July 20, 2010 (LBO) - Sri Lanka's hoteliers say 10 billion US dollars have to be invested to more than double the country's hotels rooms to 35,000 by 2016 to cater to an expected 2.5 million tourists, but the journey is not a cake walk.
Already valuations of traded stocks have zoomed to dizzy 'dot com' heights, and profits to justify the valuations are lagging several years behind.
Dizzy Multiples
The hotel sector is trading at a very high 103 times profits in the Colombo stocks. Profits have only just started to emerge in a sector which saw losses for most of last year.
"Most of the hotels were in the negative territory before December, so it was eating into total profits of the market," says Saminda Weerasinghe, head of research at Acuity Stockbrokers in Colombo.
"In December hotels contributed 3.0 percent to profits. In March it was 8.0 percent."
Occupancy in hotels is now reaching 80 percent in Sri Lanka. Sri Lanka has 14,500 hotel rooms rated by star category by the state tourism authority. The hotels are expected to be able to accommodate about 750,000 tourists.
This year the industry is expecting 600,000 arrivals, up from 447,000 last year. Sri Lanka's tourism authority is projecting 2.5 million tourists by 2016.
Weerasinghe says about 2,000 to 3,000 hotel rooms are expected to be put up by developers over the next two years. It may go up to 20,000 by 2016, he says.
Investment Plans
Sri Lanka's Amaya Leisure says it wants to put 100 million US dollars into four hotels over the next four years. Its affiliate Colombo Continental will put in another 60 million US dollars.
John Keells Holdings has said it has lined up over 50 million US dollars to put in to hotels over the next two to three years.
Of that the group has already spent 5.0 million US dollars to refurbish its property in Trincomalee and has kicked off a 25 million US dollar hotel in Beruwela in the southwest coast, says Krishan Balendra, head of strategic planning in the group.
A 10 million US dollar refurbishment of Coral Gardens Hotel in Hikkaduwa, also in the southwest, has also started.
Turning Around
Balendra says occupancy at their hotels are about 80 percent from around half that before the end of a 30-year war in May 2009. Average room rates at its two large Colombo five star rated hotels have also increased to 70 to 90 dollars a day.
Weerasinghe says profits of hotel firms are expected to grow 60 to 70 percent a year "at a minimum" over this year and the next.
"Tourism is a sector which is highly operationally geared where you have high a fixed cost base," he says. "As your top line increases the effect it has on your earnings is in multiples.
"With 60 to 70 percent earnings growth, compared to a trailing P/E (price to earnings multiple) of 103.5 the forward P/Es should hover around 60 and 64s."
An earnings multiple of 60s is still very high.
Balendra says return on capital in hotels where the group had dumped most of its capital had been 'quite frustrating'.
In the year to March 2010 JKH resort hotels had made a loss and city hotels had shown return on capital of 3.0 percent. Now city hotels were returning 5.0 percent and resorts were starting to turn around.
"Looking at occupancy we are confident that within the next two years the returns from these two segments will exceed group hurdle return on capital of 18 percent," he says.
The company carries the investments in its books at a value of around 29 billion rupees with city hotels accounting for 12.9 billion rupees. But their replacement cost is about 58.3 billion rupees, with the two city hotels alone having a replacement value of for 33.2 billion.
A 4-star 80 room hotel now costs about 30 million US dollars to build, says Jetwing leisure group chief Hiran Cooray. The firm is pumping 1.3 billion rupees this year alone to refurbish two hotels.
Cooray says Sri Lanka may need 35,000 rooms to cater to 2.5 million tourists needing billions of dollars in new investments.
"The rough estimate we have made is that we will need 10 billion US dollars," he says.
Gold Rush
S Kalaiselvam, director general of Sri Lanka's Tourism Development Authority says investors have been taking up newly demarcated tourism 'mega resorts' in state lands to build 8,000 rooms, especially in the east of the island.
"In terms of Pasikudah (in the east) about 1,000 rooms," he says. "These will come really by 2012. In the case of Kuchchiveli (in the east) it is about 3,000 rooms. In the case of Kalpitiya (in the northwest) it is about 4,000 rooms."
"These are hotels being constructed in state lands. In addition there are hotels coming up on private land."
He says most are in the planning stage.
Jetwing's Cooray says the government was building roads and planning new ones which are giving confidence to hoteliers to invest, especially in high end resorts in remote areas.
But he sounds a note of caution. At the moment he says there is a 'gold rush' to the east and John Keells is the only major group to actually put significant money in the east so far.
"The others are rushing to grab land," he observes. "But when they see the cost they pad up and wait. In cricket we say 'padding up without going into bat'."
Cooray says an 80-room hotel in a 4-star category cost 10 million US dollars to build.
"It takes at least a year to get all the approvals sorted out. That is with all the bureaucracy working quite speedily to get the approval. It takes two years to build.
"Three years when your money is sitting there. So a lot of people do not have the confidence to really go there and invest."
Playing Field
Sri Lanka's interest rates are also high, partly due to a lavish spending government that has for years borrowed all the money saved by the people and prints the balance sending inflation up.
Rupee interest rates are about 10 to 12 percent - which is low considering historical rates - and the rates cannot be locked in at the long term.
Sri Lanka has a soft-pegged monetary regime, where inflation shoots up when the central bank is forced to print money to fund deficits, requiring even higher interest rates to bring them down. Risk free rates shoot up to 20 to 22 percent every few years.
High rate volatility and balance of payments crises have been associated with such soft-pegged or 'managed float' regimes combined with deficit spending elsewhere.
Hotels are instead trying to borrow in dollars to cut interest rates. Economists call this problem - which is also associated with soft-pegs - 'liability dollarization'.
John Keells says a 200 room 4-star hotel will cost about 20 million US dollars to build. The land may cost about another 3 to 4 million US dollars.
"The whole trick in this is to be able to build at the right price," says Ajit Gunewardene, deputy chairman of John Keells Holdings.
"The discipline of building on time and at the right price is something that is going to be crucial."
John Keells expects its new hotel in Beruwela to pull in about 170 dollars full board double to generate a return on capital of 18 percent starting from 2013.
"The issue is if the 20 million dollars go to 30 million dollars you are dead.
source - www.lbo.lk
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