Financial Times

Aitken Spence earnings hit by tourism downturn
The slow recovery in resort tourism is likely to hurt short term earnings of the Aitken Spence conglomerate and its resort hotel subsidiary Aitken Spence Hotel Holdings.

The latter is expected to be particularly hard hit by the down turn in visitors to the Maldives, stock brokers Asia Securities said in a research report. "A slower than expected recovery in tourist arrivals to the Maldives and local resort destinations post-tsunami is likely to negatively impact on short term earnings of resort hotels and conglomerates with high exposure to resort tourism," they said.

"However, despite 1H2005 earnings likely suffering from unfavourable industry conditions, we believe that the medium to long term earnings growth potential of both conglomerate Aitken Spence and its 74 percent owned regional resort hotel operator Aitken Spence Hotel Holdings remains intact due to strategic diversification, superior product portfolio and likely lucrative future investment plans."

Despite the earnings downgrades, the parent firm is supported by the resilient and lucrative power and transportation sectors. Aitken Spence offers the most attractive valuations within the conglomerate sector, amidst possible expansion into other high growth areas of the economy such as health tourism in the longer term, the brokers said.

With the Maldives segment contributing more than 70 percent of Aitken Spence Hotel Holdings FY04 profit before tax, the brokers said they believe the delayed recovery of arrivals to the archipelago will have a "significant negative impact" on the group's 4Q05 earnings.

Asia Securities said it has downgraded the FY05E net profit forecasts. "Despite foreign aid workers, a growing MICE segment and short haul discount package tourists sustaining arrivals to Sri Lanka, who mainly patronise city hotels, tourist arrivals to the Maldives archipelago and local resorts remain disappointing," the brokers said. Total tourist arrivals to the Maldives during 4Q05 were only 83,880 persons, down 54.8 percent YoY, whilst average occupancy levels of most Sri Lankan resort hotels remain below 40 percent.

Asia Securities said they have downgraded Aitken Spence Hotel Holdings FY05E net profit by 36 percent to Rs 337 million, down 15 percent YoY. "However, we maintain our FY06E net profit target at Rs 578 million (up 71 percent YoY), amidst expectations of higher returns from Kandalama and Triton properties post-refurbishment."

The brokers also downgraded its FY05E and FY06E net profit forecasts for the Aitken Spence conglomerate by 23 percent and four percent to Rs. 1,183.8 million (down seven percent YoY) and Rs 1,899.9 million (up 60 percent YoY), respectively.

However, they said Aitken Spence Hotel Holdings remained an attractive buy, despite concerns relating to the short-term performance of the regional resort sector, because of its low valuations and superior product portfolio.

"Furthermore, we understand that the group is looking to venture into the Indian market, while also evaluating options within the city hotel sector, which has a higher growth potential in the short to medium term," Asia Securities said.

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