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Minor International: The Situation Remains Challenging (OTCMKTS:MNILY)

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I retain my Neutral rating on Thailand-listed hospitality & leisure company Minor International Public Company Limited (OTCPK:MNILY) (OTC:MNILF) (OTCPK:MINOF) [MINT:TB].

This is an update of my prior article on Minor International published on June 15, 2020. Minor International’s share price has declined by -15% from Bt22.80 as of June 12, 2020, to Bt19.30 as of October 2, 2020, since my last update. Minor International trades at 9.5 times historical FY 2019 P/E and 24.7 times consensus forward FY 2022 P/E.

The situation for Minor International remains challenging. Minor International’s 2Q 2020 net loss was no surprise, considering the temporary closure of most of its hotels and food outlets, and the effects of negative operating leverage. A tightening of lock-down and social distancing measures in the markets where it operates in, and a new unexpected round of fund raising remain key downside risks for Minor International. On the flip side, Minor International’s share price has fallen by -46% year-to-date, suggesting that part of the downside risks and negatives has been priced in. As such, I see a Neutral rating for Minor International as fair.

Readers have the option of trading in Minor International shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers MNILY, MNILF, and MINOF, or on the Stock Exchange of Thailand with the ticker MINT:TB. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those listed in Thailand, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Stock Exchange of Thailand is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $35 million, and market capitalization is above $3.1 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors who own Minor International shares listed in Thailand include Banque Pictet & Cie SA, State Street Europe Limited, Norges Bank Investment Management, and Aberdeen Standard Asset Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers or Fidelity, or international brokers with Asian coverage, like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Net Loss In 2Q 2020 Was No Surprise

Minor International announced the company’s 2Q 2020 financial results on August 19, 2020, and its net loss in the most recent quarter was no surprise. The company’s core hotel and food businesses in its home market Thailand and overseas markets have been key victims of the coronavirus pandemic. Minor International disclosed at the company’s 2Q 2020 earnings call on August 19, 2020, that 80%-90% of its hotels were temporarily closed in April 2020, while only slightly over 60% of its food outlets or restaurants were open for delivery and takeaway in the same month.

Minor International reported a headline net loss of -Bt8,448 million in 2Q 2020, as compared to a net profit of Bt1,786 million in 2Q 2019. Adjusting for the effects of the new Thai Financial Reporting Standards or TFRS16 and other one-off items, Minor International’s adjusted core net loss in 2Q 2020 would have been a slightly better -Bt6,869 million. Key one-off items for 2Q 2019 and 2Q 2020 included foreign exchange losses, fair value changes for interest rate derivatives, redundancy costs associated with cost cutting measures, provision expenses for employee retirement benefits relating to the new labor law, and gains from the sale of certain hotels.

The performance of Minor International’s hotel business was bad as expected in 2Q 2020, while the company’s food business fared relatively better in the most recent quarter.

Revenue for Minor International’s hotel business decreased by -91% YoY from Bt24,408 million in 2Q 2019 to Bt2,126 million in 2Q 2020, and the hotel business registered a headline loss of -Bt5,094 million at the EBITDA level in the most recent quarter. The company’s adjusted loss at the EBITDA level would have been a narrow -Bt2,275 million, if adjusted for the new TFRS16. The hotel business’ system-wide RevPAR (Revenue Per Available Room) fell -95% YoY from Bt3,053 in 2Q 2019 to Bt144 in 2Q 2020. The company’s hotels in Thailand saw -98% YoY drop in RevPAR to Bt80 in the second quarter of the year, while RevPAR for its hotels in Europe & The America plunged by -95% YoY to EUR4 over the same period.

In comparison, Minor International’s food business still achieved positive EBITDA in 2Q 2020. The food business’s 2Q 2020 headline EBITDA was Bt19 million, while the segment’s adjusted EBITDA (excluding the effects of the new TFRS16) was a much higher Bt478 million in the second quarter of 2020. Revenue for the food business decreased by -32% YoY from Bt5,865 million in 2Q 2019 to Bt3,985 million in 2Q 2020. Sales promotions and a focus on delivery sales helped to mitigate the negative impact of Covid-19 and associated lock-downs on Minor International’s food business. The same-store sales growth for its food businesses in Thailand, China and Australia were -7.2%, -27.0% and -41.7% YoY, respectively.

