Tris downgrades Minor, removes previous alert

Tris

Rating has removed the credit alert with a negative implication placed on the company and issue ratings of Minor International Plc.

Tris also downgraded the company rating and the rating on Minor’s outstanding senior unsecured debentures to A from A+ with a stable outlook.

The downgrade reflects Tris’s expectation that Minor’s leverage will rise as a result of a large debt-funded acquisition. Minor is in the execution stage of acquiring NH Hotel Group SA (NHH).

Tris forecasts that Minor’s financial leverage as measured by adjusted debt to earnings before interest, tax, depreciation and amortisation (ebitda) will rise to 5-6 times for the next few years, a level that does not support an A+ rating.

The ratings reflect Minor’s strong market position in the hotel and restaurant segments, plus its diversified sources of income from a strong portfolio of brands and wide geographic coverage.

If the acquisition of NHH succeeds as planned, Minor will further strengthen its business position by expanding its reach in Europe, adding more hotels in more locations and broadening its customer base.

The ratings also take into consideration the cyclical and risky nature of the hotel industry. Geographic diversification mitigates these concerns to some extent, however.

Tris Rating expects Minor’s ratio of adjusted debt, excluding extra items, to ebitda to jump from around 4 times to 5-6 times because of the NHH acquisition. The base-case scenario is built on key assumptions: Minor ends up owning 51-55% of NHH shares by the end of 2018; share acquisition costs €1.3-1.4 billion; and share purchases are funded with new borrowings.

Minor’s reported debt is projected to rise from 48 billion baht as of March 2018 to 120-125 billion baht post-acquisition. NHH’s lease obligations are significant. As a result, adjusted debt (including guarantee commitments and lease obligations) will rise from 60.5 billion baht to 210-220 billion baht on a consolidation basis.

NHH is the sixth-largest European hotel chain, operating 382 hotels with 59,350 rooms in 30 markets.

The supply of hotel rooms in many of these cities is limited. NHH’s target market segment is business travellers, with rooms priced in the middle to upper end of the price range. NHH’s hotels complement Minor’s hotel portfolio with little or no overlap.

Minor’s existing hotels are primarily in tourist destinations in Thailand, Australia, the Middle East, elsewhere in Asia and Portugal. Once the acquisition is completed, the substantially larger portfolio of hotels will strengthen Minor’s ability to weather the cyclical and volatile nature of the hotel industry.

Tris expects the acquisition to bring greater synergies and raise long-term growth prospects to a new level. A substantially larger hotel portfolio will enhance Minor’s competitive position and give it more negotiating power with counterparties such as travel agencies.

But Tris sees Minor’s restaurant operations remaining under pressure. A weak economy and intense competition in key markets (Thailand, Singapore, Australia, China) are the main causes. The company is tackling the operational challenges by revising menus, product innovation, new promotions and marketing campaigns, rationalising the number of outlets, and controlling costs.

The base case assumes that Minor’s same-store sales will be flat or grow at a low-single-digit rate in 2018-19. Revenue from the restaurant segment is forecast at single-digit growth during the period.

After the operations of NHH are consolidated into Minor’s financial results, the restaurant segment will make up a smaller portion of sales and profits. The restaurant segment made up 40% of revenue and 35% of ebitda annually before the NHH acquisition.

These contributions are projected to fall to 15-20% of total revenue and ebitda post-acquisition, assuming 51-55% shareholding. Despite the drop, Tris believes that the restaurant segment remains an important part of Minor’s business mix. The restaurant segment is less cyclical than the hotel segment and produces a steady stream of operating cash flows.

The NHH acquisition will substantially increase Minor’s scale of operations and earnings. Tris Rating’s base-case forecast, excluding the effects of the acquisition, assumes that Minor’s total revenue will grow by 6%-8%, pushing revenue to 58-59 billion baht in 2018.

Solid results in the hotel segment, especially at hotels in Thailand and Portugal, will drive the improvement. Revenue per available room at hotels Minor owns outright is forecast to grow at a high-single-digit rate of 7-9%. Revenue in the hotel segment will grow by midteens percentage.

Tris predicts modest growth in the restaurant and retail businesses because of lingering consumer weakness.

The ratings reflect Minor’s strong market position in the hotel and restaurant segments, plus its diversified sources of income.