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The Mauritian Tourism Industry August 2012

Bhavik Desai AXYS Stockbroking Ltd, Bowen Square, Dr Ferrière Street, Port-Louis | BRN C07007947 Melvyn Chung Kai To Tel (230) 213 3475 | Fax (230) 213 3478 | Email [email protected] | www.axysstockbroking.com

INDUSTRY OVERVIEW In today’s fast evolving world, Mauritians rested on past laurels and lost out. The shift in client base and requirements is proving to be a lasting phenomenon with both the local and regional operating environment becoming increasingly competitive. If the industry is to remain sustainable in the long-term, hotels need to re-engineer their modus operandi & reduce debt, industry operators need to engage in web-based digital marketing, and government needs to realise that clientele diversification cannot happen without new aerial routes.

Arrivals Mauritius hosted 925k tourists excluding transit and cruise passengers in 2011 [2010: 898k]. Although the 3% growth may seem respectable at first sight and in-line with worldwide arrivals growth of 4%, it pales in comparison to double-digit growth rates clocked by Indian Ocean peers [Maldives: +18%, Seychelles: +11%, & Sri Lanka: +31%].

Fig 1. Tourist arrivals & receipts

While Seychelles experienced growth or stagnation in core Western European markets, Mauritius registered declines which were partly offset by greater penetration into Eastern Europe and Asia. The Maldives, as we all know, has made a breakthrough penetration into the Chinese market, while previously off-the radar Sri Lanka has benefitted from the end of civil strife. Clientèle Europeans made up almost two-thirds of visitors in 2011, however the figure drops to 60% during H1 2012. This is

Fig 2. Regional tourist arrivals

due principally to a 6% drop in visitors from Europe rather than as an indication of diversification. An increase in tourists stemming from Russia (+88%) and China (+59%), as well as a return of Reunion Islanders (+13%) has only partially offset the slump (-8%) from core Western European markets. With diversification progressing at snail’s pace, Mauritius remains highly vulnerable with Europe sliding back into recession.

Fig 3. Mauritian tourist arrivals by country

Among regional competitors, Maldives demonstrated – with brio – that tapping into new markets was possible: AsiaPac visitors now make up ~40% of total visitors compared to just 25% in 2007. Although Sri Lanka had a better visitor mix to begin with, it has experienced substantial1 growth in Australian, British, Italian and Indian markets.

1 Arrivals doubled within two years

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Arrivals share by country [%]

Mauritius Seychelles 2007 2011 2007 2011

Europe 66 63 79 74 Africa 23 24 11 13 AsiaPac 10 11 8 11 Americas 1 2 2 2

100 100 100 100

Arrivals share by country [%]

Maldives Sri Lanka 2007 2011 2007 2011

Europe 72 57 45 43 Africa 2 2 3 7 AsiaPac 24 38 46 44 Americas 2 3 7 6

100 100 100 100 Table 1. Tourist provenance by island

Receipts Bank of Mauritius (BoM) tourism receipts showed sustained YoY growth to Rs42.8bn (+9%) in 2011. However, this was not reflected on P&Ls of listed hotel groups which showed flat or declining revenue from Mauritius hotels. While in MUR terms, BoM Receipts per Visitor (RpV) stands close to peak 2007 levels, inflation adjusted RpV stands 24% below 2007 prices and 11% below 2011 prices. Actually, in EUR terms, RpV has been more or less flat at €995±7% since 2001. Unfortunately, Europe’s sovereign debt crisis triggered a slide in the EUR’s value – 5% on an annualised basis since 2009 – against the MUR.

Fig 4. Revernue per Visitor (RpV) evolution

In order to compare Mauritius with its competition, we have to look at RpV in USD terms2. Although Mauritian RpV is on the rise and stands at its highest since the 2007 peak, Sri Lanka’s has rocketed since the end of its civil war and is on track to overtake Mauritius. While the decline in Seychelles is attributable to a 33% devaluation of the SCR in 2009, Maldives’ down-slide could be attributable to culturally less spend-thrift Asian tourists.

Fig 5. RpV in USD by island

Expenditure Statistics Mauritius’ biennial Survey of Tourism carried out on departing visitors data shows a slight drop in Shopping and F&B spending which translates to increased spending on accommodation. Two explanations exist:

• More all-inclusive packages have led to reduced additional spending; and/or

• Travelers are increasingly careful when spending on extra due to current recession prone times.

