• Rezidor pins hopes on emerging markets

Rezidor is continuing its expansion into profitable emerging markets, despite some temporary revenue issues from its hotels in Ukraine and Russia. With the proceeds of the recent rights issue on the balance sheet, an acceleration in new signings was promised, as management revealed a disappointing set of first half results.

The results were hit by a number of one-offs including a strengthening Euro, the consequences of selling out of a casino project, and the timing of Easter. 

“The Middle East and Africa really is the opportunity area,” said CEO Wolfgang Neumann. In particular, he singled out Saudi Arabia as “a very lucrative market”, where Rezidor has recently announced additions that will take its presence there to 22 hotels. Radisson Blus have just been signed for Jeddah, Jeddah Corniche and Salihiyah, along with Park Inns in Riyadh and Dammam. The majority of these are conversions, meaning they will come on stream later this year and in the first half of 2015.

Middle East and Africa was Rezidor’s best performing region in the second quarter, with revpar up 9.6%, accelerating from 6.4% in the first quarter. Western Europe also performed well, with an average 4.9% revpar increase in the second quarter helped by a strong performance from Irish and UK hotels.

That emerging markets can be inherently more risky was underlined by an update from Neumann about its hotels in Ukraine, sitting potentially in the line of fire from international military action. The company has five hotels in Ukraine, all managed, and reported year to date revpar down 14.9%, although it was admitted that more recently the decline is nearer 50%. Rezidor has 10% of its room stock in the Russian market, with 27 hotels across the country; so far, revpar is slightly softer, while domestic business confidence is down.

The risks of further escalation of the conflict and possible sanctions remain, with Rezidor’s only relief being that all the hotels in the region are on asset light contracts. Nevertheless, it expects fee income to be down by around EUR1.5m for the year as a result.

Elsewhere, France continues to be weak, not helped by a refurbishment closure in Lyon, and the Nordic markets have yet to recover. The company is still working to extricate itself from unprofitable leases, and hopes to conclude these situations before the end of the year.

There was no news on the progress of the new Quorvus and Red brands. Signings of new hotels are slightly above the level of last year, with 11 hotels and 2,200 rooms added to the pipeline in the second quarter. “The market continues to improve and we are well placed,” insisted Neumann.

Looking ahead, he added: “Eastern Europe remains a concern, while we have a number of leases on the radar which are unprofitable. We are confident that in the second half we will have further deals that will further drive value going forward.”

“With the fee business, we have struggled,” admitted deputy president Knut Kleiven. Both revenue and ebit was down on last year, and even in the Middle East and Africa, where revpar grew strongly, profits were lower due to write downs.

The rest of the year will see continued financial pain, warned Kleiven, due to the loss of income from a casino the group exited from, of around EUR2m; there is also an allowance against possible tax claim. And while the Lyon hotel was closed for refit, with a clear hit on revenues, other hotels will not be fully closed during improvement works.

 

HA Perspective [by Chris Bown]: Good news was hard to find in Rezidor’s presentation. Accounting issues tempered good headline performance in the Middle East and Africa, while Eastern Europe’s froth was blown away by the problematic political situation in Ukraine. Such are the risks of moving into emerging markets.

There was no concrete news on the new brands, while it appears that Rezidor is still taking a while to extricate itself from problem leases.

The problem for management is that we are now not far from 2015, and deadline time for the Route 2015 turnaround strategy set out in 2011. Targets on margins, revenue growth, fee growth and cost savings were all announced publicly, and if they are missed, surely investors will put management under pressure. Let’s hope they spend the EUR60m raised in the recent rights issue wisely.

 

[Andrew Sangster adds]: The Ukrainian situation at first sight seems a particular worry for Rezidor given that Eastern Europe, which is mostly Russia, is its most profitable region in terms of fees.

But Russia represents 10% of Rezidor’s room stock with the Ukraine being another 1%. This is certainly not critical for the company, especially as its exposure is all asset light. It estimates fee income in Russia will be down EUR1.5m on the year.

Nonetheless, Russia was one of Rezidor’s big success stories and at the centre of its emerging markets push. The warm glow around emerging markets faded several years ago in the wider economy but for fee income focused hotel groups the push into such territories is still seen as a huge opportunity.

The Russian meltdown hurts because the country was one of the biggest of these opportunities. While not quite on the scale of China, its fellow BRIC, Russia was seen as offering a substantial middle income population which meant establishing a sufficiently large infrastructure to enable a large scale roll out made sense for the hotel brand companies.

Rezidor had been the first out of the blocks of the global hotel brands and had been the most successful in navigating the difficult Russian market profitably. The current situation is scant reward for all that effort and success.

Arguably, the most worrying aspect is not that Russia is going to be relatively unprofitable but that investors will increasingly fight shy of investing in emerging markets. Political risk has gone from being ignored to being overplayed.

Emerging markets were – and are – all about optionality: risks have to be spread. While Rezidor has suffered a setback in Russia, its front-running role in Africa continues to look promising. It is the biggest and most experienced hotel brand companies that will succeed in emerging markets. Rezidor continues to be a favoured option in this regard.

Meanwhile, the geopolitical situation in Russia looks unpromising. President Putin has boxed himself into a corner that means yielding to the West by not supporting Ukrainian rebels in the East of that country will devastate his domestic popularity but continuing to support the rebels will lead to sanctions from the West that will in time devastate the Russian economy (and in turn his domestic political support).

Barring the emergence of some hitherto unforeseen compromise position, the situation does not look like it will end well for Russia and for those invested in the country. Most international hotel companies appear to be adopting a position of waiting and seeing. The potential of Russia is too big and alluring to simply walk away from but the threat of ever tougher sanctions is enough to cause a pause.

During July, a significant positive development for the hotel industry in Russia was the passing of a law allowing gaming in Sochi. A law was being passed to allow the development of casinos in Crimea but this was amended to include Sochi, a much more promising location for a major casino development.

Sochi’s hotels had struggled in the aftermath of the building boom ahead of the Winter Olympics. The casino initiative will help drive domestic tourism and further infrastructure development, although attracting international tourists remains a forlorn hope in the near term.

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