Business

Saturday September 12, 2009

Tropical Island’s turnaround

By TEE LIN SAY


PERHAPS with the turn in the general economy, green shoots for Tanjong Plc’s German resort aspirations (remember that?), Tropical Island, may no longer just be a pipe dream. Latest data out of the company indicate that Tanjong’s German ambition could be staging a turnaround, not too long from now.

The Tropical Island Corp is a 75% subsidiary of Tanjong PLC of Kuala Lumpur and Au Investment Co of Singapore. It was launched in 2004 as the world’s largest indoor rainforest, housed within a giant hangar, 60km south of Berlin, Germany.

The enormous arched glass-and-steel structure – more than 100 metres (m) tall, 360m long and 210m wide – was purchased for US$20mil (RM76mil) by the Tropical Island Corp. Back then, it was predicted that the park would draw 2.5 million visitors a year.

The development of Tropical Islands has been conceptualised over a few stages and is currently in the third stage of development; thus far, some RM150mil has been spent on developing the resort.

The first stage was accomplished with the opening of the dome in December 2004. The second stage involved the addition of new attractions within the dome to improve the quality and widen the appeal of the resort to a wider range of target audiences. The final stage, which is being undertaken currently, is to provide resort accommodations and related facilities to capture the growing European market for short-term family vacations.

“Visitors were taking two to three hour drives to the Tropical City, but they couldn’t stay overnite because there were no accommodations. This has been a huge reason in the low visitor average revenue per user (ARPU). Management realised this, and is now focusing on building accommodations,” says an analyst who tracks the company.

The resort, she says, also faces the challenge of low weekday visitor attendances and short stay visitors which will be partly addressed by filling in the accommodation gap.

In August last year, Tanjong signed a pact with a Danish Group, the Eske Group A/S (an European company involved in construction and project development) and Novasol A/S (Europe’s largest rental company for vacation homes) to develop 375 vacation homes and leisure outlets by April 2010.

However, the global investing environment took an unprecedented tumble as a result of the US subprime crisis which threw a spanner in the works – Eske, it appeared, was not able to pump in new funds for the development.

In Tanjong’s 2009 annual report, its chairman Robert Cheim said: “The global financial turmoil has made it difficult to assess with absolute certainty the outcome of the developer’s efforts to finance, construct and sell vacation homes. The group will therefore continually evaluate the appropriateness of the carrying value of its investment in Tropical Islands in the light of the aforesaid uncertainties.”

It is understood that Eske is no longer in partnership with Tanjong, and in place, new investors have been roped in.

This was evident, when it was announced in April 2009, that the group had entered into agreements with third parties who would independently finance the construction and development of vacation homes as well as market the rental of these homes throughout Europe to cover its growing market for short-term family vacations.

Due to confidentiality agreements, the company is not able to reveal the identities of the investors just yet.

Nonetheless, management says the target is still to complete the final phase of development by December 2011. “We understand Tanjong will likely negotiate to have a share of any profits on homes sold or rental yield,” says the analyst.

Warming up

For its year ended Jan 31, 2009, Tropical Island broke even at the earnings before interest, taxation, depreciation and amortisation (EBITDA) level. It narrowed its operating losses to RM33mil from RM59.11mil previously. The number of visitors also increased 21% to 834,000 from 691,000 previously.

The average spend per visitor increased marginally to 34.2 euro from 31.7 euro. As a result, total revenue increased by 37% to RM141mil. The resort presently contributes some 5% to Tanjong’s overall revenue.

Management’s focus has been to bring in the visitors while encouraging them to spend more. Tanjong’s goal for its financial year (FY) ending Jan 31, is to breakeven at operating level. It has been steadily growing visitorship and spend per visitor over FY05 to 2009. This has been achieved on the back of additional product offering skewed towards visitors’ preference.

Tropical Island presently receives about 90% of visitors from Berlin itself, while the balance of 10% comes from outside Berlin, but pretty much within Germany.

However, the continued losses experienced by the resort have made it necessary to evaluate whether the underlying assets are being stated in excess of their recoverable amount.

In its 2009 annual report, Tanjong says “a discounted cash flow model has been prepared to determine the recoverable amount using the ‘value in use’ calculations, which requires the use of estimates, based on agreements entered into in April 2009 with third parties to commence construction of the holiday homes.

A key valuation assumption is the construction of vacation homes to enable an increase in visitor’s attendance, particularly during non-peak periods, and the occupancy rates of these homes. The expected completion of the homes will take place in end 2011. The model confirms that the carrying value of Tropical Island is not impaired.

Breaking Even Soon

The analyst who covers Tanjong expects Tropical Island to be operationally profitable from FY10. “There may be upside to our earnings as we have imputed a 5% contraction in visitation in FY10. We understand visitor and spend per visitor trends remain robust into the year. The recession may have actually ushered locals to re-discover rest and relax spots closer to home,” she says.

She adds that the cash burn rate for Tropical Island is estimated at RM50mil versus Tanjong’s about RM1bil annual free cash flow.

Debt sitting at Tropical Island’s level is about RM360mil. In the longer run, the analyst believes it will make sense to have an exit strategy for Tropical island. She does not rule out an eventual spin-off or sale to monetise Tanjong’s investment in Tropical Island.

She says the realisable value for Tropical Island is roughly 150 million euros (RM675mil). This, of course, assumes that Tanjong finds a buyer for Tropical Island when earnings picks up in the longer run.

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