Description

Thesis summary: Rezidor, the 15th largest hotelier in the world, trades at an insane discount to global comps (4x EV/EBITDA on FY18 vs the sector 13-14x) and attractive absolute valuations (10x maintenance FCF with almost no debt). This is certainly not the best business in the sector, nor is it a liquid stock, but the degree of discount in the price is so massive I think it is extremely difficult to not earn an attractive return from here while I could easily see one or two things happening in 2018 that catalyze a 50-100% return. To me this is a quintessential deep value trade (so-so assets with a few technical oddities + illiquidity but huge margin of safety). The company is pretty small, somewhat illiquid ($500k volume a day so probably only for smaller funds), and sell-side coverage is uniformly terrible or non-existent (part of the opportunity). 

(this will not be a long writeup as I think most of the opportunity is knowing it exists).

As mentioned, Rezidor is the 15^th largest hotelier globally, operating 483 hotels and 105k rooms (80k in operation, 25k in development) with a mostly-European footprint. Geographically, ~18% of rooms are in the Nordics, 34% are in rest of Western Europe, 30% are in Eastern Europe, and 18% are in Middle East and Africa. Their two biggest brands are Radisson Blu and Park Inn by Radisson (both well established ‘midscale’ brands); they have a few other smaller brands in other verticals like luxury (Quorus) and budget (Prizotel) but these are not really needle-moving. As per most hoteliers, they do not own any of the real estate, instead employing leases (20%), management contracts (50%) and franchises (30%) across their portfolio. Importantly – and a big differentiator versus many other listed groups – Rezidor is basically net debt free (excluding leases, but that portion of the business is being managed lower as new contracts are all management/franchise). 

Operationally, performance has been mixed over the last two years. They were hit hard in 2016 by declines in traffic to the middle East and north Africa, as well as some key European destinations like Brussels and France – most all the result of the terror attacks. Additionally they have been going through a restructuring program to try to pivot the business away from leases, which involved a high number of one-off expenses (lease terminations, etc). 2017 has been better, with RevPAR growth in the 5-7% range: Eastern Europe has remained strong, Middle East/Africa is coming off a lower base, and Nordics/Western Europe have remained positive in the 4-5% range. Occupancy remains lowish (versus developed European comps) in the low 70s (still improving 1-2pts per year) as the company has a youngish fleet of properties – this explains much of the margin differential (I think the company will generate ~10% EBITDA margins vs mid-teens for other groups).

Let's be honest: this is not the best business in the space nor do I think these guys are the best operators; there will be further lumpiness (portfolio restructuring is ongoing). But it does seem to be turning the quarter – new management was appointed mid-last year after the HNA takeover, they are announcing a new 5yr plan soon (Jan 17 is their capital markets day) and I do not expect performance to go backwards from here. I think they easily do 105-110mm of EBITDA this year (on revenues of 1bn); maintenance capex should be ~3.5-4% of sales for this kind of business (ie ~38mm) and with no leverage, just taxes, I get to ~45mm of FCF before growth capex, hence 10x P/mFCF. This is, I think, less than half the median market multiple for hoteliers (which tend to trade at 13-14x EV/EBITDA and convert ~60-70% of EBITDA to FCF) despite carrying no leverage.

Technical pressure from HNA is the real reason for the underperformance

Rezidor stock has massively underperformed, -31% over the last year (versus the Swedish market +14%). While the fundamentals certainly haven’t set the world on fire, the biggest reason for the decline has been the involvement of HNA. HNA originally acceded to 51% ownership of Rezidor in mid-2016 via its takeover of Carlson Hotels (which owned the 51% stake in Rezidor). Under Swedish takeover law, HNA was obliged to make a mandatory tender for minorities upon the change of control – note, at the time Rezidor was trading around 35 SEK/share (vs current price 25.5) and this is where HNA bid for the rest of the stake. However the board of Rezidor advised minorities NOT to tender at 35 since they thought (rightly, in my view) that even that price (around 5.7x FY18E EV/EBITDA) largely undervalued the group. Nevertheless, 20% of minorities tendered and so HNA moved to 70% ownership, which is where we are today. 

Rezidor has clearly been aggressively marked down post HNA involvement, for I think a few reasons:

-          When HNA bought out the additional 20%, they delayed payment to shareholders for a few months which really started the worries re their liquidity issues (mid last year);

-          HNA has apparently run into liquidity problems, and recently (late Dec) announced they had given 10% of the company (ie 1/7 of their REZT shares) to a lender as collateral for a loan. At the same time, it should be noted that they did the same thing with a portion of their stake in NH Hotels (that the market ignored);

-          There is now very low liquidity in the stock and sell-side coverage is basically not paying attention (for example: one sell-sider uses a 14% WACC (!) to value this on a DCF basis - despite the fact they have no funded debt and are a Swedish listed company - and still thinks its worth mid-30s);

-          There is a fear that if HNA becomes a distressed seller the entire block of HNA’s ownership could end up in a price-agnostic sellers’ hands (like a lender).

I think this represents a big opportunity. The discount here is so large that any number of things could happen and generate attractive returns:

1)      HNA sells out: I do not think this would or could happen in a disorderly fashion as there is no way HNA could ‘blow out’ of the stock even if they wanted to (daily liquidity of $500k vs their stake value of $300mm). This would have to be via a trade sale or financial buyer, either of which would be massively higher than current price since a) the Board already thought 35 SEK was too low and that was when the company was in worse shape; and b) REZT could easily carry 2x of leverage which would support a 45% equity recapitalization dividend (on current market price) to any PE lucky enough to buy it meaning this asset should trade multiples higher than where it is in any kind of normal auction;

2)      Status quo is maintained but HNA risk dissipates: while I am not underwriting this as the base case, given how cheap this is at the moment I think any potential ‘normalization’ of the attitude towards HNA (eg via new banking relationships announced; asset sales elsewhere in the world carried out successfully) would surely derisk the situation here and lead to a multiple re-rating;

3)      Operational improvement: again not something I am underwriting but the new management team has been reasonably successful in the first quarter of management, they are announcing a new mid-term plan in a week or so, and I do think 2018 will be better than 2017 so it would not take much on the operational side to warrant a re-rating either;

4)      Buyout/consolidation with Carlson: while Carlson is also under HNA ownership, Rezidor/Carlson still share the same loyalty program and share a number of central costs. If the shares continue to languish so far below fair value I could see how these two assets could be combined (and Rezidor taken private in the process) – something that would have to, by law, occur north of the last offer made (ie north of 35 SEK), implying at least 40% upside

5)      Merger with NH Hotels: HNA also owns 30% of NH Hotels, the Spanish group, and there have been rumblings that putting Rezidor/Carlson together with NH would help HNA create a larger global player with scale. Since NH trades at 11x EV/EBITDA, even if this happens in stock it would still be massively accretive.

While it is hard to handicap the outcomes here, there is a good chance one (or more) of the above happens in 2018 given a) the apparent liquidity needs at HNA; b) the essential non-core nature of this asset to HNA (they backed into it when acquiring Carlson); and c) my slightly optimistic view on operational improvements. This is a business that used to trade at 9-10x EV/EBITDA, before the HNA involvement and two years of subdued operational performance, so there is huge upside if they can right the ship. I am not banking on a re-rating that far but even getting back to 6-7x EV/EBITDA would provide a near 100% return on a 2yr view, and I do think this could be resolved sooner than that.

Catalyst

- Resolution of HNA situation one way or another

- Better tone from management at upcoming CMD

- Potential consolidation with Carlson/NH Hotels/other hotel group

- Other stuff