A 5-star loss!

Perhaps benefitting from initial upturn in post-war tourism, HDL has posted a Rs. 1.4 billion gross profit as against Rs. 1.08 billion in 2008/9 financial year. However a combination of factors such as lower other income, higher administrative and other expenses and finance cost saw pre-tax loss increase to Rs. 1.2 billion from Rs. 1.1 billion. Net cash generated from operating activities had improved to Rs. 468 million as against Rs. 58 million in 2008/9.

HDL revenue had increased to Rs. 1.78 billion from Rs. 1.37 billion whilst cost of sales had risen to Rs. 382 million from Rs. 287 million. Other income had declined to Rs. 87.2 million from Rs. 115 million whilst administrative expenses were Rs. 1.1 billion up from Rs. 998 million a year earlier. Other expenses increased from Rs. 180 million to Rs. 237 million. Staff costs had increased to Rs. 264 million, up from Rs. 240 million.

Aided by minimum rates and high occupancy HDL’s room revenue in 2009/10 had increased by 37% to Rs. 729 million whilst food and beverage revenue rose by 28% to Rs. 948.5 million.

In March 2010, the company had re-valued the hotel building by an independent value – Government Valuation Department for Rs. 5.6 billion as opposed to Rs. 1.9 billion at cost. This move had resulted in a revaluation gain of Rs. 4.7 billion with carrying value of the building being Rs. 903 million as at 31 March 2010.

Thanks to revaluation gain HDL’s reserves topped Rs. 5 billion from Rs. 328 million in 2008/9. This saw negative net worth of HDL being reduced to Rs. 4.7 billion in 2009/10, as against Rs. 8.26 billion in the previous year.

Total liabilities crossed the Rs. 12 billion mark in FY2010 up from Rs. 10.6 billion a year earlier. Thanks to revaluation fixed assets rose to Rs. 6.31 billion from Rs. 1.7 billion whilst total assets amounted to Rs. 7.4 billion as against Rs. 2.4 billion in 2008/9. Debt repayment was over Rs. 1 billion mainly on Finance Ministry loan, with finance cost amounting to Rs. 1.35 billion, up from Rs. 1.18 billion in 2008/9.

As at 31 March 2010, HDL had Rs. 1.45 billion in short term interest bearing loans and borrowings up from Rs. 705 million a year earlier whilst long term loans and borrowings were Rs. 10.26 billion, up from Rs. 9.7 billion a year earlier.

Audited accounts said Hilton Colombo has full possession and control of the property, plant and equipment of the hotel. Although, the management agreement between the company and Hilton International USA expired on 31 December 2007, management fees have been accounted as per the terms of the agreement without prejudice to the rights of the company. In 2009/10, management fees amounted to Rs. 76.4 million, 187% higher than Rs. 26.5 million paid in 2008/9. This is on account of higher Gross Operating Profit (GOP). Hilton is estimated to be getting around 33% of GOP as combined management fees and group services as against only gets 12% of GOP at Hilton Residencies as per industry sources.

Company analysts opined that eventual release of results by HDL is likely to fuel the case for winding up HDL which most insist is bankrupt given the negative networth and soaring liabilities. However given the multitude of related court battles HDL and Hilton and shareholder saga in Sri Lanka continue to be a sour point, analysts added.

Results vs share price

Hotel Developers 2009/10 results were announced after the market closed on Friday. It finished the week up 20 cents to Rs. 143.70 with 26,200 shares changing hands. Its 52-week highest is Rs. 165 whilst the lowest is Rs. 115.

Despite lack of audited or provisional accounts for 20 years HDL shares have had elicited investor interest. However, its basic loss per share now is confirmed at Rs. 26.87, up from Rs. 25.87 in 2008/9.

Analysts said that HDL’s performance in 2010/11 financial year is likely to have improved in tandem with the post-war rebound in leisure sector. This together with future upside in earnings is being factored in the price which investors are willing to pay for HDL shares.

Due to non disclosure of accounts, HDL had been on the default board since June 2001, a decade ago and the eventual release of audited accounts comes many months after the board finalised and approved same.

A few months ago some analysts opined trading in HDL shares must be suspended temporarily at the time of release of accounts after a 20-year absence. This suggestion however seem to have not won favour from the CSE or the SEC on the premise that the company was on the default board.

HDL announced on Friday that it was taking necessary steps to issue the audited statement of accounts for the years starting from 1990.

