VIAD CORP (VVI) VVI
June 06, 2021 - 9:32pm EST by
alli718
2021 2022
Price: 47.60 EPS -5.93 -2.48
Shares Out. (in M): 27 P/E N/A N/A
Market Cap (in $M): 1,305 P/FCF N/A N/A
Net Debt (in $M): 333 EBIT -125 -57
TEV ($): 1,744 TEV/EBIT N/A N/A

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Description

“Clearly we'll be better off. We've seen -- we believe there's margin opportunity within the GES business on kind of the existing base of revenue, just based on a lot of the transformation work that we did over the last 12 months. And the Pursuit team has brought on new attractions over the last 12 months, and we believe those will continue to add strength to the earning power at Pursuit. So we're very bullish and optimistic about what this business looks like when there's a full recovery, but clearly, better off than where we were in 2019. I can't give you specifics around what that looks like entirely, but we're very optimistic and bullish about our future.” – Steve Moster, CEO of Viad; May 2021

We believe Viad has significantly enhanced its earnings power above 2019 levels and see several upcoming catalysts over the next few months that we believe could drive shares higher. We see 75% upside to shares on based on CY 2023 earnings that are 50% above expectations.

Viad has been written up a few times on VIC, so I point you to the previous posts for an in depth description of the business. Briefly, VVI is a combination of two distinct businesses: 1) Pursuit – an attractions and hotel business focused on iconic destinations and 2) GES – the second largest event services provider for large conferences and exhibitions. Both Pursuit and GES were impacted by COVID to various degrees: impact to Pursuit solely from restrictions and GES impact from restrictions and questions about the future of large exhibitions and conferences. 

Investment Thesis:

  1. Evidence of a strong near-term recovery and long-term demand environment for Pursuit’s attractions and properties
  2. Economies of scale and scope advantage Pursuit as a consolidator in market with a long runway for capital deployment that has been enhanced by COVID
  3. Reopening of large events in key markets has set the stage for recovery at GES
  4. Effective shutdown of GES enabled management to transform business, which will lead to long term margin benefits in a highly cash generative business
  5. Long term re-rating opportunity from group split / sale of GES

Evidence of strong near-term recovery and long-term tailwinds for Pursuit's attractions and properties

  • Pursuit’s properties are rapidly recovering to pre-COVID levels and above, and demand patterns indicate a near term boom from pent up demand. These properties in iconic destinations across the US will benefit from investment in outdoor activity equipment (RVs, hiking, camping, etc.), desire for space and outdoor activity, US consumer spending power, and the US population feeling cooped up over the last year. Longer term, we believe there is no negative impact to Pursuit’s economic model from COVID and national park visitation will return to trend.
  • Early indicators are confirming this demand boom. Viad has provided very bullish commentary on its first quarter earnings call that bookings were pacing ahead of 2019 levels. Pursuit’s properties have shown strong evidence of the recovery in Q1 despite being a slower season and being early in the vaccination roll out across the US: Viad’s Q1 RevPar Index was 98% of 2019.
  • Management has commented that they’ve experienced “strong rate improvements” across all their US destinations. We have confirmed these rate improvements using the Wayback Machine and have also seen season length extend across properties:
  • The remaining element holding Pursuit back from eclipsing 2019 profitability in 2021 is the US / Canadian border closure. There have been recent discussions between the US and Canada and speculation that a plan to reopen the border will be announced. We are not forecasting a reopening of the US and Canadian border for the 2021 peak season. Given Pursuit will still generate cash and profit in 2021 despite the border closure, we believe the reopening has little impact to the long-term value of the group as the border will more than likely be open in 2022Economies of scale and scope advantage Pursuit as a consolidator in market with a long runway for capital deployment that has been enhanced by COVID

Economies of scale and scope advantage Pursuit as a consolidator in market with a long runway for capital deployment that has been enhanced by COVID

