2013 could prove to be a milestone year for IHI

It is now just a matter of time for the sale of London apartments to materialise. Simon Naudi confirmed that the offer is in excess of the book value of the apartments included in the 2012 financial statements.

Two weeks ago, International Hotel Investments plc published its 2012 annual report and presented it to the financial community at a business luncheon. The report was recently mailed to all shareholders of the company ahead of the annual general meeting scheduled for next Thursday.

IHI chairman Alfred Pisani was unfortunately indisposed on the day and the presentation was delivered by Simon Naudi, chief executive of the management arm CHI Ltd. There was a brief introduction by Marcus Pisani. IHI finance director Joe Galea delved into the 2012 financial performance and provided an insight into some of the key figures of the financial statements.

Mr Galea highlighted that since the London property is 50 per cent owned by IHI, the operational performance is not consolidated in the group accounts. The reported revenue and EBITDA exclude the London property. Mr Galea explained that 2012 was the first full year of operational activity in London and the hotel achieved a strong turnaround by registering £4.5 million in EBITDA.

These transactions could prove to be a major turning point for the local equity market

As occupancy and room rates improve in line with the main competing hotels, the London property should register a significant growth in operating performance in the coming years.

Mr Naudi has been an executive director of IHI since 2005 and was primarily involved in business development initiatives and part of the core team responsible for searching and negotiating property acquisitions. Since 2012, Mr Naudi also assumed the role of chairman and chief executive of CHI, thereby being primarily responsible for the operational side of the hotel business.

Mr Naudi delivered a presentation highlighting the economic backdrop of 2012 in the various countries in which the group operates and detailing the company’s strategic initiatives. He spoke in great depth about the objectives for 2013.

He explained the importance of the development role of the company since the ultimate objective was always to sell a number of properties, thereby crystallising the capital gains for the benefit of all shareholders. He argued that the economic backdrop over the past five years was not conducive to such a strategy, however he stated that “the time has now come to crystallise some of the gains, initially from non-hotel assets”.

Apart from eight hotels and the management company, IHI also owns an office block in Tripoli, 50 per cent of the 12 apartments adjacent to the hotel in London and the commercial and retail centre in St Petersburg. The offices, residences and commercial centre were always considered as non-core assets with the ultimate intention of selling such properties at the opportune moment.

The sale of the 12 apartments in London had been specifically mentioned some time back and last year IHI chairman Alfred Pisani had indicated that this sale should be concluded between the end of 2012 and the first quarter of this year. Mr Naudi argued that the delay also worked in IHI’s favour since the high-end of the real estate market in London is booming with strong price appreciation in recent years. He confirmed that negotiations are reaching a delicate phase since a firm offer by an interested buyer has been presented to the company and is being considered. Mr Naudi explained that it is now just a matter of time for the sale to materialise and when replying to questions, he confirmed that the offer is in excess of the book value of the apartments included in the 2012 financial statements.

A sale in excess of this value would therefore translate into a capital gain for IHI in the 2013 financials apart from realising the significant valuation uplifts also recorded in the financial statements over recent years.

The commercial centre in St Petersburg comprising retail activities and office space situated adjacent to the hotel had failed to attract tenants immediately after it was completed due to the unfortunate timing some years back. The market in St Petersburg suffered following the onset of the international financial crisis.

In line with the improvement in economic conditions in the Russian Federation, Mr Naudi confirmed that IHI is currently concluding a number of leases and a better occupancy level would be more conducive to achieving a higher value from a buyer. IHI is reportedly in the initial stages of starting the process of marketing the property to some interested buyers and the aim is to make good progress in discussions during the course of 2013 with a sale hopefully taking place next year.

Another initiative that was also among the top priorities of IHI chairman for the past 12 months was the introduction of new equity investors to enable IHI to purchase further hotels in other major cities worldwide to expand the Corinthia brand. In last month’s announcement detailing the preliminary results for 2012, IHI confirmed that it is still in active discussions with sovereign wealth funds and other reputable institutional investors.

During the recent meeting, Mr Naudi confirmed that IHI is also actively working on this initiative and investors are reviewing the valuation of the company. IHI is aiming to conclude this private equity injection this year.

As CEO of the management company CHI Ltd, Mr Naudi shared details of the restructuring taking place within this company with the ultimate objective of increasing the efficiency in the management of the IHI-owned hotels as well as the properties owned by the Corinthia Group and others which are managed by CHI.

He confirmed that IHI now fully owns the management company after it repurchased the 30 per cent shareholding from an American company at a very advantageous rate in line with the buy-back provisions contained within the original agreement.

Mr Naudi emphasised the importance of the London hotel as it positioned the Corinthia brand among the very best hotel operators in a fiercely competitive market. CHI’s CEO claimed that they received very good feedback from their customers in London and the aim is to replicate the same quality of service in London to the other Corinthia-branded hotels around the world. CHI is also placing a strong focus on generating more bookings from their online portal since this produces higher room rates at lower booking costs. Mr Naudi confirmed that the results from website bookings are improving to a great degree and further headway is expected leading to improved operating profits for IHI.

Mr Naudi also explained that once the sale of the two main non-hotel assets are concluded, IHI will also embark on its plan to dispose of some of its hotels although this was not an objective for 2013. However, replicating the views of the IHI chairman during previous meetings, Mr Naudi confirmed that a sale of a hotel would be dependent on CHI maintaining the management of the property on a long-term agreement basis with the new owner. This is something common in the industry and is being embarked on by some of the major hotel companies worldwide.

IHI shareholders, who have patiently supported the company throughout the years, especially during the very challenging times following the onset of the international financial crisis in 2008 and the Libyan revolution in 2011, look forward to the announcement confirming the sale of the London apartments and the conclusion of the private equity participation.

These transactions could prove to be a major turning point not only for the future of IHI and the Corinthia Group but also for the local equity market in general.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising from the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2013 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

www.rizzofarrugia.com

Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.