Serendib Hotels PLC (SHOT : Rs. 21.

5) BUY

Key highlights and outlook Stock Summary

Revenue Continues to Grow:

CSE Ticker SHOT.N0000
SHOT reported a revenue of Rs. 1,768 mn (up 12.2% YoY) in Share Price (16 Oct 2016) Rs. 21.5
FY2016, while accounting for a five year CAGR of 14.56%.
Consistent occupancy and favorable growth in room rates Shares Outstanding 111,530,000
complimented the revenue growth. Group-wide sales in F&B Sector Hotels and Travels
increased by 31% during FY 2016. Market Cap 2,723 million
AVANI Bentota and Hotel Sigiriya drives revenue growth: Enterprise Value Rs. 3,524 million
52-Week Range Rs. 21.5 Rs. 40.6
Club Hotel Dolphin solely contributed 50% of the group revenue in
EPS Growth (%) 1.10%
FY2016. However, the revenue was mainly driven by AVANI Bentota
and Hotel Sigiriya which increased their revenue by 21% and 29%
respectively.

GP Margin Increases by 488bps, but the Operating Profit and Share Price Movement
NP margins decline:
Rs
SHOT achieved a GP margin of 79% in FY 2016 (77.9% in FY 2015)
despite the sharp increase in taxes on alcoholic beverages and its 50.0
impact to the cost of sales. Administration Expenses increased by
20% due to a one-off reversal of expenses that was done last year.
40.0
The underlying growth in Administrative Expenses is 11%. Sales and
Marketing Expenses increased by 75%. The increase in expenses
caused the operating margins to shrink, but an exchange gain of Rs. 30.0
38 million at group-level and increased the Net Profit Margin to
17.04%.
20.0
Shareholder Returns Exceed Market Returns:
10.0
The group recorded a ROE of 8.6% in FY 2016 (down 10%) and a
ROCE of 11%.Revaluation of properties of Serendib Hotels PLC and
its subsidiaries caused an upsurge in the equity which subsequently 0.0
led to an adverse effect towards the ROE and ROCE. However, SHOT 11-Oct-13 7-Aug-14 3-Jun-15 29-Mar-16
generated a significantly higher return to its shareholders during the
year in comparison to the market return.

The company and its listed subsidiaries are ranked among the top ten
listed stocks in the industry, in terms of ROE over the past year. Financial highlights
Valuation outlook: Year ended YOY
2015 2016
(as at 31st March) Change
Historically, SHOT has traded at an average PE multiple of 22.1x with
a STDEV of 9.98. Currently SHOT is trading at multiple of 15.1x. The
historical PE suggest that SHOT is trading within an acceptable range Revenue (Rs. million) 1,576 1,768 12.2%
but is below average and has potential to increase.
EBITDA (Rs. million) 515 535 4.0%
The primary valuation (DCF Valuation) indicates a per share price of EBIT (Rs. million) 386 361 -6.5%
Rs. 29.15 (upside 35.6%), which is further justified by our relative Net profit (Rs. million) 279 301 7.8%
valuation which gives a per share price of 26.25 (upside 22.08%)
based on a PE multiple of 14.83x. Buy. -Att to Equity Holders 201 203 0.8%
EPS (Rs.) 1.80 1.82 1.1%
ROE (%) 10% 9% -10%
P/E (x) 15.50 15.10 -2.6%
 Industry Overview
Tourist Arrivals
Nos 000's
Tourist arrivals in 2015 amounted to 1.798 million with a growth of 17%
over the previous year. The arrivals show a CAGR of 22.4% during the past 250

Thousands
5 years. Tourist arrivals are expected to be around 2.5 million this year
(39.0% increase YOY). The government is anticipating to increase the 200
tourist arrivals to 4 million in 2020.
150
India recorded the most tourist arrivals during the recent past. However,
tourist arrivals from China have shown a significant increase with a CAGR 100
over 80% over the past five years.
50
Tourism remains as the third highest foreign exchange earner to the
country. The earnings of the industry recorded a figure of over USD 3 billion -

May

June
April
January

March

August

September

October
July
February

November

December
in 2015.

The earnings have increase by 27.7% YOY and the industry increased its
contribution towards the overall income by 12.4% in 2015 (10.2% in 2014). Month
2013 2014

Stable Occupancy and Increasing Demand

The annual occupancy rate in 2015 stood at 74.5%. This has largely contributed towards the establishment of a solid growth platform for the
hotel industry to expand and develop an attractive hotel infrastructure. Occupancy in the South coast (up to Galle) and Habarana/Sigiriya/
Dambulla was consistent throughout 2015 ranging around 70%.

