bahrain hotels company b.s.c. – results update report
• Global values BHC stock at BD0.533 and recommends a BUY on the stock.
Global Investment House – Kuwait- Bahrain Hotels Company B.S.C. – Results Update - BHC, established in 1967, is a public limited liability company listed on the Bahrain Stock Exchange. BHC owns and manages a portfolio of hospitality related assets such as hotels, restaurants and catering services.
Currently the company owns and operates the Gulf Hotel which started its operations in 1969. Gulf Hotel is the first locally managed five star hotel in Bahrain and is located at the heart of the capital, Manama. In 1997, BHC launched Gulf International Convention & Exhibition Centre (GICEC) as part of its facilities. It has a total area of about 5,000 sqm and accommodates 2,200 seats. The hotel’s management works closely with Bahrain’s National Tourism Directorate, Economic Development Board, Gulf Air and International Event Management companies. In March 2006, BHC introduced a new luxury residence in the kingdom of Bahrain called Gulf Executive Residence. It is operated by and situated adjacent to the Gulf Hotel complex. The 14 floors and 97 apartments residence make a valuable addition to the BHC portfolio.
BHC has undertaken the management of a number of ventures on behalf of various companies including the management of Ocean Paradise Resort, Zanzibar on behalf of Paradise Reality Holding Company. The resort, which was opened in May 2004, is located on picturesque North East coast, overlooking the Indian Ocean. BHC’s had an agreement to manage the catering facilities at Riffa Golf Club which finished on 31st August 2007 with the closure of the course and the clubhouse for the development of the Riffa Views residential golf community. BHC was also involved in designing the catering facilities of the VIP Tower for the Bahrain International Circuit (Formula 1) project.
Financial Performance
BHC has been making strong gains in its profitability as all its business segments reported good earnings in recent years. Net profit grew at an impressive CAGR of 41.4% since 2003 and grew by 33.0% on a y-o-y basis to reach BD5.2mn. BHC’s gross operating revenue has increased by 14.4% in 2006 to reach BD21.0mn from BD18.4mn in the previous year. The gross operating revenue has been constantly increasing over the past four years at a decent CAGR of 14.5%. The company had expanded its hotel services and in March 2006 and opened a luxury residence, Gulf Executive Residence, which delivers to a new market segment and consequently increased BHC’s revenue. Gross operating profit increased by 22.6% in 2006 to reach BD7.32mn from BD6.0mn reported in the previous year. In 2006, general expenses decreased by 40.6% and administration expenses increased by 9.6% which resulted in an overall increase of 35.8% in the profit from operations to BD4.7mn.
Being in the hotel business, property, plant and equipment has always been a major constituent of BHC’s assets. However, its proportion as percentage of total assets has declined from 67.3% in 2003 to 56.6% in 2006. Total assets of the company grew at a CAGR of 8.4% over the past four years to reach BD34.8mn in 2006. Overall, BHC’s total assets were mainly employed in its core business activity in a diversified portfolio of hospitality related assets. The proportion of current assets as a percentage of total assets has increased from 27.8% in 2003 to reach 36.3% in 2006.
As the company’s net income grew over the years, return on average assets (ROAA) followed the same pattern as it was 15.9% in 2006 vis-à-vis 13.1% in 2005. Return on average equity (ROAE) increased from 16.3% in 2005 to 19.9% in 2006.
BHC reported a net profit of BD3.5mn in 1H-2007, an increase of 19.2% over the BD2.9mn reported in 1H-2006. The increase in net profit came on the back of a 10.5% increase in gross operating revenue to reach BD12.0mn from BD10.8mn reported in the corresponding period of the previous year. Gross operating profit margin for the first half of 2007 rose to 39.2% as compared to 38.8% reported in the same period last year.
The balance sheet size grew by 3.8% during the first half of 2007 to reach BD36.1mn as compared to BD34.8mn reported at the end of 2006. The growth in total assets was mainly driven by a 5.7% increase in property, plant and equipment reaching BD 20.8mn in 1H-2007 versus BD19.7mn reported in 2006.
Outlook and Valuation
We believe that BHC has a potential for growth as the company has ambitious expansion and renovation plans. In addition, the tourism sector in GCC has been showing healthy performance in recent years. At its current market price of BD0.460 BHC’s stock is trading at 9.9x its 2006 earnings, and 8.2x its projected 2007 earnings. In our calculation we have used a risk-free rate of 6.62%, a market risk premium of 5.75% and a beta of 1, which resulted in a cost of equity of 12.37%. We have assumed a terminal growth rate of 3% based on the outlook of tourism activity in the region. Using the DCF method we obtained a fair value of BD0.566 per share. Based on a forward P/E multiple of 7.1x for selected tourism companies in Bahrain and the 2007 projected EPS for the company, the peer valuation method resulted in a fair value of BD0.398 per share. Assigning an 80% weight to the DCF value, and a 20% weight to the relative value, the weighted average share value of BHC came out to BD0.533 per share. BHC’s share is quoting at a discount of 15.8% to its fair value of BD0.533. Hence we recommend a “BUY” on BHC’s stock.
