This article first appeared in The Edge Malaysia Weekly on June 22, 2020 - June 28, 2020

THE light at the end of the tunnel appears to be in sight for the hospitality industry as movement control restrictions are eased following a decrease in Covid-19 infections.

Interstate travel is now allowed in Malaysia and as the hospitality sector gears up for visitors, there is talk of forming a travel bubble, which essentially means two or more countries that have contained the pandemic agreeing to open their borders to each other.

The reality, however, is that travellers are not yet ready for international visits, hence putting domestic travel in focus for the rest of the year.

For the hospitality industry, the biggest question is how quickly people will be comfortable to venture out again, since it is a key determinant of the speed of recovery.

As many Malaysians love to travel, TA Securities chief investment officer Choo Swee Kee believes there is pent-up demand particularly after the long Movement Control Order (MCO)-induced confinement.

“The MCO period has caused substantial stress to people. With the opening up of the domestic economy, many may take the opportunity to go away to destress or to utilise their leave.

“As travel overseas could be complicated in the short term, we expect this demand to be channelled to local destinations. With hotels giving good packages and discounts and the government giving tax relief for domestic travel, a surge in domestic tourism is expected,” he projects.

Rakuten Trade vice-president of research Vincent Lau believes pent-up demand could help boost occupancy rates to 30% to 40%.

“There are people who are raring to travel. So, from practically 0% occupancy rate to 30% to 40% is definitely something,” he says, adding that the majority will only feel more comfortable travelling when a vaccine is available.

Based on the latest news reports, Sinopharm’s Wuhan Institute of Biological Products Co has come up with a promising vaccine that has not shown any serious adverse reactions during phase I and II clinical trials.

This and other vaccine developments could bode well for the hospitality sector and, as the sector’s recovery becomes more apparent, it could make for an interesting investment theme.

Choo believes the worst is probably over for the tourism industry and a recovery in domestic demand is on the cards.

“We see the possibility of a two-phase recovery process — first from domestic travellers and second from international travellers when the global economy reopens fully,” he elaborates.

Lau urges investors in the sector to be selective and only if their strategy includes a “longer horizon”.

“I would say that [for] those who can afford to wait for a year or so, it could be a sector worth considering. I think stocks like Genting Malaysia Bhd — a combination of gaming and hospitality — would be in a better position than pure hospitality stocks,” he opines.

On June 19, Genting resumed business at Resorts World Genting and Resorts World Awana, having reopened a day earlier at Resorts World Kijal and Resorts World Langkawi. The casinos, however, will be limited to members only, given social distancing requirements.

Hong Leong Investment Bank Research (HLIB Research) is positive on the news and says Genting’s members-only entry clause should not deter business volumes because the registration for membership is instant. “Business volume would likely be dependent upon the public’s reception towards safety concerns. Financial year 2020 (FY2020) will continue to be a challenging year as the duration of the outbreak remains uncertain and we do not discount citizens continuing to avoid crowded places for the time being.”

HLIB Research has a “hold” call on the stock but revised its target price to RM2.86 from RM2.55 previously after reducing its holding discount placed on Genting Malaysia to 10% from 15%, given that the opening of its casinos was uncertain earlier.

Public Investment Research says it only expects earnings to return to pre-Covid-19 levels in FY2022 and has a “trading sell” call on the stock.

Another hospitality counter is YTL Hospitality Real Estate Investment Trust, whose large portfolio of prime properties includes business and luxury hotels, which are the JW Marriott brand, Ritz-Carlton, The Majestic Hotel and the Vistana chain of hotels. The REIT also has properties in Australia and Japan.

YTL posted a 17% year-on-year decline in revenue to RM104.9 million for the third quarter ended March 31, but registered a 4.5% increase in income available for distribution to RM34 million. Earnings were dragged down by its Australian properties while those in Malaysia and Japan remained largely stable.

AffinHwang Capital Research remains cautious on the REIT’s earnings prospects and has maintained its “sell” call, as international travel bans and social distancing measures in Australia are likely to affect short-term earnings. It also foresees a prolonged weakness in the global hospitality market and is of the view that revenue may not recover to FY2019’s highs within the next two years.

AmInvestment Research, however, has maintained its “buy” call with a fair value of RM1.36 as it foresees a faster recovery. “We reckon this is temporary for YTL REIT and believe business will normalise once the pandemic is over. At the same time, it has master leases on properties in Malaysia and Japan that provide steady incomes. At the current price, the stock offers a potential upside of over 20%.”

Hospitality counters with a market capitalisation above RM500 million include Shangri-La Hotels (M) Bhd and Berjaya Land Bhd, although only 6% of the latter’s revenue is hospitality-derived as the bulk is from its number forecast operator and motor retailing segments under Berjaya Sports Toto Bhd.

Shangri-La owns and operates deluxe hotels and beach resorts in strategic locations in Kuala Lumpur, Sabah and Penang. The hotelier is debt-free, with a cash pile of RM114.66 million as at Dec 31, 2019. Its interest coverage ratio is about 25 times.

In its recently released 2019 Annual Report, the company says market conditions for its hotel businesses have deteriorated substantially due to the Covid-19 outbreak, which has also dealt a severe blow to its 2020 growth prospects.

“Occupancy and revenue levels at all our hotels and resorts are being hit hard as widespread travel restrictions and government-imposed lockdowns to contain the spread of the virus have triggered a collapse in both leisure and corporate travel demand,” says the hotelier, adding it has implemented cost-saving and efficiency programmes across its businesses.

Uncertainties may still abound, but the hospitality sector could come into focus when the travel recovery becomes clearer.

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