Result Update: Rising cost pressures
- FY23 distributable income grew 56% to HK$298m, broadly in line with our estimate
- Despite improving profitability, final distribution, however, was withheld to preserve cash
- Interest hedging ratio fell to 25% following the expiry of interest rate swaps
- Downgrade to HOLD with lower TP of HK$0.76
Riding on post-pandemic hotel sector recovery, Langham Hospitality Investments (LHI) posted a 56% growth in distributable income to HK$298m, broadly in line with our forecast. However, to preserve cash, LHI declared no final distribution in FY23, which came as a negative surprise.
Following the border reopening with Mainland China and lifting of social distancing measures, overall RevPAR posted 61.7% growth in FY23 on higher occupancies and room rates.
Langham showed robust RevPAR growth of 80.1% while RevPAR of Cordis and Eaton also rebounded 55.2% and 44.4% respectively. In 2023, occupancy rates of Langham, Cordis and Eaton were up 27.1 ppts, 23.4 ppts and 13.6 ppts to 86.9%, 89.8% and 87% respectively, with average room rates surging by 24%, 14.7% and 21.8% respectively.
F&B business was a bright spot. Following the removal of all social distancing policies in early 2023 with no temporary outlet closures, F&B revenue climbed 86% to 715m.
With total hotel revenue surging 67%, aggregate adjusted gross operating profit more than doubled to HK$526m from FY22’s HK$213m. Were it not for rising cost pressure, the growth in gross operating profit would have been stronger. Overall, LHI earned variable rents of HK$368m (FY22: HK$149m).
Cash finance cost rose 76% to HK$236m due to higher average HIBOR. In 2H23, LHI repaid a portion of bank loans to reduce debt. As of Dec-23, total borrowings stood at HK$6.06bn, down 4% from Jun-23’s HK$6.32bn. Coupled with a higher hotel valuation, gearing improved slightly to 38.3% from Jun-23’s 40.5%. Following the expiry of interest rate swap contracts that totaled HK$3.2bn, interest costs for 24.8% of total loans were fixed at an average swap rate of 3.99% p.a. as of Dec-23. The company has secured a twelve-month extension of its bank loan until Dec-24, however, it is exposed to refinancing risk amid this prolonged interest rate upcycle.
To reflect increased cost pressure, higher cash financing costs, and lower expected payout ratio of 50% (previously 90%), we trimmed our distribution income forecasts for FY24F.
In the past six months, Langham Hospitality Investments’ share price tumbled 29%, underperforming the broad market by 19ppts. Meanwhile, Langham Hospitality Investments is trading at a distribution yield of 2.1% for FY24 and 4% for FY25. Despite continued inbound tourism recovery, the current valuation is not appealing. Moreover, dividend omission could possibly dampen near-term sentiment. Downgrade the stock to HOLD from BUY with DDM-based TP lowered to HK$0.76.