Fig 6. Split of visitor expenditure

2 Tiny fraction of receipts are USD denominated

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Market Share 2011’s occupancy rate of 65% stands marginally below the decade’s 66% average and above 2009’s low 60%. Therefore we would not expect hoteliers to be struggling as much; however, hotels have collectively lost 10% of Market Share by Volume (VoMS) since 2007 to cheaper beach bungalows/apartments which abound on the island. While one could have believed that a larger hotel-room park would have forced hotels to discount3, the informal sector appears to have been the trigger. Although there are more hotels [109 in 2011 against 97 in 2007]; there exist insufficient beds (11,295) to accommodate all tourists should they all choose to stay in a hotel. This shows the relevance of beach residences which have nibbled away at the mid-market. The introduction of luxury villa rental pools4 are now likely to nibble away at the up-market. Subsequently, hotel room rates will feel added downward pressures.

Fig 7. Evolution of Hotel Vol. Market Share

Fig. 7 above shows hotels’ collective loss of VoMS in an environment where guest nights grew asymptotically. Fig. 8 below expresses available hotel guest nights as a percentage of guest nights spent on the island. We notice that this ratio is negative (ie an undersupply) for Mauritius in stark contrast to the oversupply in both Maldives and Sri Lanka.

3 Hotels gave out free nights rather than lowering rack rates 4 Tamarina, Anahita, and Valriche

Fig 8. Bedroom supply by island

Mauritius – as illustrated below – has plunged from a dominant 41% to 33% of Indian Ocean market share in just two short years! While Mauritius rested on its laurels awaiting the passage of the 2008 crisis, Maldives offset its drop in Western tourists by Far Eastern visitors, and post-conflict Sri Lanka emerged as a new place of interest.

Fig 9. Volume Market Share by island

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THE QUESTION OF AIR ACCESS I. Available Airline Seats Air Mauritius (MK) has increased its available seats to 1.9M in FY12 from 1.5M in FY06, however, there are some 87k fewer seats on European routes (cessation of flights to Vienna, Rome and Munich). Given its financial plight, from MK’s point of view, it makes sense to discontinue unprofitable routes which unfortunately only further reduces seat availabilities (MK will only fly to the UK and France in Europe). Mauritius is like the coastal village of Flic-en-Flac (FenF) amidst this year’s inaugural carnival: Enclaved. Travellers choose alternative destinations because they cannot get to Mauritius; just like the exasperated cars trying to attend the carnival that turned around having been immobilised for hours in a bumper-to-bumper traffic stretching for over 7km. Because there is a single road in-&-out of FenF, should it host another carnival, one of two things needs to happen:

1. either a new road needs to be built [analogous to having flights on new air routes5] and/or;

2. an efficient shuttle service needs to be set up to ferry all attendees [analogous to MK buying a new aeroplane and/or allowing airlines willing to increase flight frequencies to Mauritius to do so].

Fig 10. Air Traffic evolution

5 Mauritius is connected by flight to a mere fraction of the 35 countries commercial airlines could fly to and from

II. Air Fare Airfare is a mystery. We looked-up ticket prices on Air France’s (AF), Air Austral’s (AA), Air Mauritius’ (MK) and Emirates’ (EK) respective websites to fly to different Indian Ocean islands for the same one week period. We repeated the same search a week later, and to our utter astonishment, prices to Mauritius had fallen – on average – by $400. While we do concede that there exist destination specific seasonalities and that these rates do not reflect an entire year, our goal was to show that a price difference exists and that Mauritius is the most expensive Indian Ocean destination to get to. Based on our distance-based fuel savings estimates tabulated below, we can rule out distance as a key contributing factor to the more expensive fares. If mileage is not the issue, it leaves the following possible causes for the higher ticket prices:

1. High airport and other passenger taxes; and/or 2. Tour operations hoarding up seats at much

cheaper rates; and/or 3. Airlines oligopolistically setting higher prices.

Airfare

From Paris Dist. Flight EK ECFM 6

via Dubai to [km] Time 7 [$] [$]

Mauritius 10,300 12h 20m 1,350 0

Reunion 10,350 12h 25m — 0

Seychelles 8,550 10h 30m 1,130 40

Maldives 8,300 10h 15m 1,130 50

Sri Lanka 8,550 10h 30m 1,090 40

Table 1. Flight indicators from CDG via DXB as at Jul 4th 2012

Airlines are unlikely culprits of price setting because they are all recording losses at the moment. Should supply constriction be an issue, it seems unfair for the traveller not using a tour operator to have to shell out a premium for a seat. If taxes are the issue, government could temporarily subsidise them to encourage arrivals growth. In its 2011 Budget, govt. raised its per tourist charge to Rs1,400 and

6 Extra Cost of Fuel if flying to Mauritius 7 Assumes 45mins for Taxi, Take-Off, & Landing per flight leg and a constant speed of 950km/h.

