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Hotel Royal Limited’s Latest Earnings: Charging Ahead despite the Challenges Faced

Hotel Royal Limited (SGX: H12) is a property investment company based in Singapore. The company’s portfolio currently consists of hotels in Malaysia, Singapore, and Thailand, and a commercial complex in New Zealand. In addition, the company also invests in equities on its own and has funds parked with fund managers.

The company announced its third quarter results yesterday and things are not looking so well. Let’s take a closer look.

Financial highlights

For the nine months ended 30 September 2014, Hotel Royal recorded a 5% year-on-year drop in net profit to S$8.36 million despite enjoying a 5.3% increase in revenue to S$40.7 million. The drop in profit is mainly due to the increase in finance cost and administrative expenses for the company – both grew at a faster pace than revenue.

The operational on-goings

Operationally, revenue from the company’s hotel rooms had been boosted by its newly-acquired resort in Thailand and the increase in room rates in Malaysia. However, the tourism industry in Singapore seems to have cracks appearing as Hotel Royal’s hotels here had experienced lower room rates and lower occupancy.

Fortunately for investors, even if Hotel Royal’s business does slow down significantly over the short-term, it is unlikely to suffer any dramatic permanent damage. This is due to the company’s strong balance sheet. Hotel Royal has an asset to equity ratio of only 1.35 – that means the company’s not highly leveraged and it gives the firm a huge buffer if there’s a need to raise more cash in the future.

Although investors might be happy to note that Hotel Royal has strong finances, there’s still plenty of room for improvement for the company in terms of generating a return on shareholder’s equity. With current numbers, Hotel Royal’s annual return on equity is only around 2.2% – that’s not a number to get excited about at all when real estate investment trusts (which are also property owners) are offering much higher yields.

Future outlook

Hotel Royal is expecting more challenges ahead for its business. In order to remain competitive, the company has decided to refurbish and upgrade most of its properties.

Moreover, the company is also busy with acquisitions. In October, Hotel Royal announced that is buying up The Baba House, a 97-room boutique hotel, for a proposed sum of RM26.1 million. Together with the planned capital expenditures related to the upgrading works, investors can expect the company to significantly increase its leverage over the next few years. Hopefully, the firm will be able to boost its returns on equity with the acquisitions and the upgrading – this would be something for investors to keep an eye on.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.