|Shares Out. (in M):||81||P/E||0||0|
|Market Cap (in $M):||1,185||P/FCF||0||0|
|Net Debt (in $M):||516||EBIT||0||0|
|TEV (in $M):||1,646||TEV/EBIT||0||0|
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Investment Thesis: Compelling Risk/Reward
PQR is an underfollowed, Spanish-listed Company that owns and operates 61 local and regional theme parks across the U.S. and Europe. The Company has recently faced a perfect storm including extraordinarily adverse weather, a broken IPO, and missed earnings/disappointing guidance, which is providing an opportunity to buy an under-the-radar quality business at a low multiple on below-normalized earnings with multiple levers to increase value. PQR and the theme park industry are better businesses than the market realizes. Over the long-run, PQR has generated stable, organically growing EBITDA and cash flow with a good management team that has a proven track record of redeploying capital at high rates of return. With a return to normalized earnings, valuation will re-rate in-line with peers, and potentially higher, given the growth that will come on line in the coming years. The Company is trading at approx. 6.9x EBITDA and an approx. 10% maintenance FCF yield on our 2020 estimates. Recent, large insider buying further supports our thesis.
Capital Structure: Bad owners to good owners, bad capital structure to good capital structure
Business Description: Growing/high ROIC compounder with stable cash flow and upside
PQR owns and operates 61 local and regional theme parks across the U.S. and Europe. The Company is diversified geographically with the largest park (Warner Park in Madrid) only accounting for 8% of revenue. PQR is a better business than it might seem. The vast majority of PQR parks are local/regional, which compared to national/destination parks have lower dependence on tourism, more stable/predictable demand, and a better value proposition for consumers as evidenced by the Company’s solid performance during the 2008-2009 and 2011–2013 downturns vs. peers (e.g. Six Flags went bankrupt). For anyone in New York, you might know the Splish Splash water park (https://www.splishsplash.com/).
PQR is one of only two global players focused on these smaller local/regional parks. From our diligence, we believe management has an excellent reputation as an operator which is also reflected in high quality IP partners (e.g., Warner Brothers/DC, Nickelodeon, Lionsgate, FC Barcelona).
What makes PQR particularly interesting are the multiple growth levers to drive value:
Compelling Valuation: low multiple on below-normalized earnings
Management initially guided to 2017 EBITDA of €205mm but missed expectations (€174mm EBITDA) primarily due to bad weather - extreme rain in the Europe (+11% rain days) and US (+15% rain days) and hurricanes affecting parks on the east coast of the US. This followed below average weather in 2016.
Assuming ‘normal’ weather in 2018, the Company will generate at least €205mm EBITDA in 2018. Management’s 2018 guidance is cautious (and below their own budget) at €196mm in order to ensure the Company beats guidance after the recent disappointment. On our 2018 conservative estimate, PQR trades at 8.3x EBITDA which is already attractive, but the opportunity is more compelling when you look out a few years and the business has grown through organic initiatives, growth capex (expansion and MECs), management contracts, and M&A. We conservatively expect the Company to generate €240mm to €250mm EBITDA in 2020, representing 6.9x EBITDA based on today’s TEV (excludes cash generation). Given the various growth initiatives and, in particular, M&A that is not in our projections, our etimates could prove conservative.
Assuming a reasonable 9.5x valuation on our 2020 EBITDA with today’s net debt would be a €22.80 stock, 55% higher than today’s stock price (25% IRR) over two years.
It is also worth noting that PQR trades below comps and we believe PQR offers the most compelling risk/reward of the group given its growth opportunities versus the group (Merlin – 9.9x 2018, SIX – 13.9x 2018, FUN – 10.0x 2018, SEAS – 9.2X).
|2015||2016||2017||2018E||2019E||2020E||2020 valuation||9.5 x||10.0 x|
|% y/y||8.8%||(1.2%)||(0.8%)||9.0%||8.0%||8.0%||Less: Net debt||(516)||(516)|
|IRR (2 year)||25%||29%|
In terms of maintenance free cash flow, PQR trades at an approx. 7.2% FCF yield on 2018 numbers and approx. 10% FCF on 2020 numbers. It is also worth noting that part of the maintenance capex could be considered growth capex as maintenance capex is broken down into ‘maintenance and ‘novelties’, the latter which refers to new rides, etc. in the parks. While part of the novelty spend is intended to maintain the current business and keep customers returning, it typically drives some organic revenue growth.
We also believe the stock is under the radar due to its geographic listing as it is listed in Spain despite only 24% of revenue coming from Spain (40% from US and the remainder is throughout Europe). We do not see this as a fundamental headwind and expect the Company and stock to become more well known by the investment community over time.
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