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Airport fee to Rs1,000 per departing passenger. Since, arrivals growth has slowed.

Direct

Airfare

Fuel Sav

Non-Stop Dist. 8 Flight AA AF MK per seat

From Paris to [km] Time [$] [$] [$] [$]

Mauritius 9,450 10h 40m 1,260 1,430 1,230 0

Reunion 9,350 10h 35m 965 1,185 1,520 5

Table 2. Direct flight indicators from CDG as at Jul 4th 2012

III. Is Flying Profitable? Route unprofitability is a commonly used argument in favour of “there is no air access problem”. There appears to be legitimacy to such claim given that several carriers9 have stopped flying to Mauritius. Additionally, on existing routes, British Airways flies thrice a week, AF four times a week, and Air India has stopped flying although they could all fly daily to Mauritius. We suggested earlier, that airlines willing to increase frequencies should be allowed to do so, but the question is: Do they want to? Airlines have claimed that the Maldivian route is more profitable due to its proximity to northern hemisphere countries. While this may be true for Asian countries, it fails for European destinations as shown in our tables above. Thus, national airline-less Maldives’ open air policy appears to have played its part in ferrying tourists to the atoll.

IV. Concluding Remarks We conclude that while there lies some truth in the unprofitability of the Mauritian route, high hidden charges make flying to Mauritius more expensive than it should. Although we believe a greater number of unscheduled flights should be allowed in to help fill the mid-market rooms, it is the charges/takes on tickets that should be alleviated to seriously boost arrivals

8 Distance figures may appear wrong as most of us have never studied non-euclidean geometry 9 Singapore Airlines, Qantas, Cathay Pacific & Virgin Atlantic

DRIFTING TO THE IMPASSE Both policy makers and hospitality industry operators had forgotten the lessons of the sugar boom 30 years ago: excessive spending brought Mauritius on its knees requiring emergency IMF aid, and was followed by a massive devaluation of the Rupee. In the wake of the bumper mid-noughties, government announced a 2M visitor target (Which begs the question: is Mauritius a mass market or niche up-market destination?) and began building a new airport terminal. Hoteliers who had raised both rates and stars during the bumper years without any service upgrades, followed government’s lead, ego tripped and spent borrowed money lavishly to build new 5-Star hotels. The resulting inverted pyramid10 allowed beach bungalow rentals to flourish. Then came the financial crisis of 2008 followed by a global recession and a European sovereign debt crisis. The EUR fell from record highs, tourist arrival growth rates slowed, and visitors became cautious spenders. Further, erosion of market share to self-catering beach rentals coupled with a larger hotel park led to declines in occupancy rates. Inevitably, rack rates corrected and aggressive indirect discount wars were triggered. The effects of topline decreases were accentuated by further increases in operating costs and a spike in interest repayments. Today’s heavily indebted11 hotel groups find most – in some cases all – of their operating profits syphoned off to repay debt leaving them cash strapped. That is, they are unable to conduct periodical refurbishments required to refresh ageing properties. While Mauritians built castles in the sky, regional competition awoke; hence, the drastic drop in regional market share. During that period, government flip-flopped on brand image and botched marketing campaigns. Also, MK’s exit-less fuel hedge contract resulted in massive losses which led to a gradual decrease in flights to Europe. 10 No. 5-Star rooms > 4-Star rooms > 3-Star rooms 11 The industry’s debt doubled in the 4yrs between Dec-07 and Dec-11, ie standing at 13.3% of GDP in 2011 (8.7% of GDP in 2007). The combined debt of the top four groups stands at an astounding Rs27bn compared to Rs7.3bn in 2007

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Unless both industry operators and policy makers come together to re-engineer the industry, we fear that some players may not survive a prolonged downturn. Given the weight of the tourism industry in the local economy, we cannot afford to leave these issues unattended.

