Why not just merge CDL Hotels with its two subsidiaries

Friday 17th May 2002

Why have one listed company when you can have three? That seems to be the attitude of Singapore-based investment conglomerate Hong Leong Group.

Through various subsidiaries, it controls New Zealand-listed hotel owner and manager CDL Hotels. CDL in turn owns 60.1% of property developer CDL Investments and 50.7% of Sydney hotel owner and property developer Kingsgate International Corporation.

CDL Hotels is a moderate sized company and CDL Investments and Kingsgate are smaller again. Therefore it would seem logical for the enormous Hong Leong or its half-owned subsidiary, Millennium & Copthorne, CDL Hotels' parent and the world's biggest hotel company, to combine the assets of the three companies.

Rather than analyse three annual reports, which all look similar and came out at the same time, let's confine ourselves to the top of the corporate food chain, CDL Hotels.

Unlike many companies that hide away their performance trend statements toward the back, CDL makes it a prominent feature at the front. It also exceeds expectations by producing eight years worth of figures rather than the obligatory five.

This is particularly laudable given a five-year summary would put the company's latest result in a much better light than the one showing its buoyant mid-1990s performance.

In the year to December, the company reported revenue of $202.3 million, down 20% on the previous year but 23% higher than 1999.

Net profit is better than both years, however, at $10.7 million against $1.4 million and $6.2 million respectively.

Earnings per share were 3.1c, six times higher than the previous year and the best in four years. Still, it is still only half the figure recorded in 1995.

Other good news is that the company's liabilities as a percentage of total assets have shrunk from what was already a prudent 48% to a rather conservative 33%.

Operating cashflows have also recovered, showing a surplus of $111.5 million against a shortfall in 2000 of $37.1 million.

In his review, highly experienced chief executive Tsang Jat Meng (69) talks of an oversupply of rooms in the New Zealand hotel market, which continues to put pressure on margins.

"Increasing the yield achieved by the hotels remains the primary focus for the group," he says.

CDL is fortunate in that it has three classes of hotels, carrying the Millennium, Copthorne and Quality brands, catering to different classes of customer. This helps it ride out a slump in a particular category of customer that would devastate a less diverse hotelier.

The company has spent heavily in recent years on refurbishing many of its hotels and it seems logical to assume its yield will improve once the bulk of this work is over.

Mr Tsang's strategy is to generate "internally driven" growth. Presumably he intends to achieve this by extracting greater efficiencies from existing assets. He also intends targeting "opportunities to franchise and manage hotels not fully owned by the company."

Its Sydney hotel, Kingsgate's main asset, had a disappointing year with operating profit down 60% to $1.5 million.

It sounds as if Mr Tsang and CDL are losing patience.

"Presently the board is evaluating the various options in respect of the Millennium Hotel, Sydney, so as to improve its revenue and profitability and to reposition it in the marketplace."

Both he and chairman John Wilson conclude with optimistic noises about the prospects for the property and tourism sectors on both sides of the Tasman.

Also, without going as far as making a profit forecast, they appear confident the current financial year will be profitable (barring any further unforeseeable events).

CDL Hotels' annual report offers moderate levels of disclosure and design quality, as befits a moderately sized listed company.

If it merged its various assets into a single, larger entity, it might be able to offer a little more of both.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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