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Are Tougher Times Ahead For Hotel Royal Limited?

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When it comes to hotels, companies like UOL Group (SGX: U14) or GuocoLeisure Limited (SGX: B16) might come to mind more readily than an outfit like Hotel Royal Limited (SGX: H12).

But make no mistake, Hotel Royal – as its name suggests – is very much involved with the hotel business. With the release of its second quarter results just recently, let’s take a closer look at the hotelier.

Brief introduction

Incorporated in 1968, the Hotel Royal started off running hotels but gradually branched out to into different ventures. Today, even though hotels are still a big part of its business, Hotel Royal also owns commercial real estate and invests in equities and “established fund managers”.

The company’s flagship 16-storey Hotel Royal comes with 331 suites and luxurious rooms and is located along Newton Road, a stone’s throw away from Singapore’s well-known shopping belt, Orchard Road. Some of the company’s other assets also include Hotel Royal @ Queens, Hotel Royal Penang, and Grand Complex, a prime commercial complex in the central business district of New Zealand.

Financial results

For the first half of 2014, Hotel Royal managed to eke out a 2.3% year-on-year gain in overall revenue to S$25.7 million. Coupled with lower cost of sales, gross profit inched up 8.1% from S$12.7 million a year ago to S$13.8 million.

However, faced with rising administrative expenses and lower “other income” contribution, Hotel Royal only managed to grow pre-tax profit by 4.3% to S$7.2 million. The bottom-line’s further aggravated as the company’s income tax expense almost doubled from S$0.66 million to S$1.26 million due to its higher rental income from Grand Complex. As a result, net profit dropped 15.7% year-on-year to S$2.61 million.

Financial position as of 30 June 2014

Compared to the end of 2013, Hotel Royal’s balance sheet had worsened: cash on hand dropped from S$20.1 million to S$16 million while total borrowings increased from S$86.9 million to S$104.8 million. It should be noted that the weaker balance sheet came about because the company had been spending for expansion: Hotel Royal Bangkok (one of its hotels) had undergone renovation and the company had increased its ownership stake of 11 apartments in Royal Residences.

That said, while spending for growth might be a good thing, investors should still keep an eye on the company’s balance sheet due to the high amount of debt.

Prospects & Valuation

Management acknowledges that the comapny is facing challenging times due to recent unrest in Asia, such as Thailand’s political instability and the unfortunate flight accidents involving Malaysia Airline. These events have negatively impacted the company’s hotel businesses in the region. In addition to the above, the company’s profitability may also be affected by currency risks in its investment portfolio of equities and funds.

Although management admits that tougher times may be ahead, they are trying to progressively upgrade the company’s portfolio of hotels and other properties so as to maximize rental income. At its current price of S$3.91, Hotel Royal Limited is valued at 35 times trailing earnings. Interestingly, shares of the hotelier are only priced at 0.8 times its book value despite the high price earnings ratio.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.