Graded (1 -5 Star) establishments in the country increased their room capacity to 19,376 during 2015. This is a growth rate of 4.7% compared
to 18,510 rooms in 2014. Further, the total room capacity (including supplementary establishments) increased to 30,078 in 2015 from 28,426
in 2014.

However, the room capacity is required to increase to 51,243 in 2016 in order to meet the demand of the increasing tourist traffic.

The potential for growth and stable occupancy levels have attracted major global hotel chains, including the Shangri-La Group, ITC Hotels,
Starwood Hotels and Resorts, Marriott International, Hyatt Hotels Corporation and have hotel developments underway in Colombo and along
the South-west coast. A large FDI pipeline is also in place to explore the high potential in the tourism industry. The entries of major global
hotel chains has forced local hospitality leaders such as John Keells, Aitken Spence, Jetwings, Amaya Leisure and Laugfs Leisure to have
aggressive expansion plans.

MICE tourism also shows promising prospects for the future. MICE sector travelers have increased from 80,000 in 2006 to 144,000 in 2014.
Currently it accounts for roughly 10% of the tourist arrivals. The MICE tourism sector targets around 155,000 travelers by the end of 2016.

Occupancy (%) 2011 2012 2013 2014 2015 Room Capacity

Colombo City 84 75.8 75.2 75.9 76.4
11.1%
40,000 12%
Greater Colombo 79.5 74.5 70.1 74 74.4
7.4%
South Coast 78.1 73.9 70.2 73.1 74.3 30,000 5.8% 8%
4.7%
East Coast 75.7 68.2 69.8 73.8 74.1 20,000 4%
-0.4%
High Country 73.3 68.1 73.2 74.9 74.8 10,000 0%
Ancient Cities 71.7 66.5 73.5 75 75.2
0 -4%
Northern Region - - 69.9 72.4 72 2011 2012 2013 2014 2015
No. of Rooms - Graded No. of Rooms - Supplementary
All Region 77.1 71.2 71.7 74.3 74.5
Growth of Graded Rooms
Historical Results
Year ended 31st March 2011 2012 2013 2014 2015 2016

Profit/(Loss) for the year (000's) 129,278 91,361 367,476 201,707 279,472 301,363
Non-Controlling interest (000's) 12,781 50,388 96,273 49,872 78,117 98,304
Profit/(Loss) Attr to equity shareholders (000's) 116,497 40,874 271,203 151,835 201,355 203,059

Earnings per share (Rs.) 1.31 0.82 2.43 1.36 1.81 1.82
Interest Cover (Times) 5.10 3.30 11.50 5.80 10.10 16.00
Return on Equity (%) 10.70 4.70 16.20 8.30 9.90 9.20

Hotel Operation
Annual Sales Growth (%) 32.60 16.90 38.20 (11.70) 23.30 12.20
Room Occupancy (%) 79.00 80.00 77.00 68.00 78.00 79.00
Net Assets per share (Rs.) 10.25 13.85 16.27 17.27 25.45 29.41
Debt / Total Equity Ratio (%) 64.30 41.40 53.50 47.00 20.00 13.40

Market/ Share holder Information

Market Value per share (Rs.) 32.00 24.80 23.70 28.00 28.00 27.50
Price earnings Ratio 24.50 30.20 9.70 20.60 15.50 15.10
Dividend per share Nil Nil Nil Nil Nil 1.00

Forecast Financials
2016 2017E 2018E 2019E 2020E 2021E

Revenue 1,768,248,795 1,893,794,459 2,033,044,052 2,170,344,150 2,317,400,075 2,477,884,367

- Room Revenue 1,414,599,036 1,485,328,988 1,559,595,437 1,637,575,209 1,719,453,970 1,805,426,668
- Food & Beverage 247,554,831 297,065,798 356,478,957 409,950,801 471,443,421 542,159,934
- Other 106,094,928 111,399,674 116,969,658 122,818,141 126,502,685 130,297,765
EBIT 360,773,959 369,289,920 396,443,590 423,217,109 451,893,015 483,187,452
Net profit 301,362,920 292,543,899 314,054,480 335,263,913 357,980,377 382,771,188
- Att to Equity Holders 203,058,797 197,116,527 211,610,390 225,901,338 241,207,726 257,911,812
EPS (Rs.) 1.82 1.77 1.90 2.03 2.16 2.31

Key Ratios
2016 2017E 2018E 2019E 2020E 2021E

EBIT margin (%) 19.50% 19.50% 19.50% 19.50% 19.50% 19.50%

NP margin (%) 15.45% 15.45% 15.45% 15.45% 15.45% 15.45%
ROE (%) 8.59% 7.48% 7.20% 6.92% 6.68% 6.48%
Net Assets Per Share (Rs.) 29.41 24.94 27.76 30.77 33.98 37.41