2012 PROSPECTS Our projections place arrivals for 2012 at 938k (+1.4%) [925k in 2011] excluding transit & cruise passengers. 2012 is a difficult year wherein Europe is slipping back into recession. Because European economic woes are unlikely to be resolved any time soon, we fear that 2013 may be as harsh as 2012. Unless diversification bears fruit and offsets the 6% drop in European arrivals, our projections could well be on the high side. Lest for a miracle, the industry to continue to suffer from:

1. Overdependence on Europe 2. A weak EUR 3. Erosion of market share 4. Obsolete marketing 5. Limited accessibility 6. Unsustainable indebtedness

The Debt Trap All of the big four hotel groups expanded their up-segment portfolio at over-budgeted costs. Ergo their Debt:Equity Ratios close to or in excess of 100%. Their declining Mauritian operating profits – if any – are being gobbled up by loan repayments. You will recall that RpV has been more or less constant at ~€1k which hoteliers must have also noticed. Nevertheless, they allowed cost to balloon expecting the EUR’s appreciation 12 against the MUR to offset growing cost bases. The decline in the Euro’s value13 killed margins therein exposing a fundamental flaw in their business models. This poor/negative cash flow situation will hinder the refurbishment of ageing properties which are about to face increased competition from newer hotels.

12 6% on an annualised basis between 2002-09 13 While the BoM’s “Operation Reserve Reconstitution” will alleviate woes via an indirect MUR depreciation, it is only a temporary fix. Perhaps akin to subjecting a cancer patient to a single chemo shot in lieu of treatment

Subsequently room rates will face added downward pressures. Four options exist:

1. Postpone issue via renegotiated loan terms 2. Raise equity 3. Sell assets 4. Allow situation to deteriorate until bankruptcy

The industry’s ugly duckling will be the one that is fastest to slash gearing and turn its operations “lean”.

Heisenberg Policies At a national level, Mauritius’ loss of market share is partly related to poor marketing strategy and partly due to diminishing aerial accessibility. The flip-flops have to stop and the multiple brand images cede the way for a single one. Whatever it be, it has to be marketed adequately. MTPA’s annual budget is around Rs390M 14 which is insufficient. e.g. Should Mauritius decide to target a maximum number of Americans, the Superbowl would be the most appropriate forum to run an advert promoting Mauritius; however, Rs390M would buy less than 2mins. of air time, ie enough time for ~4 ads. We believe that it would be fully justified to use a greater fraction of the ~Rs1.2bn govt. raised in passenger taxes in 2011 towards marketing endeavours as the industry is at a crossroad. In a 21st century digital age, traditional marketing campaigns will no longer suffice. Targeted approaches using the social web landscape is a must. Also a must are one-stop websites which allow travellers to book flight+hotel to Mauritius from anywhere on the globe, on any specified date, and at reasonable prices. Marketing technique diversification is as (if not more) important as clientele diversification. While clientele diversification will form the crux of the industry’s sustainability, diversification also entails the creation of new access routes. Should the national airline not be in a position to create these new routes, others willing to, should be allowed to do so.

14 Based on Budget speech 2011

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Threats Break-up of the Eurozone & prolonged recession

A weakening EUR

Increased regional competition

Opportunities Planned diversification of markets

Planned opening up of local skies

Rethinking of the modus operandi

CONCLUSIONS

While tourism has not reached the end of the road, it finds itself at a critical juncture where a paradigm shift is required. With hindsight – a luxury not available during the blinding über years – both government and hotels over-targeted growth and appear to have believed that diversification was not a pre-requisite. Subsequently, we are unprepared for the subsequent triple-whammy:

Loss of market share,

Weakening of the EUR

Shrinking routes In 2012, hoteliers will find it difficult to fare better than in 2011. The deepest low-season trough in eons coupled with smaller MUR income and increased interest repayments will further cut PAT. Hotels need to navigate their way out of their present debt traps which will not be an easy task. Raising equity could prove to be difficult given the current economic environment, while selling assets would require acquirers which at moment are positioned as bargain hunters. Re-scheduling repayments à la Greeks would ease cash flow but only buy time. The onus is thus on both hoteliers and policy makers to set aside differences to collectively and successfully market and reform the sector as has been done for both Textiles and Sugar companies. Nonetheless the greatest onus lies in the hands of policy makers to make Mauritius more easily accessible by air.

REFERENCES

Statistics Mauritius, Digest of International Travel & Tourism Statistics, 2000 - 2011.

Statistics Mauritius, International Travel & Tourism, 2000 - 2011.

Statistics Mauritius, Monthly Tourist Arrivals, Jan 2012 – May 2012.