Although Minor International has implemented various cost savings initiatives as per the chart below, a loss for the company was unavoidable, considering negative operating leverage as a result of high fixed operating costs (typical of hotel and food businesses) and interest expenses. The company has Bt127 billion in interest-bearing debt as of June 30, 2020, and its pro-forma debt-to-equity ratio is expected to still remain high at 1.37 times following the completion of its Bt25 billion capital raising plan (a mix of rights, warrants and perpetual bonds) first announced in May 2020.

Minor International’s Cost Savings Initiatives

Source: Minor International’s 1H 2020 Results Presentation Slides

Bleak Outlook For FY 2020 And Beyond

Sell-side analysts see Minor International incurring a net loss of approximately -Bt13 billion for FY 2020, but the market expects the company to be marginally profitable in FY 2021.

On the positive side of things, Minor International noted at the company’s recent 2Q 2020 results briefing on August 19, 2020, that over 90% of its hotels and more than 70% of its food outlets are currently open for business.

On the negative side of things, a further tightening of lock-down and social distancing measures in the markets where Minor International operates in is always a key downside risk, as evidenced by the recent partial lock-down imposed in Madrid, Spain discussed in the next section.

Madrid Lockdown

BBC News reported on October 3, 2020 that Spain’s central government has initiated a partial lock-down in Madrid. Measures put in place as part of the lock-down, which affects over a few million people living in Madrid, suggests that “people can travel outside their home districts for essential journeys only” as per the BBC news article. Also, there are limits placed on the maximum number of people allowed to gather, and the operating hours of restaurants and bars. A second wave of Covid-19 infections in Spain and especially Madrid, as per the charts below, led to the implementation of the partial lock-down.

Daily New Confirmed Cases Of Covid-19 In Spain

Source: Worldometer

Total Covid-19 Cases Per 100,000 People In Specific Countries In Europe

Source: October 3, 2020 BBC News article titled “Coronavirus: Spain imposes partial lockdown on defiant Madrid”

Spain accounted for 38% of Minor International’s revenue from its hotels in Europe & The America in 2Q 2020. The company had highlighted at its recent 2Q 2020 results briefing in mid-August 2020 that “in Spain we are actually doing quite well” with “occupancy going up to like in the high 40s up to 50s.” The recent partial lock-down in Madrid, Spain could potentially reverse such positive operating trends for Minor International’s hotels located in the country.

Liquidity And Cash Burn

As of end-July 2020, Minor International has cash on hand and working capital facilities of approximately Bt36 billion and Bt26 billion, respectively. At the company’s 2Q 2020 earnings call, Minor International stressed that this is “enough for us to go on throughout the remainder of the year and next year” and it has already factored in “another smaller wave of the virus” as part of its calculations.

Minor International’s cash burn, as defined by the company as operating cash flow less capital expenditures and repayment of lease liabilities, was -Bt6.4 billion in 1Q 2020 and -Bt8.7 billion in 2Q 2020. On a month-on-month basis, the company’s cash burn was -Bt3.0 billion, -Bt3.6 billion and -Bt2.1 billion for the months of April, May and June 2002, respectively.

Assuming a worst-case scenario where Covid-19 is not contained by the end of FY 2021, Minor International could potentially run into serious cash flow issues, and a new, unexpected round of fund raising cannot be ruled out completely.

Valuation

Minor International trades at 9.5 times historical FY 2019 P/E and 24.7 times consensus forward FY 2022 P/E based on its share price of Bt19.30 as of October 2, 2020. Market consensus expects Minor International to be loss-making in FY 2020, and be marginally profitable in FY 2021.

Risk Factors

The key risk factors for Minor International are a further tightening of lock-down and social distancing measures in its home market Thailand and foreign markets where it has a presence in, and a new, unexpected round of fund raising assuming that Covid-19 takes a longer-than-expected time to be contained and the company does not have sufficient cash flow to sustain operations.

Note that readers who choose to trade in Minor International shares listed as ADRs on the OTCBB (rather than shares listed in Thailand) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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