Centel keeps high marks as tourism shines

Tris Rating has affirmed the company rating on Central Plaza Hotel Plc (Centel) and its outstanding senior unsecured debentures at A.

The ratings reflect Centel’s strength in hotels and quick service restaurants (QSR), its low but rising level of financial leverage, and its support from Central Group.

But these strengths are partially offset by the cyclical nature and susceptibility to risk of the hotel industry, as well as the intense competition in the QSR segment.

Tris expects the tourism industry in Thailand to remain strong. Tourist arrivals to Thailand grew sharply during the past three years at an average rate of 13% a year, to 35.4 million inbound tourists in 2017. The number of arrivals grew by 12.7% year-on-year to 19.5 million in the first half of 2018.

Chinese tourists have played a large part in the flourishing of tourism in Thailand, growing at an average of 28% a year during 2014-17. The Chinese contributed 28% of total arrivals in 2017.

Tris expects Centel to benefit from strong growth in Thai tourism, as most of Centel’s properties are situated in key tourist destinations in Thailand. At the end of the first quarter of 2018, Centel owned and operated 15 hotels in Thailand and two hotels overseas, while managing 18 hotels in Thailand and three hotels abroad.

The company derived 80% of total hotel revenue from hotels in Thailand.

Despite the good prospects for the Thai tourism industry, Tris sees Centel as susceptible to event risk, given that its hotel segment mainly relies on the Thai tourism industry.

Tris also views the increasing reliance on Asian tourists (mainly Chinese) as potentially affecting future performance if such tourists shift to other countries as their preferred destination or if there is economic stagnation in their own countries.

Tris forecasts the overseas hotel income contribution to rise to one-third of Centel’s total hotel revenue by 2022, against the current contribution of one-fifth of total hotel revenue.

Overseas hotels in the pipeline include two owned hotels in the Maldives and a hotel under a joint venture in Dubai.

Tris expects strong competition in the restaurant industry in Thailand to continue to put pressure on Centel’s growth, as there are a growing number of choices available to consumers and low barriers to entry in the restaurant sector.

Centel’s same-store sales growth in the food segment was slightly negative over the past several years. Overall food revenue, however, grew by 4% to 10.89 billion baht in 2017, driven mainly by new store expansion.

Tris expects KFC to continue to dominate Centel’s food portfolio. KFC operations as a franchise contributed more than half of Centel’s food segment revenue and earnings before interest, tax, depreciation and amortisation (ebitda) during 2014-17.

Tris forecasts Centel’s leverage indicated by adjusted total debt to capitalisation ratio to rise to 58% in 2020 from 49% in 2017. This is due to sizeable investments of around 18 billion baht over 2018-20, of which around 80% will be investment in new hotels and renovation of existing hotels.

The rest will be used to add new food outlets and maintain existing food outlets.

Tris expects Centel’s average revenue growth of 5% a year and ebitda to range between 4.8 billion and 5.4 billion baht during 2018-20, mainly driven by new food outlet expansion as some hotel properties will still be under major renovation and some hotels in the pipeline will have not yet started operations.

Adjusted debt to ebitda ratio will rise and hold below 3.2 during those years, compared with 2 in 2017.