AX Holdings will be investing €7 million in its hotels next year, building on the €1.5 million investment already made this year.
The Suncrest had already been refurbished in 2007, a project that was meant to get it through the next 10 years. Chief financial officer Michael Warrington said there was a good reason for the fresh investment.
“About five years ago, we were the first hotel chain in Malta to embark on the concept of all-inclusive holidays, with tremendous success. We transformed the product from B&B or HB so guests have nothing else to pay and can eat and drink as much as they want. Since then, all our competitors in the north have adopted this concept, which is ideal for the leisure segment of the tourism industry.
“It is also a concept that fits in well with tour operator sales. In our Sliema hotels, 40 per cent of bookings are direct individual ones over the internet, whereas in the north, this is just six to seven per cent,” he said.
“The decision changed the fortunes of the Suncrest. This year, we recorded one of the best results we have seen in 15 years. It has shown us that there is the demand, the market and the opportunity. So if we reinvest, we think we could very easily double the profits we made this year.
“The group made a post-tax profit of €25 million last year and we believe in using some of that to improve the product and the property. Not every hotelier thinks that way.”
The group has spent €300,000 to upgrade the indoor pool area of The Palace in Sliema, a further €350,000 on the Victoria (the plan is to refurbish two floors every year given the high occupancy) and €250,000 for a new indoor pool at the Sunny Coast in Qawra.
Group chairman Angelo Xuereb was clearly pleased with the planned reduction in utility tariffs, which would help profitability.
“One of the biggest disincentives to investment was uncertainty on the tariffs. In each of our hotels in one particular year, we saw our bills go up by €150,000.
“In the tourism industry you agree a contract this year for next year. So, if suddenly a tariff changes, that comes straight out of your profits. You cannot go back to the tour operator and say the price of oil or electricity has gone up as they will never accept to pass that on to the client,” Mr Xuereb said.
Mr Warrington was also philosophical about the lean years, saying that this was when tough decisions were taken by the management team which trimmed costs so that any increase in turnover would now mostly go to profits.
The group’s profits were boosted by a one-off property valuation, which is not expected to be repeated this year. Nevertheless, operational profits are sound and Mr Warrington said that the group was forecasting that profits this year would be up 12-15 per cent, thanks to the better performance by hotels and a rebound in the construction side.
The group is also a shareholder in Valletta Cruise Port, which saw great reductions in passengers this year following the pull-out by MSC.
“It was not as bad as we were expecting this year and the hard times gave us the impetus to go out to fight to win back the business. MSC is in fact coming back and other lines are coming,” Mr Xuereb said.
“MSC tried Tunis as they thought charges might be lower. But the reality is that clients wanted Malta not Tunis – as has been seen in surveys.”
With the group already at the excavation stage of Hilltop Gardens (see above story), they are looking to tap the financial markets again. AX Holdings had originally offered an 8.25 per cent bond, which they then refinanced at 6.7 per cent, maturing 2014-2016. There is also €1.3 million outstanding of its four per cent bond which matures in December, which will be repaid at a premium of 40 per cent.
“We think that the fundamentals within the group are very strong at the moment. Our leverage as a group this year is under 30 per cent. Which effectively means that we have significant borrowing capacity,” Mr Warrington said.
Why not raise finance through a bank in such a low interest rate scenario?
“You have to look at the profile of the projects that you want to finance. With some of them, it makes more sense to have bond financing,” Mr Warrington said.
“Typically, bank financing tends to amortise from the full amount to zero. But with effective working capital management, you should be looking at a combination of equity and debt. How you structure that debt is critical to cushion you in times of crisis. So we are looking at 10-year financing as this structures our balance sheet in a very sound way, giving us a lot of head room with regards to how much profit you are generating to service that bond.”