TRIS Rating affirms the company rating on Central Plaza Hotel PLC (CENTEL) and the ratings on CENTEL’s senior unsecured debentures at “A”. The ratings reflect CENTEL’s strong market position in its hotel and quick service restaurant (QSR) businesses, low but rising level of financial leverage, and support from the Central Group. However, these factors are partially offset by the cyclical nature and susceptibility to global and local events of the hotel industry and the intense competition in the QSR industry.
KEY RATING CONSIDERATIONS
Strong market position in hotel business
CENTEL operates hotels under its owned brands including the “Centara Grand”, “Centara”, “Centra”, “COSI”, “Centara Boutique Collection” and “Centara Residence & Suite” brands. These hotel brands, especially Centara Grand, have favorable brand recognition in the domestic market. The company currently owns and leases 17 properties in business areas and key tourist destinations in Thailand such as Bangkok, Pattaya, Huahin, Samui, Krabi, and Phuket, and also in the Maldives. The company also operates 22 hotels under management contracts. During the past few years, its managed hotel room base has been quite flat. However, the company has a sizable number of managed rooms in the pipeline expected to open in 2019-2022.
CENTEL’s hotel portfolio is somewhat geographically concentrated in Thailand. CENTEL will add more hotels outside Thailand such as Dubai, United Arab Emirates (UAE) and the Maldives. We forecast the overseas hotel income contribution will rise to around 30% of CENTEL’s total hotel revenue in 2023, against the current contribution of less than 20% of total hotel revenue.
In 2017, CENTEL introduced an affordable lifestyle hotel brand called “COSI” to target a lower price segment and younger customers. The company opened its first COSI hotel in Samui in late 2017. The company plans to open more COSIs, including Pattaya in 2019 and Chiangmai in 2021. We view that the COSI brand will add a more diverse segment to CENTEL’s hotel portfolio. However, the success of the COSI brand still remains to be seen.
In the next five years, the company plans to expand its hotel portfolio, after remaining stable during the period of 2013-2017. TRIS Rating expects CENTEL’s capital expenditures will total around Bt28 billion for new hotels and hotel renovations during 2019-2023. We also expect the number of owned hotel rooms to reach 6,000 rooms by 2023, from 4,192 rooms as of March 2019.
Slowdown in inbound tourists from China and Russia affects hotel performance
We see that CENTEL is susceptible to event risk, given that its hotel segment mainly relies on the Thai tourism industry. We also see the reliance on Asian tourists (mainly Chinese) could potentially affect the hotel performance if they shift their preferred destination to other countries or if there is economic stagnation in their countries.
Inbound tourists grew at an average of 8.5% per annum during 2016-2018, reaching 38.3 million tourist arrivals in 2018. However, tourist arrivals grew only 1.5% year-on-year (y-o-y) in the first quarter of 2019. The slower growth was attributable to drops in Chinese tourists by 2% and Russian tourists by 1%.
CENTEL’s organic revenue per available room grew at an average of 2.7% per annum during the past five years. Until the first quarter of 2019, CENTEL’s revenue per available room was hit by the slowdown in the Chinese and Russian tourists, decreasing by 5.7% y-o-y. We see the effect from the slowdown in the Chinese and Russian tourists as temporary, and expect CENTEL will maintain acceptable hotel performance as the company previously operated at an occupancy rate (OR) higher than the industry average and achieved a premium in revenue per available room compared with peers.
Strong market position in QSR business
CENTEL operates 10 franchised brands and three owned brands. Brands in CENTEL’s portfolio are well-known, for example “KFC”, “Mister Donut”, “Auntie Anne’s”, and “Ootoya”. As of March 2019, CENTEL operated 1,003 outlets. The company’s extensive network of QSR outlets nationwide allows the company to leverage marketing and operating costs. The company also has a track record of consistently expanding food outlets while maintaining average sales per outlet. During the past five years, the company has expanded by roughly 40 outlets per year.
The company has yet to prove success in the development of its own brands. The performance of own-branded “The Terrace” has softened and the outlet expansion was muted in the past several years. The company is working to improve the performance of The Terrace. Additionally, in 2019, CENTEL launched two new owned brands including a Thai fast food QSR brand called “Aroi Dee” and a suki hotpot restaurant brand called “Suki House”. If its owned brands achieve favorable results, it will not only broaden its cash flow base but also lessen reliance on franchisors. The success in revamping The Terrace and launching new owned brands remains to be seen.
