6 - 12 September 2001

Raising stock

Alfred Pisani, chairman and CEO of IHI plc, talks to Blanche Gatt about the company’s prospects for growth in the current stagnant market environment

In the wake of announcements that International Hotel Investments plc (IHI) has acquired a prime property, the Alfa Hotel, in the heart of Lisbon, reports about how this Corinthia Group initiative is faring on the market become ever more pertinent. As investors across the board continue to watch the discouraging performances of their investments with dismay, equity activity remains sluggish and many stock market players decide to wait out the slowdown on the sidelines.
While a number of listed companies have shown significant decreases in the price of their shares, others are hovering uncomfortably just below their issue price, but for both former and latter, the public’s reaction is the same: caution and prudence are ruling the day.
IHI is one of those companies whose stock has fallen, but not that dramatically. The issue price of Lm1 per share is now stuck at around 93 cents, meaning current equity holders would make a loss of seven cents per share if they were to sell at today’s prices. Is this why there is so little movement on IHI shares at the moment? Corinthia Group and IHI chairman and CEO, Alfred Pisani, believes this is the case.
Explaining his view during an interview last week, he said that IHI is fulfilling its brief to the letter, with a strategy for growth and profit built upon the solid foundations of the Corinthia Group’s long experience of the hotel business around Europe.
“I personally,” he said, “have had 39 years of experience since I first opened the restaurant at Villa Refalo in 1962 with a Lm9,000 pound loan from the bank. Today, with one single interim cash injection of US$3m when LAFICO a new shareholder came in 1974, the Corinthia Group has a capital value of US$800m – IHI has inherited the goodwill that Corinthia enjoys after all these years in business, which gives it a powerful advantage in operation.”
IHI was set up in March 2000, and subsequently floated on the Malta Stock Exchange the following May, its mission to pursue the business of investment, development and management of upscale hotels in Europe and the Mediterranean. At the time, the company was launched with a capital value of Lm40 m, 75 per cent of which was contributed by the Corinthia Group and 25 per cent subscribed to by the public. The future certainly seemed bright.
The brand new public company immediately acquired the Corinthia San Gorg and the Grand Hotel Royal in Budapest, as well as 20 per cent in two other Corinthia Group subsidiaries, Quality Project Management Limited (QPM) and Corinthia Hotels International Limited (CHI), which would bring the necessary development and management expertise to bear on the various projects IHI took on.
“One of the ways the public can see very clearly how it benefits from the goodwill enjoyed by the Corinthia Group,” said Alfred, “is in the ease with which we deal with banks to enhance our return on investment rates. For example, the development of the Grand Hotel Royal Site in Budapest is costing US$65m; instead of using all our available funds on this one project, we managed to raise 50 per cent of the costs in loans from two Budapest banks – K&M Bank and OTP Bank. The shareholders still own 100 per cent of the project, but have only paid for 50 per cent of the project. The rest is in loans that are self-financing over a period of six years or so. We have also succeeded in organising the same conditions for the Lisbon hotel – which will be funded 50:50, half by us and half by the German Rheinhyp Bank.
“With property prices rising at a rate of around eight per cent a year, within six years the price of the property will have gone up by approximately 50 per cent. So what was bought, for example, for Lm100, and you have only paid Lm50, is now worth Lm150 – three times the original value. This is the accumulated advantage IHI enjoys – if we paid the entire cost of developments, we would be unable to take on more projects concurrently, and consequently generate less profits in the long-term for our shareholders.”
Corinthia Hotels International operates over 20 hotels in eight different countries, most of these countries would be described as developing nations, and include the Czech Republic, Hungary, Portugal, The Gambia, Tunisia, Libya and Turkey besides Malta. This, Alfred tells me, is a result of defined strategy to buy cheap and sell dear, and IHI is following in big brother’s footsteps in this case.
“If you go to invest in highly developed countries,” he explained, “you will find that things are very expensive. If 10 rooms in Hungary cost Lm10, the same 10 rooms in London will cost Lm20 or more. This means that your return on investment will be much lower. Malta, for example, is still a developing country. Fifteen years ago a house in Sliema might have cost you Lm15,000 – today the same house will cost you Lm100,000. So anyone who bought 15 years ago and sells today is clearly making a substantial profit on his investment. But this growth curve of around 15 per cent per year will not continue indefinitely. The cycle will flatten itself out naturally, and there won’t be the major changes we have seen over the past years.
