Action Hotels – Investment First Look

The big news is not continued dividend payments or expansion going to plan. But, the misreporting of the operational hotel rooms.

Before, we begin.

Action Hotels is an owner of branded three to four-star hotels. Since their establishment in 2005, it develops partnerships with: –

  1. Whitbread (owner of Whitbread),
  2. Intercontinental Hotel,
  3. And Accor.

It is a subsidiary of Action Group Holding Company (K.S.C.C). 

 

Action Hotels Plan and IPO

The company got listed in late 2013 at 64 pence per share, with net proceeds of £26.4m ($34m). Today, the shares trade at 37 pence.

One interest data point is Action spent $98m before their IPO. That amount translated to 1,000 rooms in services.

But, the company’s main aim is to operate 5,000 rooms by 2020. So, the question on every analyst’s lips: “How is £26m going to get the job done?”

From IPO prospectus, assume $100m gets you 1,000 rooms into operations. Would it cost another $400m to achieve 5,000 rooms?

Since the end of 2016, Action added an extra 1,177 rooms and total debt rose to $228.4m from $108m, an increase of $120.4m. Factor in net proceeds of $34m, it costs Action $154.4m.

How is the expansion coming along?

(P.S. The section below reveal something investors should know!)

Action Hotels – their growth So Far

(N.B.: Results don’t include financial notes. So, some data is from last year.)

We know they plan to operate 5,000 rooms by 2020. Today, it has 2,181 rooms. But the weird thing is the number of rooms stayed the same over the period 2010 and 2012. Were there funding issues?  We don’t know.

Action Hotel room numbers

Warning: – The real issue is the number of hotels reported as operational. Management blamed lower revenue per room (RevPAR) of $61.7 (down from $71) on the big increase in rooms from 1,561 to 2,181.

That is false because management is putting “wools over the investors and shareholders’ eyes”.

Compare 2015’s operational highlights to 2016’s operational highlights, it is night and day!

The 2015’s operational highlights showed 1,928 rooms in operations in 2015.

The 2016’s operational highlights showed 1,561 rooms in operations in 2015.

 

When you take 2015’s operational numbers, it means the REAL increase is 253 rooms, not 619 rooms! That is lower than 2015 (440) and 2014 (484).

Why the discrepancy?

Action Hotels doesn’t want to tell investors the real reason for this poor performance, that is LOWER OIL PRICE!

 

That’s affecting the Gulf State economies, representing 65% of total revenue.  

Lower oil prices mean lower government revenue, which leads to budget cuts. In turn, that means lower business visits.

 

Okay, calm ourselves and assume other data is accurate.

(N.B.: Below are last year numbers.)

Another area, investors should watch is Property, plant and equipment. To know if Action Hotels are leasing or owning the properties.  

In the financial notes, it tells us that land build-up been tremendously fast. Since the end of 2011, the value of land under ownership rose from $58m to $103m. At the same time, the value of buildings rose from $53m to $187m.

The increase is $179m on the change in land and buildings.

But, some of it came from revaluation surplus meaning land and buildings value are mark-to-markets. It is fully-priced at the market value, so if a competitor wants to take over Action Hotels, they are not paying a premium for it.  

Analyst Tip: Search for Consolidated statement of changes in equity, which is on the balance sheet. Look over to the “revaluation reserve” and, since 2011 it rose from $24m to $73m.

$49m came from revaluation meaning the real increase is $130m.

(P.S. There is no land depreciation, whereas building is depreciated at 2% per annum.)

 

Action Hotels – Interpreting their Final Results

Sales growth is as expected and is mostly boosted by the expansion of hotel rooms in its portfolio.

Gross margins are maintained in the 70s, but higher finance costs of $13m are overshadowing operating profits of $6.43m.

Action Hotels finance costs

Although we don’t know the reason why finance costs jumped 110% from last year, despite total debt rising by 30%. It is a worry because financing interest costs might have risen because of the continued low oil prices.

The reasons why operating profits fell by 27% are pre-opening expenses doubling and depreciation rising by 50%.

 

Balance Sheet

Action continues growth at a fast pace with property, plant and equipment doubling in 5 years.  

N.B.: Details of Action Hotels expansion under section “Action Hotels – their growth So Far.”

 

Debt levels continue to grow to $228m and are secured by land and buildings.

 

Cash Flow

Some investors look at net cash earnings of $23m (up from $11m) and think the company is generating a lot of cash. But they are spending more on growth.

 Action hotel free cash flow

 

The blue bar chart of “Free Cash Flow” is deep in the red. And since 2012, the company burn $150m for expansion.

Expect this cash burn to continue as they aim to operate 5,000 rooms by 2020.

Naturally, a growth company don’t pay a dividend, but this one does. And it is the WRONG dividend policy to take!

(P.S. More of this in the details below. See “Dividends”)

 

 

Action Hotels operational breakdown and KPI

Unsurprisingly, the majority of sales came from the Mid-East.

 Action Hotels revenue breakdown

Due to its fast expansion, it posted disappointed Hotel KPIs numbers.

Action Hotels KPIs numbers

Hotel rates are falling, as well as lower occupancy, both of these data helping to reduce RevPAR (Revenue per room) to $61.5 (£49). The other is new hotel rooms. 

 

Financing Action Hotels

Apart from raising net proceeds of $26m from the IPO. Most of their financing came in the form of borrowing loans. It’s no secret that Action Hotels been borrowing heavily to expand their rooms portfolio.

The current debt level is at $193m (£160m), most of it long-term loans and secured against the net book value of land and buildings.

Both land and buildings are valued at $270m.

Action Hotels has $77m margin of safety, which is a 30% more than its debts. However, that safety will come under pressure if property prices were to collapse.

 

Dividends

When you are trying to aim for 5,000 rooms by 2020, there is no way they should be paying shareholders dividends.

But, they have and it continues for this year.  

So, what prompted the payments. Well, as mentioned in the introduction, Action Hotels is a subsidiary of holding company called Action Group Holding Company (K.S.C.C). KSCC controls 65.7% of Action Hotels

The full-year dividend was 2.26 pence per share from 2.21 last year. Today’s share price is 37 pence per share, making it a 6.1% yield.

(P.S. The dividend payout was smaller at $4.54m, compared to last year $4.94m because of the weaker British Pound.)

 

 

What others are saying

Both Investor Chronicle and ShareProphets got a buy rating for this company.  

 

 

My Thoughts

My main concern is the reporting of Action Hotels rooms in operation. The mismatched between last year 2015 (1,928 rooms in operation) vs. 1,561 rooms is disturbing.

Even if management is laying the blame otherwhere, how would you value Action Hotels?

For shareholders, they need to ignore revenue generation because that comes from rooms growth and focus on these: –

  1. Property; – Value of land and building.
  2. Total debt.
  3. Company’s objective.

Using last year numbers, I refer to $77m as the difference in total debt and net book value of land and buildings. That number is important. Because after all debt repayments are repaid, it represents the equity portion for shareholders.

I know that earnings power would pay off debts over a period, but finance costs exceed operating profits. Until they stop expanding, net cash earnings are ineffective measure because of negative free cash flow.

I wouldn’t recommend investing in this company based on the structure of ownership, where the parent company owns over 60%. With high debt levels, it brings the arrangement of debt into question.

 

Is something fishy going on at Action?

Would you invest in Action, if the oil price is back up at $100?

Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.