re-opening of the border with Mainland China.