“Now countries like Hungary and Poland are all in a similar situation to Malta 15 years ago. We will see a similar growth curve as we saw here, especially in light of the fact that most of these countries are EU applicants who will see dramatic changes in property values, wages and many others on accession. So our definite strategy is to go to countries still in the early stages of their growth cycle where we will get the best return on our funds. Of course, there may be a bit more risk involved, but the potential for enormous returns, coupled with our very careful analysis of the situation in each particular country, more than makes up for it.”
Some investors like to see hard cash evidence of an investment’s progress coming to them regularly, especially in the current economic climate, but IHI does not intend issuing dividends for the next few years. “It was clearly explained in the offering memorandum that no dividends would be issued,” said Alfred. “This is a real estate company primarily, where every investment is matched by an equal amount from the banks, so the first earnings of the company will naturally go to pay off loans. Eventually, perhaps in three to five years’ time, we may perhaps decide to start issuing dividends, but definitely not for the time being.”
“If you look at the Corinthia Group’s progress over the years, you will see that I’m not talking through a bubble or a mirage. Today the Group is worth over US$800m. All I’m saying to the public is, I’ve done this before, and would you like to do it again with me? My mission is to turn IHI into a substantial organisation in international terms. I have done it before, and I can do it again.”
Today, just over a year after it started operating, IHI owns three prime sites, the Corinthia San Gorg, the Grand Hotel Royal in Budapest and the new purchase, the Alfa Hotel in Lisbon. Despite these acquisitions, share value has dropped and so far there are no indications of recovery.
“The share prices on the MSE do not reflect a true
picture of the value of our company,” insisted Alfred. “Already our assets are substantially higher than when we started out, and we strongly believe that our company is worth far more today. Each of these properties had numerous complex issues impeding their successful development, which we have managed to clear in this short time. We have been through all these throes, like permits, capacity, architectural design, and so on, which on their own already add substantial value to the sites. And then you look at the stock market and its clear that it does not reflect a true picture of our company.”
Alfred sees the problem being more indicative of an infection of general investor’s gloom than a statement about IHI. “There is a virus going round,” he said, “and everyone’s afraid of it. It is the same on the international market – mostly caused by sentiment. But it is a continuous cycle, which will shift back into focus naturally. I firmly believe that this will happen soon, and the IHI share prices will reflect the fact that the company is putting its words into deeds, and is growing stronger every day.”
Undoubtedly, the 3,000 odd shareholders of IHI are keen to see this happen. In the meantime, IHI is continuing with its expansion plan, negotiating with parties in Croatia, Russia and elsewhere on further acquisitions for its portfolio. However, further acquisitions would require additional capital – how would the company raise it?
“If an opportunity does arise,” said Alfred, “we will have to raise more capital, by referring to the shareholders to inject more money first. And I think if they appreciate the true value of the company we would get support from them – what we see today is only a momentary trough that is not related only to IHI. Of course it is not the most comfortable situation, but if we were to make an offer to increase the share capital, I believe that people would decide on the strength of what the company is doing and support it.”
While it might sound unreal to be talking about going back to shareholders for added funds when they are watching their initial investment dwindle, albeit not as dramatically as others, Alfred Pisani is emphatic about the potential of IHI. And, as he points out that while shares in some other companies have dropped some 40 per cent, the seven cents drop in IHI shares happened months ago, and have since remained stable. Investors are not divesting themselves desperately of their IHI shares, whether through choice or circumstance.
“Our shareholders always knew this would be a long-term investment,” concluded Alfred. “And that includes Corinthia Group which is the biggest shareholder, and ergo, has the greatest interest in seeing the success of IHI. As chairman of both companies, I believe we shall deliver our promise and continue moving forward at the same accelerated pace.”