Tooth fairy for Raffles?

April 25, 2003
Singapore Democrats

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Lee Han Shih
Business Times
22 April 2003

Raffles Holdings’ management should review their optimism and be more open

IF Warren Buffet ever thought of investing in Raffles Holdings, he would change his mind after seeing its latest results.

On an asset base of $1.9 billion and riding on an unbeatable advantage of having its flagship sitting right on top of one of Singapore’s busiest MRT junctions, Raffles Holdings only managed to chalk up a $250,000 profit for the first three month of this year – and that’s after a million or so in interest income was included.

This is pretty dismal, but Mr Buffett has bought into companies that have performed worse – if he saw a good chance for them to turn around.

What he can’t stand – and almost never buys – are companies whose management and directors don’t give investors enough information to make educated decisions.

‘Full reporting means giving you the information that we would wish you to give to us if our positions were reversed. . .We would expect both a lot of financial details and a discussion of any significant data we would need to interpret from what was presented,’ he told shareholders in the 2000 Berkshire Hathaway annual report.

On that score, Raffles Holdings didn’t make the cut when it announced its first quarter results last week. At first glance, the announcement was impressive: 15 pages on numbers topped by a four-page press statement that comes with comments by chairman Cheng Wai Keung.

But dig a bit deeper, and investors are left groping for answers buried in a sea of numbers.

The group runs two hotel chains – Raffles, with eight hotels and resorts; and Swissotel, with 23 hotels. Given its poor performance and the impact of the Severe Acute Respiratory Syndrome (Sars), investors will want to know whether Swissotel makes money, and whether Raffles Holdings will face a cash squeeze.

Swissotel cost Raffles Holdings more than $400 million two years ago. As at today, there is no indication whether it has even begun to pay for itself.

Oh yes, Raffles Holdings provides reams and reams of figures, such as room rates and occupancy and how each hotel performed against a ‘competitive set’.

This makes fine reading for investors interested in, say, how a Swissotel property in Lima, Peru fared against its rivals.

But for those interested in the bigger picture, such as the profits or losses made by the hotels either by geographical regions or by individual chains, the answer is nowhere to be found.

Certainly, no investors can tell from its announcement whether the purchase of Swissotel has been the right decision and, if it is not, whether anyone in the group should bear responsibility for it.

(Last month, its long-time chief executive Richard Helfer abruptly left. This may or may not be related to Swissotel, but a purchase of $400 million usually requires a board decision. If it turns bad, it is the entire board, rather than one person, who should shoulder the blame.)

Swissotel aside, there is another major concern. Hidden deep within the cashflow statement is a startling fact: Raffles Holdings actually ran a negative operating cash flow of $2 million in the first quarter.

It would have suffered an even bigger cash outflow in investing activities (such as buying equipment) if not for a one-off sale of a ‘non-core asset by a subsidiary company’ that raked in $32 million. With that included, cashflow from investing activities stood at a positive $25.5 million. Remember, all this was just for Q1. Subsequent quarters are expected to be much worse.

Yes, Raffles Holdings has some $113 million in cash at the end of March, but hotels have notoriously high overheads, especially for high-end chains such as the Raffles.

How many quarters of negative cash outflow can the company sustain before its cash runs out and it has to go, bowl in hand, to the lenders?

Not only has Raffles Holdings not addressed this question, but it even gives the impression that it has no financial worries.

‘The group will…pursue accretive growth opportunities…in its core hotel business in targeted key international destinations, leveraging on its strong balance sheet,’ it said.

In other words, Raffles Holdings is looking at acquiring more hotels.
For investors not familiar with the business, a strong balance sheet (which Raffles Holdings certainly has) means much less than strong cashflow (which it does not have).

Numerous owners have found out that owning a property can be a liability if you can’t generate money from it.

To Raffles Holdings, a strong balance sheet means strong Ebitda (earnings before interest, tax, depreciation and amortisation). Last week, it boasted that Q1’s Ebitda grew by $700,000 to $19.8 million.

To this, Mr Buffett has a clear reply: ‘References to Ebitda make us shudder – does management think the tooth fairy pays for capital expenditures?’

From Raffles Holdings’ announcement, it looks as if its management really does.