TRIS Rating Co., Ltd. has affirmed the company rating of Central Plaza Hotel PLC (CENTEL) at “A-”. At the same time, TRIS Rating has also assigned a “A-” rating to CENTEL’s proposed issue of up to Bt2,000 million in senior debentures. The rating outlook is “negative”. The ratings reflect CENTEL’s diversified cash flow from the hotel and quick service restaurant (QSR) businesses, leading position in the QSR business, and a diverse hotel portfolio with solid market positions. The ratings also take into account the support from the Central Group. However, these factors are partially offset by the downturn in the tourism industry due to the global economic slowdown; the nature of the hotel industry, which is seasonal and highly sensitive to external factors; and the nature of the QSR industry which is highly competitive with low margins. Additional concern is CENTEL’s continuing expansion in the hotel business, which requires substantial amount of investment that will drive leverage higher.
The “negative” outlook reflects the weaker performance of CENTEL during the time of spending capital expenditures. The company's ratings will be negatively impacted if hotel operations are further affected by the global economic downturn, or if the company enlarges the current expansion plan and increases CAPEX above the existing level. CENTEL is also expected to achieve its plan to reduce leverage after two new hotel properties commence operation.
TRIS Rating reported that CENTEL was founded in 1980 by the Chirathivat family to own and operate a hotel in Thailand. CENTEL currently operates nearly 2,700 rooms at 16 hotel properties in key tourist destinations in Thailand, under its own Centara brand. Except for the Sofitel Centara Grand Hua Hin, which is managed by Accor International, CENTEL manages hotel properties under its Centara brand. Sofitel Centara Grand Bangkok and Novotel Centara Hat Yai are managed by CENTEL under the Accor franchises. CENTEL operates QSR businesses under its subsidiary, Central Restaurants Group (CRG). CRG’s food portfolio consists of several international and regional franchised QSR chains: KFC, Mister Donut, Baskin Robbins, Auntie Anne’s, Pepper Lunch and Beard Papa’s, with a combined total of more than 500 outlets countrywide. The hotel and QSR businesses each accounted for half of the total revenue in recent years. On behalf of CENTEL, the Central Group recently renewed a leasehold contract of Sofitel Centara Grand Bangkok with the State Railway of Thailand for another 20 years. Since the property is a strategic asset, which contributed around 12% of total revenue in 2008, the renewal should help the company sustain its leading position in the meeting incentive conference and exhibition (MICE) market and maintain market share among the 4-star hotels.
TRIS Rating said that CENTEL’s revenue in 2008 continued to grow, but overall operating performance slightly dropped. Revenue grew by 13% in 2008 to Bt8,024 million and increased by 1% in the first three months of 2009 to Bt2,108 million year-on-year (y-o-y). Total hotel revenue increased by 5% y-o-y in the first three months of 2009, while QSR sales dropped by 3% y-o-y. Hotel revenue increased to Bt1,054 million in the first three months of 2009, though the average revenue per available room (RevPAR) dropped by 16% (excluding new opening hotel, Centara Grand @ Central World) over the same period due to the industry slowdown. The slight increase in hotel revenue was attributable to an increase in the number of hotel rooms at Centara Grand @ Central World, which opened 400 more keys for service over the first three months of 2009. Despite a soft market, the company ran hotel properties at occupancy rate of 71% in the first quarter of 2009, relatively higher than the industry average. QSR operation slowed in early 2009 as same-store sales contracted by 9% in the first three months of the year, which led the company to close a number of non-performing outlets. In April 2009, the company adjusted the QSR portfolio to cope with the slowing performance by terminating the Pizza Hut franchise. CENTEL gradually discontinued 25 Pizza Hut outlets, which will cause in QSR sales for the whole year to drop, but better profitability in the long term. Profitability also weakened over the past year. The operating profit margin dropped to around 18% for 2008 and the first three months of 2009 from 21% in 2007.
The funds from operations (FFO) to total debt also decreased to 15% in 2008 from 18% in 2007. The debt to capitalization ratio continued to increase to around 55% in March 2009 from 44% at the end of 2005 as the company continued expanding, spending over Bt6,000 million to develop three major properties in three key tourist destinations in Thailand. The company leased out Centara Grand Samui to the Centara Hotels & Resorts Leasehold Property Fund (CTARAF or the Fund), generating proceeds net of related expenses of Bt1,400 million. Though the proceeds received from the CTARAF will alleviate the need for its planned public offering, the need for new capital to complete construction of three new projects remains high. The company used new debt to finance the project construction. With strong relations with commercial banks, CENTEL normally has bank project financing in place to support construction. As of March 2009, the company had available credit lines with commercial banks of more than Bt6,000 million. Because the company recently decided to delay construction of the Centara Grand Phuket resort, for one more year, capital expenditures (CAPEX) will peak after mid-2009, when the company completes the Centara Grand Mirage Beach Pattaya. Hence, the total debt to capitalization ratio is expected to remain high through the end of 2009.
TRIS Rating said, the Thai tourism industry has been affected by the global economic recession and the national political unrest since late 2008. The number of international tourist arrivals to Thailand in the second quarter of 2009 is expected to decrease, following a 15% drop in the first quarter, with a potential contraction in the full year number. The downturn has become an industry-wide threat, weakening the performance of hotel operators and forcing some owners with financial difficulties to sell properties. For hotel operators with sufficient financial resources, there seems to be an opportunity for new investment at reasonable prices. However, any new debt financing will increase financial risk. It is crucial for hotel operators to maintain sufficient liquidity and financial flexibility to stay viable during the downturn. Major debt-financed acquisitions may reduce the financial cushions and credit profiles of selected operators. -- End
Company Rating: Affirmed at A- Issue Rating: Up to Bt2,000 million senior debentures due within 2013 A- Rating Outlook: Negative
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