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

• PQR now has strong owners and an attractive capital structure
• Prior to 2016, PQR was owned by Arle Capital, a private equity fund that was in wind-down since 2009. Because of this, PQR was over-levered and did not have the right ownership or capital to grow the business.
• After rejecting private equity bids speculated at higher than €18, PQR went public in May 2016 at €15.50 per share (initial range of €18-20 but IPO’d the day after the worst IPO in Spanish history, Telepizza), raising €525mm of proceeds. Prior to the IPO, PQR had over €1 billion of net debt and was over 5x levered. The company now has €515mm of net debt (2.5x on 2018E EBITDA).
• PQR’s two largest shareholders are successful European holding companies: Alba and GBL. Both hold board seats and collectively have acquired an additional 10% of the Company recently at today’s price levels.
  • Corp Financiera Alba (“Alba”) owns 20%. Alba is a Spanish holding company. Alba purchased 8% of PQR in the IPO (at €15.50) and has steadily increased its stake, most recently acquiring 5% of the Company in the mid €14s at the end of November 2017.
  • Groupe Bruxelles Lambert (“GBL”) owns 21% of PQR. GBL is a Belgian holding company. GBL acquired a 15% stake from Arle in April 2017 at €17.20/share and then increased its position at the end of November 2017.
  • We see two board members with already sizeable stakes meaningfully increasing their position as a powerful signal.

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:

• Organic: PQR has multiple iniatives to grow top-line in terms of both traffic (off-season events, new rides/VR) and pricing (increasing percaps, dynamic pricing), which should drive low-to-mid-single digit organic growth. For example, there is currently an increase in penetration of season passes.
• Expansion capex: PQR will spend ~€20-30mm per year on new projects such as second gate parks, lodging, or transformational new areas. These projects have targets of 20% ROIC. Certain projects such as the new Nickelodeon area in Parque de Atracciones Madrid (€5mm) and water park expansion at Warner Park (€8mm) have already been invested with incremental benefit in the 2018 season. In 2019, PQR is scheduled to open Ducati World, a €25mm expansion project at its Mirabilandia park in Italy.  The Company has a strong track record of returns from such capex (e.g. Slagharen)
• Mall Entertainment Centers (“MECs”): PQR has a strong pipeline of indoor family entertainment centers. These Centers have smaller footprints (4-7k sq ft) but provide attractive returns (20%+) with real estate developers financing half of the investment and reduced risk of seasonality and weather. We believe this is a solid opportunity in the US and Europe as mall owners are increasingly looking to diversify away from retail due to e-commerce headwinds. To date, PQR has 5 developed MEC concepts: Nickelodeon-themed park, Lionsgate-themed park, acquarium, water park, and rainforest park. PQR also has partnerships with Discovery and FC Barcelona to develop MECs and would expect at least 7 MECs to be online by 2020.  Our research of similar projects, including at peer Merlin, generate attractive returns.
• Acquisitions: PQR management has an excellent track record of growth through acquisitions. Since 2004, the Company has completed 18 deals (54 parks) across 10 countries. The Company targets to improve EBITDA by 50% after 2 seasons and has historically paid ~6x EBITDA. While the Company was limited under prior ownership/leverage (only 1 acquisition in last 5 years), we expect M&A to return as a growth driver given the improved balance sheet, aligned ownership, and highly fragmented industry. PQR has a solid pipeline and is one of very few operators with the geographical scale and expertise to acquire small to medium parks and realize operational improvements and synergies.
• Management contracts: PQR manages 4 parks in Dubai and Vietnam where other investors have put up the capital and PQR takes a management fee at 100% margin. We find these opportunities to be attractive as PQR is one of few operators in the space with the scale/experience and can benefit from these without putting capital at risk. In China, PQR has partnered with Harves Century, a major private real estate developer with $6bn worth of projects and a partnership with state-owned China Development Bank to support the tourism industry.

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).