John Keells Stock Brokers bullish on tourism sector

Wednesday, 27 July 2011 00:01 -     - {{hitsCtrl.values.hits}}

John Keells Stock Brokers (JKSB) has expressed bullishness on the tourism sector based on the performance so far this year.

The latest assessment is contained in a tourism sector update released by JKSB. Here are excerpts.

Tourist arrivals +37% in YTD June 2011; Western Europe the largest tourism generator

Tourist arrivals into Sri Lanka have seen a sharp increase during the off peak season in CY11, with 381,538 tourists visiting the island in YTD June 2011, +37% over the same period last year. In terms of region of origin, Western Europe has been the largest tourism generator with arrivals totaling 143,454 (37.6% of total arrivals), +32.5% in YTD June 2011.

South Asia is the second largest contributor at 111,570 visitors (29.2% of total arrivals), followed by East Asia (10.8%).

Monthly occupancy rates boosted by increased visitor arrivals; +22.8ppt in April 2011

The increase in visitor arrivals has boosted occupancy rates, which reached 73.5% in April 2011 vs. 50.7% in April 2010, as shown below. The South coast is estimated to have enjoyed 73.3% occupancy during April 2011 (+23 ppt yoy), while Colombo City recorded 80.1% occupancy in April 2011 (+25 ppt yoy). Our channel checks suggest that overall occupancy rates dropped to 59% in May 2011, which we believe is reflective of the off-peak season.

Positive medium term outlook for existing hotel operators driven by room supply constraints

We are bullish on the sector overall, with a preference for hotel consortiums vs. stand-alone property operators.

Our discussions with local hotel operators indicate that most properties which have been closed for refurbishment are on track to re-open during the winter season. Given the strong growth in visitor arrivals recorded during the off peak season, we expect hotel operators to see a surge in occupancy rates during the peak season (Nov 2011-Apr 2012).

The Sri Lanka tourism board expects to receive over 700,000 tourists to the country in CY11, implying at least 7% yoy growth.

Looking ahead, the Government of Sri Lanka expects to achieve 2.5 million tourist arrivals by 2016, which would require at least another 15,000 graded rooms to cater to this demand. As such, the Economic Development Ministry aims to double hotel room capacity to 45,000 by 2016 (vs. current capacity of 22,745).  Over the near to medium term, several new hotel properties are set to become operational by end 2012.  These include 1) a joint venture between Aitken Spence Hotel Holdings PLC (AHUN) and Six Senses Resorts & Spas; 2) Brown’s Beach hotel, a 200 roomed 4 star resort, in which AHUN has a 29.46% stake; and a 3) 190 roomed 4 star hotel by John Keells Hotels PLC (KHL) in Beruwala.

Over the longer term, several hoteliers, including international hotel brands, have hotels in the pipeline which we believe should mitigate the constraint in room supply.

As at 30 June 2011, the Ministry of Economic Development had received 126 new hotel projects for consideration, of which 18 projects have received final approval, while four have been rejected. We provide further details on the largest of these hotel projects in the table below.

Until the new room supply comes on-stream, we expect established properties to benefit from the constraint in room supply in the form of higher ARRs and occupancy rates.