Description

Long Elegant Hotels Group

All values are given in Dollars (the reporting currency) unless specified otherwise.

This is not a great idea, but since VIC requires 2 ideas every year here it is.

Elegant Hotels Group is a London listed hotel company with 6 Hotels and 1 restaurant in Barbados. All properties are Free-hold and all but 1 hotel are situated on “the Platinum” coast, the most expensive part of the island.

Elegant Hotels has a long history on the stock market, having been listed, taken private and listed again in 2015. In the meantime, it had financial difficulties in the years 2008-2009.

The company was take public for 2 reasons:
- To raise capital in order to lower debt
- Provide way to exit the investment by the Vision Capital (they owned Elegant since 2004, and I don’t think they had much fun from the investment).

Since then a lot has changed.

First some numbers:

Price: 82.05 p

Avg. Daily Volume: 360,000

Market Cap: £72M ($88M)

Net Debt: $61.8 M

Enterprise Value: $150M

TTM Revenues: $57M

TTM EBITDA: $19.6M

TTM FCF: $12.5 M after maintenance expenses

TTM EPS: £ 12.5 p

Dividend yield: 8.6%, covered about 1.3-1.4 times when you include maintenance

PE: less than 7.5

EV/EBITDA: 7.6

In 2012 a new CEO was brought in named Sunil Chatrani (he had been with the company from 2010), who is Chairman of the Barbados Hotel & Tourism Association.

Before his appointment, the properties were run to maximize cash-flow and little cash was reinvested. This made the properties appear dated and not up to standards. Because they maintained the ADR (Average Daily Rate), something had to give. That was occupancy, which was about 55-60% in 2010-2011 and now stands between 63-69% on average. Occupancy does fluctuate a lot between high and low season, which explains the relatively low average occupancy rate.

The re-investment turned the company around. Revenues went from 37 million in 2010 to 57 million in 2016. At the same time EBITDA went from 6 million to 19.6 million. This was during a period when arrivals to the island were broadly flat. Due to the high fixed costs in running a hotel, the marginal revenue is very important and management realizes this.

A major advantage about Barbados compared to many other destinations is that tourism is relatively stable across cycles. This has to do with its status as a luxury destination. This ensures arrival numbers fluctuate less than normal travel destinations. The difference in arrivals between good and bad years is usually less than 15%.
Another peculiar thing about the destination is the relative absence of “brand” hotels. Due to the fact that most hotels are family businesses, the competitive space is less intense than many other destinations.

The share-price decline

In June 2016 the share-price started to decline quite dramatically. The reasons are 3 fold:
- The fall of the GBP due to the Brexit-anxiety
- Zika Virus concerns
- Softness in the luxury segment in Barbados

Since Elegant Hotels has 70% of its clientele from the UK, a 15-20% slide in the value of the pound meant a vacation costs a lot more than it used to be for their clients. And since their cost base is linked to the dollar, there was very little they could do. This 15-20% change can make a large difference in your holiday budget when a room costs you somewhere between 300 and 600 dollars a night. In the Christmas holiday season, expect +$1.000 a night.

Despite this 15-20% rise in the cost for 70% of their clientele, occupancy declined by just 5%.

The Zika concern should alleviate itself in the long run, so I won’t spend more time on this.

The last point is harder to consider. The softness is because more people rented a villa or went to the cheaper segment of the market instead of staying in an upscale hotel like Elegant has. How this will evolve over time seems impossible to comprehend but then again the valuation of the company is not stretched. This does compensate for some of the risk that is taken on. However, I believe that the customer experience that Elegant offers differentiates it a lot from a lower range hotel or Villa.

To counteract this a bit, Elegant is trying to attract more customers from the USA and Canada, thus shielding it somewhat from large fluctuations in the exchange rate of the GBP.

Growth:

The company has a sensible growth strategy. They plan to acquire a hotel in Barbados or a nearby (Antigua for example) Caribbean island every 18-24 months. The acquisition has to tick a few boxes before they will consider it. They must be able to refurbish it so they can reposition and reprice it when they bring it back to the market. In a way, they want to buy undermanaged hotels and flip them.

There is only one example of this strategy, but at first sight it appears to have been successful. In 2016 they bought Waves Hotel and Spa for 18 million from the family owners. The Hotel has experienced a large re-rating since the renovations (going from a 3.5 tripadvisor score to 4.5 right now). They also have been able to reprice the hotel by quite a margin (at least 50 dollars a night on the cheaper rooms).

The problem right now is that the new hotel is still in its startup phase and generated negative EBITDA this year (it opened in August, and the reporting year for elegant ends 30 september). The company however expects Waves to be earnings enhancing in the next year and should improve further in 2018.

Another growth path is management contracts. The company is focusing on this path since it requires less capex and thus generates a higher ROI. In the next few years I don’t expect this segment to make a meaningful contribution to earnings.

Ownership:

The CEO and Chairman both own a little over 2% of the company. This is a lot less than I like, but it does equal to about 5 to 10 years’ worth of wages (5 for the CEO, 10+ years for the Chairman).
Another notable large holder is Luke Johnson, with 12.5% of the outstanding shares, and largest individual shareholder. He took over these share at a price around 70 p from Vision Capital.

Luke Johnson is a UK based serial entrepreneur in the hospitality sector. What his influence will become as largest shareholder is difficult to predict but I do regard it as a more positive development than having Vision as an owner.

Risks:

Margins and revenues having peaked
Stronger dollar
Debt is a little highes than I'd like

Catalyst

Stronger Sterling
Normalization of the business (margins and EBITDA of 2014-2015 again)