Description

Rezidor Hotel Group (ticker REZT SS), based in Stockholm, Sweden, is an operator of branded hotels throughout Europe, the Middle East and Africa (EMEA) under a Master Franchise Agreement.  Rezidor is a rapidly growing hotel group with 309 hotels in operation and under development, with over 63,000 rooms in 48 countries.  Rezidor is one of the fastest growing hotel groups in the world with 20% compound annual growth rate in the number of hotels in operation and under development since 1994. 

The last share price of REZT SS was SEK 38.90 (about €4.13), the equity market cap is €620mm and total enterprise value is €628mm.

SAS Group (the Scandinavian airline) held 75% of Rezidor before its IPO on November 28^th 2006 (at SEK 52 per share), though their stake dropped to 6.7% after the IPO.  Carlson Hotels Worldwide (based in the US), who held 25% of Rezidor before the IPO, purchased 10% in connection with the listing taking its stake up to 35%.  In May Carlson raised its stake to 41.7% by purchasing SAS’s 6.7% stake.  Carlson is the Master Franchisor with whom REZT SS has the Master Franchise Agreement for the EMEA region.  I.e., Rezidor doesn’t own the brands itself; it has the rights to the brands in the EMEA region of the world under the Master Franchise Agreement with Carlson which runs until 2052. 

Rezidor’s Master Franchise Agreement with Carlson gives it exclusive right to the brands in the EMEA region of the world.  Of its existing 234 hotels in operation (48,449 rooms), 157 hotels (35,169 rooms) are under the Radisson brand (upscale), 68 hotels (12,227 rooms) are under the Park Inn brand (mid-market), 2 hotels (404 rooms) are under the Regent brand (luxury), 3 hotels (169 rooms) under the Country Inn brand (economy) and 4 hotels ( 480 rooms) are unbranded.  A further 75 hotels (14,622 rooms) are currently in development.  Of these, 38 hotels (8,404 rooms) are in development under the Radisson brand, 32 (5,228 rooms) are in development under the Park Inn brand, 2 hotels (563 rooms) are in development under the Regent brand, and 3 hotels (427 rooms) are in development under the Missoni brand. 

In 2006, Rezidor stated its goal of opening 20,000 rooms between 2007 and 2009.  Of these 20,000 rooms 17,005 are now secured in the pipeline and 4,053 have already been opened.  Additionally, 1,670 rooms are secured to be opened after 2009. 

As part of its “asset-light” strategy, in the past Rezidor shed all its real estate to the point where it owns none of its hotels today.  30% of rooms are leased, 46% are managed, and 24% are franchised.  In the case of the leased hotels, Rezidor pays a lease for and manages the property “owning” the full P&L.  The leased model has the most operating leverage.  In the case of managed hotels, Rezidor manages the hotel (which is owned by someone else) and receives fees for the management based on revenues and profit.  In the case of franchised hotels, Rezidor is the franchisor, and the franchisee pays fees based on revenues to Rezidor for use of the brands.

The Rezidor model has been to move away from leased hotels and move towards managed and franchised hotels (again, “asset light” model that has been pursued by Hilton International, Intercontinental, and others).  Rezidor was one of the first hotel companies to pursue the asset-light model.  The benefit of this model is a less volatile revenue and earnings stream compared to the traditional brick and mortar model, and less capital intensity.  Despite only 30% of the hotels being leased, the leased hotels account for a large majority of the company’s revenues and a similar proportion of its EBITDA, but fee based revenue is growing rapidly.  Fee revenue grew 20% year over year in the first nine months of 2007.  For the 20K new rooms to be added between 2007 and 2009, the company’s target is that 50% of these are managed and 30% are franchised, with the remaining 20% leased. 

Rezidor has attractive elements to its strategy and business.  As stated earlier, it has an ambitious program to add new hotels, (as indicated earlier, adding 20K rooms between 2007 and 2009 on top of the 45K rooms it ended 2006 with).  Its Radisson brand is the second largest upscale brand in Europe.   Branded hotels comprise 65% of hotels in North America, while they comprise only about 25% in Europe, the Middle East and Asia, so Rezidor is well position to exploit the growth of its brands as these markets grow and mature.  Rezidor has one hotel in China and a number in the former Soviet Republic (CIS), where it’s been operating since 1994 and which is an area of focus for the company.  It has 23 hotels (6,500 rooms) in operation and under development in Russia & CIS, well ahead of competitors Marriott, InterContinental, Accor, Starwood and Hilton.  49 of its 234 hotels are in the Middle East, Africa and Eastern Europe and it has 38 more under development in these locations.  It has a well diversified range of price points and is geographically diversified.  It is the smallest of the publicly traded peers, so it G&A infrastructure can support more hotels without a proportionate increase in costs (this partially explains REZT SS’s lower EBITDA margin than peers).  

