Description

Playa Hotels & Resorts (PLYA) is a $1.15 billion market cap owner of thirteen all-inclusive hotel/resorts in Mexico and the Caribbean totaling 6,130 rooms with nine resorts in Mexico and four in the Caribbean.  Locations operate under a number of brands but are anchored by Hyatt Ziva/Zilara, which is Hyatt’s first foray into the all-inclusive space and which Playa spearheaded. Management, which has deep hotel experience, plans to grow by rolling up additional all-inclusive properties through a mix of management contracts, manage with option to buy, or acquisitions. All-inclusive is a fragmented space and Playa’s targets are smaller operators, often mom and pops, typically with properties in need of investment/updating. Looking out to my estimated 2019 EBITDA and using a 10.5x to 11.0x EV/EBITDA I believe the equity is worth ~$15.00, or 40% to 45% upside from today’s price of $10.40.

My 2019 valuation requires management execute on their current thirteen resorts, a number of which have had major renovations and are not yet back to stabilized levels. My numbers include only one calendar quarter for the planned late 2019 opening of their 750 room Cap Cana, Dominican Republic (DR) new-build resort, the development of which should be funded by a combination of cash spent, cash on the balance sheet and cash flow. I also only give partial credit for the re-opening, post renovation of their Sanctuary-branded property, also in DR. Playa will be a non-owner, manager for fees of the Sanctuary property with the cost of a major renovation borne by the property’s owner. Though Playa should see rev/EBITDA growth into 2019 based on stabilization of their existing properties, these new resorts provide built in growth for 2020 and 2021 as they ramp.

CEO Bruce Wardinski, who founded Playa in 2006 and his management team have significant branded hotel experience (see presentation link). Should management continue to execute on what they have now and announce further signed deals in 2018 and 2019 that would come online in 2020, 2021 the market may assign a higher valuation than my current 10.5 to 11.0 EV/EBITDA range. Twelve times my 2019 and 2020 EV/EBITDA yields a $17.00 to $22.00 stock. However, put another way, if they execute now, then there will be reason to believe in a long runway of growth for the stock which is in an industry that always seems to be well-liked by investors and which has shrinking publicly traded supply, all of which has already run up with the rest of the market.

Management’s detailed presentation can be found here: http://investors.playaresorts.com/phoenix.zhtml?c=254435&p=irol-calendar. Given the that the business is new to trading, the level of detail is helpful to both buy and sell side that are new to the story. In addition, VIC member apacs wrote up the name in Feb, 2017 while it was still trading under PACE Holdings, the SPAC via which PLYA came public. The share count today of 110M shares includes conversion of all the SPAC warrants, the details of which are covered in the comment section of apacs write up.

Playa’s all-inclusive resort niche focuses on leisure travelers which book with longer lead times than business guests and which includes room, food and entertainment, though Playa charges for certain extras/activities. Together these factors allow Playa to take a larger share of customer wallet on their trip, capitalize on economies of scale, and to plan supplies/staff more efficiently. EBITDA margins are in the low 30%s, above non-inclusive competitors. Hyatt Ziva & Zilara are two sides of the same brand with Ziva open to families/children and Zilara being an adults-only offering. Their new Panama Jack brand will be positioned below Hyatt and the Sanctuary brand will be higher-end.

The space is highly fragmented and populated by many small players which do not always make the investments required to keep properties up-to-date. This gives Playa a competitive advantage in that they have been aggressive in updating properties making them more attractive to groups and travel agents. It also serves as an important anchor to their growth plans. First, they have a strong brand name in Hyatt, they also believe they have the ability to create their own up and coming brands via Panama Jack and Sanctuary.  Second, the small players are good targets with which to strike deals for management contracts or outright purchases. Management contracts can be constructed to include clauses for partial or full purchases in the future.

Management says they are targeting properties that are “under-branded, under-managed and under-invested”. Properties with these characteristics are often family-owned, a factor which tends to drive a slower sale process as the family decides if they really want to sell and can require Playa management to deal with multiple family generations. However, deal multiples are lower than a more competitive corporate deal or auction. Management credibility would be enhanced if they if they can announce another deal in the first half of 2018. Should future deals be similar to the Sanctuary deal it probably means the property needs to go offline while a renovation takes place. Thus, any deal announced in 2018 is likely to hit the top/bottom line at the earliest 2H 2019 with a real ramp in 2020.  Further out, management has four externally managed properties with management contracts expiring in 2022. Taking those contracts in-house should add to margins as they save on management fees, convert to their current brands and begin to feed through their inhouse distribution. Past Playa management internalizations have roughly doubled the property EBITDA as detailed in their presentation.

Regarding the Sanctuary deal, management is guiding to $1.0M to $1.5M of fee revenue in 2019 and $2.0 to $2.5M in 2020 with very little costs associated with the revenue. I modeled $1.1M in 2019 and $2.2 in 2020 with growth of 7%, 5%, 5%, 4% in subsequent years and deducted 3% in cost and added the remainder to EBITDA. In order to ballpark future new resort additions, rather than assume they make outright acquisitions, I added in four additional management fee deals each with the same metrics as above and with start dates occurring about one per year. However, almost of this growth hits in 2020 and beyond and thus is not in my 2019 valuation, but is upside to outyears.

For existing resorts, I have occupancy rising from the low 80%s it is at now to 86% in 2021, topping at 1% below the 87% management mentioned as full occupancy. I grow ADR 5.4% in 2018, and roughly 3% per year in subsequent years.

My 2018, 2019 EBITDA is approximately $187M and $204M, respectively. At 2019-end I have debt remaining the same at $877M, cash of $338M 2017Q3 (this $338 includes an addition to today’s cash for free cash flow generated and a deduction for the expenditure of an add’l $200M to develop Cap Cana DR and other puts/takes). Along with a current market cap of $1,146M, yields an EV at 2019-end of $1,146 + $877 - $388 = $1,686. $1,686 divided by my 2019e EBITDA of $204 = forward EV/EBITDA of 8.3.   At $15.00 stock price 2019 EV/EBITDA would be 10.8x EV/EBITDA.  Though I maintained the same debt level I assume management, if they do not make acquisitions, will use some cash to pay down the term loan and reduce interest costs.

My 2018 EBITDA is arguably more prone to downward revisions as they work through any unexpected hurdles and costs of being a public company. However, this is not a startup. The resorts are up and running and have been and investors have three to four quarters of results to review including conference calls transcripts. In my view, management is, within reason, on target with their stated goals. Arguably, one item somewhat lagging is announcing more new management deals. It's not a material issue yet, but now they need to show progress, preferably in 1H 2018.

In addition to recession, the most significant risk may be weather. Caribbean hurricanes in Q3 caused some minor closure of the DR sites and lost stays due to closure of airports in Houston and Miami. However, they avoided the major destruction that occurred in Puerto Rico and a few other Caribbean islands. In the past, their Cabo resort suffered major damage due to a Pacific hurricane.

Catalyst

The three drivers of the stock I believe are 1) Bringing existing resorts to fully stabilized levels, 2) delivering the new-build Cap Cana and renovating/reopening Sanctuary on-budget and on-time and 3) announcing a minimum of one new deal, but preferably two in 2018.