Despite operating multiple brands, the company’s food segment is quite concentrated in the KFC brand. CENTEL derived over half of its total food earnings before interest, tax, depreciation, and amortization (EBITDA) from KFC while its four other major brands, including Mister Donut, Auntie Anne’s, Pepper Lunch, and Ootoya, contributed approximately 30% of total food EBITDA. Apart from KFC, there are some other small brands with good prospects such as “Katsuya” and “Tenya”. However, these brands contribute less than 10% of total food EBITDA. We expect KFC to continue to dominate CENTEL’s food portfolio for the next several years, as it will take time to broaden CENTEL’s food EBITDA base across more brands.
Stiff competition in the restaurant segment
TRIS Rating sees a weakening same-store sales growth trend for CENTEL mainly due to high competition in the restaurant industry. CENTEL’s same-store sales have been slightly negative in the past few years. In the first quarter of 2019, CENTEL’s same-store sales decreased by 3.8%, in line with the industry trend. The company also managed to grow revenue from its food business by expanding food outlets, to Bt11.90 billion in 2018, a 9.2% growth, and Bt2.87 billion in the first quarter of 2019, a 3.4% growth y-o-y.
TRIS Rating expects intense competition in the restaurant industry to continue to put pressure on CENTEL’s same-store sales. However, given the favorable brands in its portfolio, the company will be able to increase food revenue by opening more outlets. We forecast revenue from the food segment to grow by 7% per annum on average during the next three years.
Rising financial leverage
Under our base case assumption, we expect CENTEL’s revenue to grow around 3%-7% per annum during 2019-2021, mainly driven by expanding quick service restaurant outlets and the 2021 reopening of some hotels under renovation during 2019-2020. EBITDA is forecast to range between Bt5.90-Bt6.70 billion per annum during 2019-2021, compared with EBITDA of Bt5.60-Bt5.90 billion per annum during the past three years.
CENTEL had modest financial leverage during the last three years, resulting from relatively slow owned hotel expansion during the past several years. The debt to EBITDA ratio was around 2 times and the ratio of funds from operations (FFO) to debt hovered around 40% during 2016-2018.
TRIS Rating forecasts the company’s leverage will increase, due to sizable investments, mainly in its hotel business, of around Bt23.00 billion in total during 2019-2021. We project the debt to EBITDA ratio to rise to 3.6 times and the FFO to debt ratio to decline to around 22% in 2021. We see that these ratios will improve later on as the company starts to realize returns from newly opened hotels in 2022-2023.
BASE-CASE ASSUMPTIONS
• CENTEL’s revenues to grow around 3%-7% per annum over the next three years.
• CENTEL’s operating income as a percentage of operating revenues to stay around 27%.
• Total capital spending to be Bt4.90 billion in 2019, Bt9.30 billion in 2020, and Bt8.40 billion in 2021.
RATING OUTLOOK
The “stable” outlook reflects our view that the company will maintain its market positions in the hotel and QSR businesses and maintain favorable profit margins over the next several years. The company should maintain the debt to EBITDA ratio well below 4 times and the FFO to debt over 20%.
RATING SENSITIVITIES
CENTEL’s ratings could be revised upward if the company meaningfully enlarges and diversifies each of its business portfolios while maintaining a satisfactory financial leverage. On the other hand, a rating downside could occur if we see a material weakening in its operating performance or overly aggressive debt funded investments, which result in the debt to EBITDA ratio increasing beyond 4 times or the FFO to debt ratio falling below 20% for a prolonged period of time.
COMPANY OVERVIEW
CENTEL was founded by the Chirathivat family in 1980 to operate the hotel business in Thailand. The company was listed on the Stock Exchange of Thailand (SET) in 1990. It expanded into the QSR business in 1994. CENTEL is a member of the Central Group, a leading retailer in Thailand. As of December 2018, the Chirathivat family held a majority stake of 62% in CENTEL’s shares outstanding.
CENTEL operates 39 hotels and a portfolio of 7,563 rooms of which 17 hotels are CENTEL’s owned and leased properties and the rest are hotels under management contracts. These hotels are situated in key tourist destinations in Thailand and five other countries including the Maldives, Vietnam, Sri Lanka, Oman, and Qatar. For the food segment, CENTEL offers a variety of products such as donuts, fried chicken, pastry, and Japanese foods. The company operated 12 franchised brands and owned brands, with a total of 1,003 outlets nationwide as of March 2019. In 2018, the hotel business generated 68% of CENTEL’s EBITDA while the rest came from its food business.
RELATED CRITERIA
- Rating Methodology – Corporate, 26 July 2019
- Key Financial Ratios and Adjustments, 5 September 2018
Central Plaza Hotel PLC (CENTEL)
Company Rating: A
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