In terms of financial performance, Q3 results were released on October 29^th.  Q3 EBITDA was up 38.8% and YTD, EBITDA rose 33.2%.  Q3 EBITDA margin increased to 12.9% from 10.4% the year earlier.  Q3 RevPAR like-for-like (for leased and managed hotels) was up by 10.9% to €82.6 and occupancy was 76.0% (vs. 74.5% for Q306).  Q3 total RevPAR (for leased and managed hotels) was up by 9.3%.  Nine month RevPAR life-for-like was up 8.6% and nine-month total RevPAR was up 5.8%.  The quarter showed strong performance by every measure, especially compared to peers with exposure to the North American market.

So Rezidor is growing rapidly, with operations in attractive markets, utilizing excellent brands under a long term master franchise agreement, moving even more towards managed and franchised hotels (which already account for 70% of rooms in operation), and shows continued strong operating performance.  But is it cheap?

VALUATION

I looked at trading multiples of Rezidor compared to European publicly traded peers (Accor, Intercontinental Hotels, NH Hoteles, Sol Melia and Millennium & Copthorne) and found REZT SS is trading well below its peers on EV/EBITDA, EV/EBIT and P/E measures.  All the peers have growth strategies that include adding more hotels and all have positive increases in RevPAR.  I did not look at EV/EBITDAR as I don’t think this is a good metric since REZT SS owns no hotels, and leases all its non-managed and non-franchised hotels.  Most of the peers own some brick and mortar, understating their “rents” relative to REZT SS. 

While strategies and mix vary, taking the two comps that have the most similar mix of owned/leased vs. managed vs. franchised, (Intercontinental and Sol Melia SA), REZT SS falls below both in terms of EV/EVITDA and EV/EBIT multiples, and in between, but closer to the cheaper of the two in terms of P/E.  While I didn’t include US comps in my comparison, I know that US hotel companies trade at higher multiples than the Europeans in general in both EV/EBITDA and P/E terms, so Rezidor is obviously cheaper than the US comps. 

Of the comps I’ve used, Accor, NH Hoteles and Millennium are the most asset heavy, with Millennium having a high level of outright ownership of its hotels (probably the highest of the comps).  More similar to Rezidor are Intercontinental and Sol Melia, which are more heavily weighted towards managed & franchised that the other comps.  Intercontinental has only 27% of its hotels in the EMEA region, while Sol Melia has 70% in EMEA.  Of the comps, NH Hoteles and Accor have the highest exposure to EMEA with 78% and 70%, respectively, while Rezidor is almost totally in EMEA (except for a few unbranded hotels).

Using Bloomberg most recent 28 day consensus estimates, my comp chart reveals the following:

Applying mean peer multiples (which are usually lower than median) to Rezidor’s consensus data reveals upside potential of at least 30% to Rezidor’s stock price. 

On EV/EBITDA for 2007 - 2009, the mean comps imply a stock price of about SEK 53 for Rezidor.  On EV/EBIT the mean comps imply a price of about SEK 52. 

And on forward P/E ratios, Rezidor appears 3 to 4 multiple points lower than the comps.  The peer mean P/E ratios for 2007 – 2009 imply a stock price for Rezidor of SEK 49.  It’s important to note that Rezidor share price is quoted in Swedish Kroner, but financial data is reported in euros.

Hotel shares have not been spared the wrath of the market since the summer.  Rezidor shares are down about 35% since June 30, 2007, despite being having the least financial leverage of my European comps by far (net debt at September 30, 2007 was about €8mm on an equity market cap of 620mm).  The Bloomberg European Lodging Index (BEULODG ), by comparison, is down 14.2% since June 30, while my European comps, on a simple arithmetic basis, are down 28% on average since June 30.  One explanation I can come up with to explain Rezidor’s underperformance is its relatively small market cap (€620mm), which is 1/3 of the smallest of my other European comps.  This underperformance is even more perplexing in light of Rezidor's strong year to date performance and lack of North American exposure.  It’s also worth nothing that only three analysts follow Rezidor on the sell side.  SEB Enskilda’s analyst seems most on top of the name, and he has a Buy rating and a SEK 60 price target for Rezidor.

CONCLUSION

Rezidor is a rapidly growing hotel company focused on an asset-light strategy in attractive EMEA markets (no North American exposure) with strong brands and strong operating performance, and substantial pipeline of new hotels in development that will increase the number of rooms by 44% by the end of 2009 (compared to the end of 2006).  Despite these attractive qualities, Rezidor is the cheapest of the European hotel companies, (and cheaper than the US listed hotel companies).   The average multiples at which the European comps trade imply 30% upside to Rezidor’s current stock price. 

Catalyst