Fortress Hotels’ earnings forecast at Rs. 215.7 m

John Keells Stock Brokers (JKSB) is forecasting Fortress Hotels PLC to post net earnings of Rs. 215.7 m for FY2012 and an earnings figure of Rs. 299.4 m for FY2013, considering the anticipated elevation of the hotel sector of the country and the refurbishments that are planned to go through during the year. Here are excerpts of the JKSB earnings update on RHTL:
Fortress Hotels PLC which started operations in the recent past is positioned to cater to the higher end market with a range of value added services. Located in the southern capital city of Galle, hotel’s main clientele hails from UK which is the second largest tourism market in Sri Lanka being followed by India.

The Fortress, which happens to be the Vallibel Group’s primary luxury tourism property, has 53 rooms. The hotel operated with 65% occupancy during FY2011, while it was completely occupied during the peak season.
Financial performance
The revenue of RHTL witnessed an elevation of 47% YoY that achieved a top line of Rs. 416.3 m for FY2011 that brought in a profit of Rs. 84.4 m compared to the loss of 78.9 million in the preceding year.
This was shouldered by the revival of the tourism sector that enabled the hotel in achieving an all time high occupancy rate of circa 65% in comparison to 52% in the preceding year. This in turn increased the average room rate to Rs. 20,217 compared to Rs. 16,420in the preceding year.
The gross profit margin improved from 65% (FY2010) to 73% in FY2011, mainly backed by the increase in ARR while maintaining the total direct cost incurred. The net profit margin of the counter improved from a negative of 28% to a positive circa of 20% during FY2011. Revenue from restaurant sales has also shown a staggering growth of 34% compared to the 4% growth in the last year which created a positive implication towards the net profit.
Meanwhile the interests cover of RHTL improved to 2.1X in comparison to the interest cover of 0.2X the preceding year due to the debt re-payments. Moreover, EPS also improved from a negative Rs. -0.7 to a positive Rs. 0.8.
Future outlook
Sri Lanka’s hotel and leisure industry is set for buoyant growth with the increased tourist influx in to the country following the end of the three decade old armed conflict that made two thirds of the coastal belt accessible.
The period under review was an exceptional one for Sri Lanka which welcomed 655,000 tourists to the island which is 47% increase compared to the preceding year where Government expects to achieve tourist arrivals of 2.5 m by 2016.
The supply deficit that is expected to be witnessed by the hotel sector would also be of benefit to existing leading five star hotels. Thus Fortress has the advantage of reaching high room occupancy levels going forward. The global economic revival together with the anticipated growth in the hotel sector will create a favourable potential for the company.
Valuation
On a futuristic perspective, we forecast RHTL to post net earnings of Rs. 215.7 m for FY2012 and an earnings figure of Rs. 299.4 m for FY2013 considering the anticipated elevation of the hotel sector of the country and the refurbishments that are planned to go through during the year.
In terms of price earnings valuation the counter is currently trading at a PER of 37.0X which we expect to improve to 14.5X in FY2012 and 10.4X in FY2013. In addition the counter is trading at a PBV of 5.0X, which we expect to improve to a PBV of 3.7X in FY2012 and 2.7X in FY2013 respectively. Further this is as opposed to a sector trailing PER of 38.5X and a sector PBV of 3.1X.