Bank of Mauritius, Monthly Statistical Bulletin, May 2012.

Ministry of Tourism, Arts & Culture [Maldives], Tourism Yearbook, 2001 - 2011

National Bureau of Statistics [Seychelles], Tourism Statistics.

Central Bank of Seychelles, Tourism Receipts.

Sri Lanka Tourism Development Authority, Annual Statistical Reports.

United Nations World Tourism Organisation, UNWTO World Tourism Barometer, Jan 2012 & May 2012.

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APPENDIX A I. Main Domestic Players The largest hotel groups (in terms of revenue) although not fully sourced from Mauritius are: New Mauritius Hotels Ltd (NMHL) which operate under the Beachcomber Brand, Sun Resorts Ltd (SUN), LUX* Island Resorts Ltd (LUX) previously known as Naiade Resorts Ltd, and Constance Hotel Services Ltd (CHSL).

2011 Indicators

NMHL LUX SUN CHSL

Hotels # 8 5 4 2

Stars * 4 - 5+ 3 - 5+ 4 - 5+ 5 - 5+

T.A Ratings 15

4.39 4.29 4.50 4.49

Rooms # 2,024 1,429 1,057 946

In Mtius # 1,957 916 969 343

Occupancy % 68.0 71.0 59.8 64.0

Turnover (TO) Rs bn 7.6 3.8 3.7 2.0

TO per Room Rs 10,320 7,295 9,265 15,810

Table 3. Key hotel group indicators

II. Market Share In 2011, both NMHL and Sun recouped VoMS back to 2009 levels in the wake of the re-opening of Le Trou aux Biches and Long Beach respectively. NMHL leads the pack with 17%, followed by LUX 9%, SUN 7%, and smaller players CHSL [3%] and SCT [2%]. Given the difficult operating environment, we expect the pecking order to remain the same.

Fig 11. Mauritian VoMS by hotel group

15 Trip Advisor ratings normalised and trimmed by AXYS

III. Share Performance Official List hoteliers had a poor 2011 on the Stock Exchange of Mauritius (SEM). Although riding the up-tide when the Semtri climbed to record levels in May-11, their subsequent declines were steeper than the overall index’s bear run. On a YTD basis NMHL is down 19%, SUN is down 32% and LUX is down 28%; compared to the Semdex’s 7.6% drop. All of the above are trading close to Mar-09 trough levels.

Fig 12. Official List hotels' share performance

On the DEM, the lesser known and liquid of the two boards of the SEM, the picture is somewhat different. While the Demtri levelled-off with narrow range fluctuations, the DEM’s two hoteliers declined. On a YTD basis, CHSL has lost 36% to new record lows and although SCT fell by 15% it is trading well-above 2010 levels.

Fig 13. DEM List hotels' share performance

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IV. Foreign Investments NMHL, the SEM’s 4th company by market capitalisation is also among the most liquid stocks and primary non-bank target for foreign investors. In CY11, NMHL attracted net foreign investments worth Rs363M and made up 87% of all foreign trades on hotel companies. While LUX registered a portfolio outflow of Rs12M, foreigners were net buyers of both SUN and CHSL to the tune of Rs7M and Rs14M respectively.

Fig 14. Foreign portfolio investment by group

APPENDIX B

I. Price to Earnings Growth (PEG) Ratio

PEG Ratio =< 𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 >

𝐸𝑃𝑆 𝐺𝑟𝑜𝑤𝑡ℎ

PEG Ratio

0 ≤ PEG < 1 Under-valued PEG = 1 Fair-Valued PEG > 1 Over-valued

II. Turnover per Room

TO per Room =∑𝑅𝑒𝑣𝑒𝑛𝑢𝑒∑𝑅𝑜𝑜𝑚𝑠

III. Revenue per Occupied Room

Rev. per Occ. Room =∑𝐻𝑜𝑡𝑒𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

∑𝑅𝑜𝑜𝑚𝑠 × 𝑂𝑐𝑐.𝑅𝑎𝑡𝑒

IV. Enterprise Value per Room

EV/Room =(∑𝑆ℎ𝑎𝑟𝑒𝑠 × 𝐿𝐶𝑃) +∑𝐷𝑒𝑏𝑡 − 𝐶𝑎𝑠ℎ

∑𝑅𝑜𝑜𝑚𝑠

AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission.

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the mauritian tourism industry - axys · pdf filethe mauritian tourism industry ... triggered...

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