Think 'Dubai hotel', and there's a good chance the image that comes to mind is one of glistening, possibly gaudy, high-rise luxury as opposed to a Premier Inn. Across the gulf region, it transpires that that stereotype is borne out by the facts. Just a fifth of branded hotels cater to the economy and mid-range budget. But shifts in regional demographics and growing demand for affordable accommodation mean this is changing, which provides the foundations of the long-term investment case for Aim-traded Action Hotels (AHCG). Yet shares in the company have been largely ignored by the market since its 2013 IPO, and now look great value trading at a 37 per cent discount to adjusted net asset value (NAV) per share of 129¢ (84p).
- Big discount to NAV
- Board connections
- Under served market
- Decent dividend
- Key executive risk
- Share liquidity
Action licenses three- and four-star hotel brands from leading operators including InterContinental (IHG), Whitbread (WTB) and Accor (Fr: AC), to whom Action pays a fee based on revenues and profits. This allows Action to benefit from serious brand power which last year helped it achieve an occupancy rate of 77 per cent. For the chains, Action provides a presence in Middle Eastern states where foreign companies are often prohibited from owning property. The hotel group is able to acquire land thanks to its Kuwaiti-incorporated majority shareholder AGHC.
At the end of June Action had 1,488 rooms across eight hotels and plans to add a further nine hotels in the United Arab Emirates, Saudi Arabia, Australia, Oman and Bahrain by 2017. The costs associated with these openings will weigh on profits for the next couple of years, but will boost the longer-term potential for earnings and NAV growth. Importantly, Action is borrowing from local banks at an average interest rate of just over 5 per cent. With only 35 per cent occupancy typically required to break even, taking on low-cost debt to fund investment should benefit the group's earnings growth and cash-generation potential.
Competitive bank loans aren't hard to find when your founder and chairman is a member of Kuwait's ruling family. While this brings some board dependence risk, Sheikh Mubarak Al-Sabah's connections across the gulf give Action invaluable access to prime development locations. This pipeline strength is underscored by 31 per cent forecast annual compound growth in rooms to 2020, according to broker Investec.
Data from hotel industry analysis company STR Global suggests there will be enormous demand for those rooms. Last year, demand for three- and four-star hotels in Gulf Cooperation Council (GCC) countries increased by 9 per cent, which was more than 50 per cent ahead of the growth in supply. Airline travel to the region, as well as population and GDP are all expected to increase significantly in the next three years. And although the prospects of budget accommodation companies elsewhere are looking shakier due to the rise of Airbnb, lower uptake of the platform in the Middle East, together with Action's focus on business travellers, offers significant shelter.
ACTION HOTELS (AHCG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 53p | MARKET VALUE: | £78.2m | |
| TOUCH: | 51-55p | 12-MONTH HIGH: | 72p | LOW: 51p |
| FORWARD DIVIDEND YIELD: | 3.8% | FORWARD PE RATIO: | 48 | |
| NET ASSET VALUE: | 121¢ | NET DEBT: | 75% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 29.8 | -3.5 | -3.6 | 1.5 |
| 2014 | 37.6 | 2.2 | 1.3 | 2.2 |
| 2015* | 51.3 | 1.5 | 0.9 | 2.2 |
| 2016* | 85.8 | 4.3 | 1.7 | 3.1 |
| % change | +67 | +215 | +89 | +41 |
Normal market size: 5,000 Matched bargain trading Beta: 0.34 £1=$1.54 *Investec Securities forecasts, adjusted PTP and EPS figures | ||||
