Share analysis: Gulf Hotel Group – Hospitality

The Company

Gulf Hotel Group (GHG) is a public limited liability company that has been listed on the Bahrain Bourse since 1987. A luxury hotel brand, GHG was inaugurated in 1967 under the name of Bahrain Hotels Company. The company is primarily involved in two main operations: the management of hotels, residential and commercial properties; and food and beverage retail and distribution. The group operates mainly in Bahrain, with only one international venture, located in Zanzibar, via its wholly owned hotel management subsidiary.

The major shareholder of GHG is the government-owned Gulf Air Company, which holds a 30.14% stake in the group. The second-largest shareholder is the Family Investment Company, at 12.74%, followed by YK Almoayyed & Sons, which owns a 7.24% stake, and the Social Insurance Organisation with 5.42%.

The Gulf Hotel was the first five-star property in the kingdom, established in 1969. The group has developed in line with the growth of the leisure and tourism industry in Bahrain, and currently holds a 24.5% market share of the five-star hotel segment. The hotel has 359 rooms, 16 restaurants and lounges, and a convention and exhibition centre.

GHG established the Gulf Hotel Management Company in 2002, which provides hotel management and catering services to aircraft, ships, government organisations and companies. The group also manages Ocean Paradise, its 10%-owned Zanzibar-based resort. In 2006 the company introduced the luxury 97-apartment Gulf Executive Residence, and in 2013 the group constructed the Gulf Hotel Laundry Services facility to handle greater laundry volumes.

The food and beverage segment contributes more than 75% of group revenues and generates gross margins of 30-35%. Hotel operations, on the other hand, have been generating gross margins of 65-70%.

Development Strategy

The group has diversified its operations into commercial and residential property management and food and beverage retail. GHG is also expanding geographically: it manages the 10%-owned Zanzibar-based resort, and has invested BD50m ($132.5m) in Dubai to set up two five-star hotels over the next few years. It has bought a land plot at Business Bay on Dubai Creek, in the heart of the Northern Emirate, and is expecting construction to commence in 2015. GHG also owns a 28.06% stake in Bahrain Family Leisure.

The group’s net profits increased 17.2% year-on-year (y-o-y) in the fist nine months of 2014 to reach BD9.5m ($25.2m), and operating revenues increased 6.3% y-o-y. GHG’s profits are not only facing pressure from the increasing number of hotels in Bahrain, but also from strong competition from GCC countries that are attracting tourists and conferences.

Competition in the hospitality market is intensifying as new international five-star hotels, such as Le Meridien and the Four Seasons, penetrate the market, thereby increasing the high-end room supply and putting pressure on hotel occupancy rates. According to a recent EY “Middle East Hotel Benchmark Survey”, occupancy rates in Bahrain improved to 42% in 2013, up from 37% a year earlier. However, they remain lower than those seen in other GCC countries. The average room rate declined to $205 per night in 2013 from $208 per night in 2012.

The food and beverage sector depends on both tourist and local expenditures. Tourist expenditures advanced as a result of an increase in arrivals to the country, which were up 8% y-o-y in 2013. In terms of local expenditures, growth in the food and beverage retail industry is also correlated with population figures and demographic structures. Bahrain has witnessed consistent growth in its population, with over 77% of the country between the ages of 15 and 64. The younger generation constitutes the majority of consumers in the food and beverage retail industry, as they are more likely to dine out at restaurants than their older counterparts, especially at restaurants that offer international cuisine.