Cornel and Company owns 56% stake in HDL whilst Mitsui Co/Taisei owns 27.5% followed by Treasury 9%. The public holding is around 7.5%.

Auditors raise several issues, including going concern

External auditors SJMS Associates have raised several issues concerning Hotel Developers (Lanka) Plc’s accounts of 2009/10 as well as accumulated losses eroding stated capital and going concern.

In response to the latter concern, the HDL management had said that the financial statements have been prepared on the assumption that the company is a going concern, i.e. as continuing in operation for the foreseeable future. It is therefore assumed that the company has neither the intention nor the necessity of liquidating or of curtailing materially the scale of its operation.

The management also said the Government of Sri Lanka has opposed the winding up action in the District Court with Attorney General appearing for the Government (DC Colombo Case No.217/Co). There is also provision in the settlement agreement which states that the Government may convert the outstanding loan of Rs. 10.19 billion into equity at any time after July 1997 and such a course of action will prevent erosion of the stated capital. Further, the Government has not made any claim on the loan to date.

“Taking such into consideration, the directors have assessed and are confident that the company will be able to continue its operations for the foreseeable future; hence adoption of the going concern assumption in preparation of these financial statements is considered appropriate,” the HDL Management has said.

Auditors SJMS Associates in other opinion expressed said that it had not received declarations from the several key management personnel stating their emoluments and their interests in contracts with the company hence unable to determine the adequacy of disclosures in related party transactions.

Due to the several matters, auditors were unable to determine the existence and value of property, plant and equipment. One is there is a legal dispute in respect of lease of land on which Hilton Colombo is constructed.

As per note to financial statements the leasehold land has been obtained on a 99-year lease from Cornel & Company Limited. Cornel & Company Limited had obtained the lease of the said land from the Urban Development Authority (UDA) on a 99-year lease ending on 15 February 2083. The company had issued shares for the full value of the lease rental to Cornel & Company Limited.

In terms of the Share Transfer Agreement between the Government and Cornel & Co, shares issued to Cornel & Company Limited have been transferred to the Government. Cornel & Company Limited had failed to comply with the terms of the lease agreement by not making the balance 80% of the due payments to the UDA. In 1999 the UDA surrendered its right to the land to the Government by deed 673 and 674 and the land has subsequently been taken over by the Government.

Auditors also said there has not been a physical verification of plant and equipment. Further, the plant and equipment register and the assets do not indicate identification code numbers.

Another issue is that the management agreement dated 31 January 1984 between the company and Hilton International USA expired on 31 December 2007. The renewal or extension of the management agreement is in dispute and the management fees had been accounted as per the terms of the said agreement.

“In our opinion, except for any disclosures or adjustments that may be required in the financial statements due to the matters referred to in the preceding paragraphs (1) to (3), the company maintained proper accounting records for the year ended 31 March 2010, and the financial statements give a true and fair view of the company’s state of affairs as at 31 March 2010 and of its loss and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards,” chartered accountants SJMS Associates said in their audit report.

Many litigations pending still

HDL, whose existence has been riddled with litigations, has in store several coming for consideration of a settlement, if any.

The case in District Court Colombo filed by Cornel and Company against Mitsui and Company Ltd., Taisei Corporation, Attorney General and Nihal Ameresekere and the company will be called on 8 November 2011.

HDL is the fifth respondent in the case where the plaintiff has filed (in March 1998) that the defendants are acting against the rights of the plaintiff in the Hilton Project contrary to the conditions in the agreement entered into between the parties.

Cornel and Company’s relief prayed include a declaration that the agreements are illegal and void and interim injunction restraining the defendants from giving effect to any of all the terms and conditions in the agreement.

A case filed in November 2006 in District Court Colombo by Nihal Ameresekere to wind up HDL will see written submissions being made on 28 November 2011 whether the inquiry into the winding up application should be disposed of by way of written submissions or oral submissions. The company is opposing the winding up.

The stay order issued by High Court staying the proceedings of the Magistrate Court until the final determination of the High Court is coming up for argument on 24 October 2011.

The background to this is in October 2008, when the CMC filed in the Magistrate Court a case against the company for operating Hilton without a trade licence for 2007 and thus not having paid the Trade Licence Duty in terms of Government Gazette No. 1062 of 20 July 2007.

The company appealed to the High Court against the order dated 25 January 2010 made by the Magistrate Court in relation to a preliminary objection raised by the company.