TRIS Rating has affirmed the company and senior unsecured debenture ratings of Central Plaza Hotel PLC (CENTEL) at “A” with “stable” outlook. The ratings reflect the diverse sources of cash flows from CENTEL’s hotel and quick service restaurant (QSR) businesses, strong position in the QSR industry, and diverse hotel portfolio, which comprises its properties with solid market positions. The ratings also take into account the support from the Central Group. However, these factors are partially offset by the low margins of the QSR industry and the nature of the hotel industry which is seasonal and highly sensitive to uncontrollable external factors. Both industries are highly competitive, considering the huge supply of hotel rooms in key tourist destinations and the aggressive promotional efforts that are common among competing operators of QSRs. The “stable” outlook reflects the expectation that the company will be able to maintain the strong market positions of its major hotel and QSR brands. The company is not expected to implement aggressive debt policy for its new investments.
CENTEL was founded in 1980 by the Chirathivat family, which currently holds 63% of the company’s outstanding shares. The company is a Thai leading hotelier and QSR operator. As of June 2014, CENTEL’s hotel portfolio consisted of 8,216 rooms, at 43 hotel properties located in key tourist destinations in Thailand and five other countries. Properties owned by CENTEL directly comprise 46% of the total rooms across 15 hotels, including one joint venture (JV) and one property leased back from a property fund. CENTEL acquired Centara Grand Island Resort & Spa Maldives in late 2012. After the acquisition, CENTEL opened a second four-star hotel, Centara Ras Fusi Resort & Spa, in the Maldives in March 2013. Currently, the company operates 250 hotel rooms in the Maldives. CENTEL manages the hotel properties under its own “Centara Grand”, “Centara”, and “Centra” brand names.
All activities in the QSR segment are conducted through its subsidiary, Central Restaurants Group (CRG). CRG currently operates 13 QSR brands, consisting of 11 international franchised QSR chains and two of its own brands, “RYU Shabu Shabu” and “The Terrace”. During the past 12 months, two new franchises were added to its portfolio, “Tenya” and “Kutsuya”. As of June 2014, the company operated a total of 767 outlets countrywide.
Normally, the revenue CENTEL receives from the hotel segment is less than the revenue from QSR segment. However, in terms of cash flow, the hotel business generates more cash flow than QSR business as the hotel business has a higher operating profit margin. However, the performance of hotel segment is more volatile. For example, the financial performance may drop sharply in response to uncontrollable external events. In 2013, the hotel segment comprised 47% of CENTEL’s total revenue, while earnings before interest, tax, depreciation, and amortization (EBITDA) of hotel segment accounted for 68% of CENTEL’s total EBITDA.
Political protest began anew in Thailand in late November 2013. However, the political protests did not cause a material effect on the financial result of CENTEL for the full year. This changed in the first half of 2014. The political protests continued and were forced to end by a coup d’?tat, which did affect the foreign tourist's confidence. The political situation made foreign tourist arrivals decline to 11.77 million persons, a 9.9% year-on-year (y-o-y) drop in the first six months of 2014, from the double-digit growth rate during the last three years. However, TRIS Rating views that since the curfew was already terminated in June 2014, Thailand’s tourism industry would be able to benefit from the peak season in the fourth quarter of the year.
The overall occupancy rate (OR) of CENTEL’s own properties increased from 69.4% in 2012 to 79.6% in 2013. For the first six months of 2014, CENTEL reported an OR of 72%, compared with 80% in the same period of the previous year. However, CENTEL’s average room rate (ARR) increased, rising from Bt3,777 per night in 2012 to Bt4,462 per night in 2013 and to Bt5,186 per night in the first six months of 2014 due to the higher room rates of CENTEL’s new properties in the Maldives.
In 2013, total revenue grew by 18% to Bt17,096 million, as the hotel segment and QSR segment grew. Sales in the QSR business rose by 10% after adding more outlets. Revenue in the hotel segment increased by 28% as the number of foreign tourist arrivals increased and the new hotel properties in the Maldives turned in good performance. In the first half of 2014, the performances of the hotels in Bangkok were affected by the political turmoil. Despite this disruption, total revenue of CENTEL increased by 3% y-o-y to Bt8,811 million due to the strong performance of overseas hotel properties and growth of QSR sales. Revenue contribution of domestic hotels comprised 77% of the revenue in the hotel segment, compared with 91% in the same period of the previous year. CENTEL’s operating profit margin improved from 19.6% in 2012 to 21.5% in 2013. In the first half of 2014, the operating profit margin dropped to 21.4%, compared with 23.8% in the first half of 2013.
Funds from operations (FFO) increased from Bt2,390 million in 2012 to Bt2,938 million in 2013 and stood at Bt1,404 million in the first half of 2014. As a result, the FFO to total debt ratio improved from 18% in 2012 to 21% in 2013 to the first half of 2014. However, the EBITDA interest coverage ratio declined from 5.7 times in 2012 to 5.4 times in the first half of 2014. As of June 2013, the company had available commercial bank credit lines of approximately Bt2,000 million. CENTEL’s capital structure has improved as it repaid its outstanding debt. The debt to capitalization ratio declined from 57.4% at the end of December 2012 to 54.2% at the end of June 2014.
CENTEL plans to invest around Bt10,000 million to build new hotel properties over the next three years. The investment will be funded mainly from operating cash flow. TRIS Rating forecasts CENTEL will generate approximately Bt3,000 million per annum in operating cash flow. Thus, the debt to capitalization ratio will hold at 50%-55% in the medium term. Should the company make other investments, TRIS Rating expects that CENTEL will carefully manage its capital structure and sources of funds for the new investments.
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