Equity Analysis /
Sri Lanka

Aitken Spence: Maldives key to recovery; raise TP and reiterate Buy

    Asia Securities
    23 July 2019
    Published by

    SPEN estimates revised on better than expected recovery at SL Resorts

    While we still expect AHUN earnings to remain pressured over the first six months of FY20E, our channel checks confirm that booking momentum for November and beyond is recovering faster than expected driven by deep discounts and a gradual restoration of airline capacity. Momentum should further improve once cutbacks to jet fuel and handling charges in Colombo lead to a reduction in airfares, drawing a higher proportion of bargain hunting group travellers, thereby partially offsetting the impact from cancelled bookings post 21/4. Unlike for KHL, for AHUN the heavy exposure to the Maldives will cushion the overall impact to realize the turnaround in the sector much faster. However, we do note that AHUN is set to enter a refurbishment phase which could dampen the recovery process. However, no timelines have been provided yet. As such, with revisions to AHUN earnings, we also make revisions to our SPEN estimates. As a result, our SOTP valuation-based target price goes to LKR 56.80/share (previously LKR 52.00/share). Including a forecast DPS of LKR 1.50, we expect a TSR of +33.4%. BUY. We note that the upside is mainly from the sharp drop in price over the past year.

    Heavy exposure to the Maldives to cushion impact and realize quick turnaround

    Expanding capacity in MV and dampened business activity in Oman saw the International segment margins contract 6.5ppt over FY16-FY19. However, with the Maldives airport expansion coming into effect, driving double-digit growth in FY20E arrivals to the Maldives, we expect improvement in occupancies and margins within the segment. With international operations accounting for the majority of earnings (60.1% of total EBIT in FY19), we believe AHUN is in a solid position to offset domestic weaknesses and still realize a group EBIT profit in FY20E, although significantly below FY19 levels.

    Aggressive capex and working capital restraints to add pressure in the LR

    However, unlike KHL, AHUN is set to enter a period of heavy capex with projects in the pipeline including a new resort in the Maldives as well as the refurbishment of Heritance Kandalama, Heritance Tea Factory and Adaaran Select Meedhupparu, Maldives. It is unclear if these are full or partial refurbishments or when the projects are set to commence. Nevertheless, this along with working capital restraints, AHUN is likely to see a significant increase in borrowings, both long and short-term, adding further pressure on already heightened finance expenses, apart from the impact to earnings. We note that we have not factored in a moratorium on debt as it is still under discussion.

    TP increases to LKR 56.80/share while we maintain our BUY rating

    The stock has dropped 8.6% YTD and down 12.4% YoY and is trading at 4.9x our FY20E earnings. With revisions to Leisure segment estimates in SPEN, our SOTP valuation-based TP goes to LKR 56.80/share (previously LKR 52.00/share). Including a DPS of LKR 1.50, we derive a total return of +33.4%. BUY. We note that the upside is mainly from the sharp drop in price over the past year.