CDL Hotels hopes to make a profit this year - maybe

Friday 7th September 2001

Once upon a time companies used to make profit forecasts. However, the forecasting ability of directors proved so poor that almost all gave up the attempt.

In that context, shareholders should be grateful hotel and property group CDL Hotels has gone as far as forecasting in its annual report that it expects to make a profit in 2001.

The reluctance to be more specific is understandable given the trying environment for hoteliers. Chronic oversupply in some areas, volatile tourist numbers and preferences and a trend toward serviced apartments have all affected margins in recent years. Throw in the vagaries of property development (through listed subsidiary CDL Investments) and substantial Sydney assets (through Kingsgate International Corporation) and CDL has its hands full.

Chairman John Wilson doesn't offer a lot of hope of dramatic recovery.

"The board is of the view that considering the uncertainty of the property market and prevailing economic conditions the future outlook is rather challenging.

"Barring unforeseen circumstances, the board is of the view that the year 2001 will be a profitable year."

The softness in property markets on both sides of the Tasman has seen writedowns in values over the years (CDL's accumulated losses total $221 million). The latest revaluation, a writedown of $23.7 million on Kingsgate's Millennium Hotel Sydney, helped trim profit dramatically in the year to December 31. CDL turned in a net profit of $1.4 million compared with $6.2 million in 1999. This is despite a significant lift in revenue from $164 million to $242 million.

What's worse, its net operating cash flows fell to negative $37 million from positive $62 million. This shows up in the balance sheet as a blowout in accounts receivable to $109 million from $32 million. A note to the accounts shows the culprits are "residential debtors" who owe $77 million against zero in 1999.

This is probably related to the sale of luxury apartments in Sydney, which have yet to settle. However, more information on this item would not have gone astray.

Based on shareholders' funds of $210 million, the company achieved a mere 0.7% return last year but even in 1999 its return was just 3%.

Of course, property is a cyclical business and CDL may well be at, or near, the low point of the cycle. However, its five-year financial summary (commendably positioned at the front of the report rather than hidden at the back like most other reports) shows the good times were not that great either.

Its best result in the past five years was in 1996, when it produced a net profit of $15.5 million on equity of $182 million for a return of 8.5%. That would not have been enough to warm investors' hearts and it has seen a steady slide in performance since then.

The company is obviously conscious of this and is addressing it.

New managing director Tsang Jat Meng (68) has come over from Singapore to take charge. The company is spending millions on upgrading facilities and he stresses increasing yields is the group's primary focus.

As part of global chain Millennium & Copthorne Hotels, CDL hopes to benefit by promoting its 29 hotels to the world's tourists through the parent company's massive distribution network. This is important as tourists made up 62% of its guests last year.

Segmented figures show hotels to be the weakest part of the group. After the valuation writedown, hotels lost $21 million before minority interests. Even ignoring that, it still would have made only $2 million on revenue of $120 million. Geographically, New Zealand is profitable but Australia is on fairly even revenues.

Tourist numbers to this corner of the world are growing strongly and that is forecast to continue. However, the number of accommodation and tourist operators looking to take advantage of that growth is also increasing. When expensive hotels have been built, they have to be filled even if it means slashing margins.

While CDL may remain profitable, it will be no easy job improving its margins or shareholder returns.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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