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Action Hotels ready to build on strong start to 2017

Trading since the turn of the year has been strong, with total revenues 14% ahead compared to the same period in 2016
ibis hotel front
Action says its focus on providing midscale and economy hotels for business travellers helps to protect it from wider economic issues

Not all hotels in the Gulf States are five star giants and not everyone wants to pay the prices they charge.

This has ensured there’s a growing market for business-focused, mid-tier properties; a hole that is being admirably filled by AIM-listed Action Hotels PLC (LON:AHCG).

The market is certainly opening up for Action. After opening three properties last year, it now has twelve operating hotels in its portfolio, as well as a further six in the pipeline.

The firm isn’t stopping there though. Action is looking to take advantage of a sector it considers to be under-explored, and will have nearly 3,200 rooms once the latest pipeline of developments is finished.

Action’s revenues up in 2016 and again this year

The company has enjoyed a solid start to 2017 so far. It told investors that trading since the turn of the year has been strong, with total revenues 14% ahead compared to the same period last year.

The hotel sector in the Middle East has come under a little pressure in 2017, but Action said its focus on economy and midscale hotels helps to protect it from those wider issues.

As for 2016, Action Hotels told investors it had another year of growth in all of its key performance indicators, including revenue, underlying earnings and asset values.

For the 12 months to 31 December 2016, Action expects to report that total revenues rose by 22% to US$53.1mln (2015: US$43.5mln) when it publishes its full results, likely to be on 2 May.

It also forecasts a 16% increase in adjusted underlying earnings to US$18.5mln, while the value of its hotel assets should come in at US$458mln, a year-on-year increase of 15%.

Action said the growth was driven mainly by solid performances across its operating portfolio along with the addition of three new hotels opening during the year.

Given that the AIM-quoted firm is in the “accelerated growth and development phase”, as it puts it, an overall net loss before tax position is expected.

That’s mainly due to the pre-opening costs of new hotels and finance costs, as well as depreciation and amortisation.

As a result of the finance costs, which relates to the increase in debt required to find the development pipeline, the overall net loss figure will be higher than originally anticipated.

The background

Established in 2005, Action is recognised as one of the pioneers of the branded three and four star hotel market in the Middle East. There is also a growing presence in Australia.

At the beginning of 2016, Action Hotels acquired a plot of land located within Dubai’s Media City, due to open later this year.

It is situated less than 1km from the coast and is surrounded solely by five star hotels, with only one other mid-market hotel in the vicinity. It is the company’s second hotel in Dubai, but is typical of the strategy for its Middle East expansion.

Last summer, the company announced it would develop a new Novotel-branded mid-market hotel in Dubai Healthcare City to target leisure, medical tourism and business travellers.

The hotel is Action's first to be Novotel-branded, though it has worked extensively with its French owner Accor before. 

Action Hotels’ sites are mostly located within the Gulf Co-operation Council - the economic union of the Arab states - as branded mid-scale hotels are significantly under-supplied in this region compared with Europe and the US.

With prime credit ratings and stable economic outlooks, underpinned by strong economic and tourism growth, the GCC is forecast to be among the world’s fastest growing regional economies.

Governments in the area are also increasingly focused on promoting tourism, supported by an increase in travellers from member states and demand for more affordable hotel accommodation for both business and leisure.

In 2014, Dubai Airport overtook Heathrow as the world’s busiest airport.

Action currently operates twelve operational properties offering more than 2,000 guest rooms.

It has ambitions to grow the portfolio to 15 hotels providing around 2,500 rooms by the end of this year. The long-term target is for 5,000 rooms by 2020.

The model sees it operate sites for well-known brands such as ibis, ibis Budget, Mercure, Holiday Inn, Staybridge Suites, Premier Inn and Tulip.

Not just Middle East-focused, Action is in Australia too

It also has a growing presence in Australia, operating two hotels in Melbourne with a third in the pipeline in Brisbane, though this is seen as a strategic hedge to the Middle East operation.

And the numbers are starting to stack up at the Australian hotels, too.

Action delivered an impressive occupancy rate of 91% at its recently-acquired ibis Budget Melbourne Airport, while its newest and largest hotel has shown “encouraging early trading figures”.

Occupancy there was over 51% in just its third month since opening, a pretty good return for a new hotel.

This goes some way to explaining why the company prefers to work with the big names of the hotel industry rather than operate its own brands.

Chief executive Alain Debare said: “We appreciate the operational expertise they bring to the table and more importantly the marketing muscle they are able to bring, which accounts for about 40% of the bookings.”

Regional diversification

Governments in the region are diversifying away from oil and gas, meaning more jobs are being made available in different areas.

This is good news for Action, as businesses look to reduce costs such as travel budgets; the group offers corporate travellers a three-star no frills alternative.

This alternative may become the norm in the not-too-distant future. Its Kuwaiti operations were one of its top performers last year.

Founded by a member of the Kuwaiti ruling family, Action Hotels has a solid grounding in its Middle Eastern market that it uses to its full advantage.

"To get into the Middle East you have to partner up with owners; to own property you have to be a GCC national,” explained Katie Shelton, Action’s head of corporate affairs.

“If you want to run a business a GCC national has to own 51% of that, so there are massive barriers to entry for any international company buying land and setting up businesses.”

Long-term operating leases key to future growth

Action Hotels wants to expand through long term operating leases, where appropriate, which require less capital expenditure.

Because it is focused on business travellers, it is usually not affected by global instability or economic turbulence. In fact, Action reckons the opposite is true.

“Businesses become increasingly cost conscious and are looking for affordable quality mid-scale hotels which offer better value for money for their employees,” it said.

And finally, the share price…

The company’s share price took a little beating on the back of the news that revenues would be lower and the net loss higher in 2016 than originally anticipated.

That meant shares were changing hands for 40p, near all-time lows and down from the 60p+ they hit last year. The company has a current market capitalisation of £57mln.

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Action Hotels PLC Timeline

December 05 2016

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