  • We think the Pursuit business is a gem. Pursuit owns travel guides, lodging, attractions, transportation, restaurants, and retail in end-markets – allowing company to provide unique experiences and drive strong economics. For example, in Banff / Jasper – Viad owns 30%+ of the Jasper hotel bed base, multiple tours, multiple attractions (including the top rated on and many traveler’s choice options TripAdvisor), multiple restaurants, transportation, and planning services for groups / weddings. Pursuit also announced that they broke ground on a new 88 bed hotel, which is the last hotel permit in Jasper. These economies of scope have enabled pursuit to generate double-digit pre-tax return on assets, and 20%+ EBITDA CAGR from 2015 to 2019. Pursuit has similar positions in Glacier National Park where it owns over 20% of the bed base, and Alaska where it owns 13%+ of the beds in Denali / Kenai national park.
  • Viad also owns a scalable attraction, FlyOver, which has significant room for organic expansion beyond the 2 units currently open (Vancouver / Iceland) and 2 in development (Las Vegas / Toronto). Success in markets outside the Top 50 most visited cities globally, such as Vancouver and Iceland, demonstrate significant expansion opportunity for FlyOver. We envision Pursuit expanding to 100+ locations via owned and operated locations and franchising opportunities in markets that are more difficult to navigate on their own such as Middle East, LATAM, and APAC.
  • Incremental capital will be invested in Pursuit going forward; and the company recently acquired a new attraction in the Canadian Rockies. Management has completed over 12 acquisitions at Pursuit in recent years, which have collectively generated a 20%+ IRR. We believe M&A will accelerate due to COVID driving leisure property owners to sell businesses to avoid another steep drawdown. Given Pursuit’s strong returns, economies of scale / scope, and track record we are excited about future organic and inorganic capital deployment, and with the share price starting to recover, we believe a larger deal is becoming more likely.

Reopening of large events in key markets has set the stage for recovery at GES

  • Last Vegas announced return of events at 100% capacity starting 6/1 which is a bellwether for the exhibitions industry. World of Concrete is the first major event in Las Vegas which is scheduled to start June 7 
  • Given many other indoor activities (Casinos, Restaurants, Airports etc.) and outdoor events (Kentucky Derby, Sports games, etc.) have been able to safely operate with large crowds, we expect conventions to safely reopen.

  • Exhibitions will cascade across the US with states such as Texas, Georgia, and Florida already supporting large events. States that have been perceived to be more cautious like IL are allowing events to return with Chicago Auto running on 7/19. Viad expects a very strong second half with more large events than usual, but expects them to come at a smaller size.

  • Comparing the two exhibitor lists from World of Concrete 2020 and 2021, exhibitor attendance at World of Concrete are estimated to be at 50% of 2019. Channel checks and commentary from Informa, Hyve, and Emerald implies exhibitor attendance at 60-80% of 2019 levels for the back half of 2021.
  • With 20% more events than H2 2019 and exhibitor attendance between 60-80% - back half revenues are trending between 72% and 90% of H2 2019. We model 62% of H2 levels in the back of 2021 for conservatism and GES recovering to the high 70s in 2022 and high 80s in 2023 because of a tepid market recovery offset somewhat by market share gains. Importantly, the recovery at GES enables Viad to be cash flow positive at the group level starting in the third quarter of 2021 as Pursuit is already expected to generate cash.

Shutdown has allowed management to transform GES into a better business with higher margins, increased market share, improved end-market exposure, and better competitive positioning

  • GES is seeing a weakening competitive set because of the pandemic with competitors suffering from a cash crunch and customers de-risking suppliers. Management highlighted a survey of tradeshow suppliers showing 25% were uncertain about their future or expecting to go out of business. GES has called out over 30 new corporate customer wins already, which is a meaningful increase vs. the pre-COVID corporate customer base. Corporate customers were just 14% of revenues in 2019. Corporate customers carry higher margins – we estimate 400bps higher - than exhibition customers due to a higher mix (66% vs. 33%) of non-core services which carry margins 10pts higher than core exhibition services. We believe GES will continue to benefit from this flight to safety and take advantage of what management described as an environment with “very strong RFP opportunities."
  • GES used the pandemic to redesign its business model and fixed cost base. The company has shifted to a freelancer model for on-site event staff, which will drive higher utilization of these resources. Currently While GES had limited seasonality, the underlying operation had a lot of ‘lumpiness’ from city to city and month to month, leaving people underutilized. GES has been able to test this flexible labor model at events earlier in the year and can now deploy it at larger events. Additionally, GES has permanently removed $10mn of facility by resetting its real estate footprint, including harvesting cash from several owned facilities.
  • Margin guidance of 8%+ EBITDA seems conservative and greater than 20% flow through rate implies GES could reach 10%+ assuming $130mn of fixed operating costs. This implies absolute levels of EBITDA above 2019 levels on a sales base significantly below 2019 and a significantly lower breakeven point. If market share gains can offset the unknown long term of impact to the events industry, GES can emerge with EBITDA nearly double 2019

Valuation

  • Viad is best valued as a SOTP, which we believe not only captures the differences between the two divisions, but also reflects reality as the group will likely be separated in the future given the lack of synergies between the two businesses. Before separating the divisions, management wanted Pursuit to reach scale of $250mn+ in revenue which was the long term target the company announced in its 2016 analyst meeting. Pursuit was on track to achieve the $250mn figure in 2020 prior to the COVID outbreak.
  • After the separation, we believe Pursuit will be valued at 12.5x EBITDA as a growing iconic leisure concept that earns high return on capital and a long growth runway. GES will be valued as highly cash generative industrial services provider at 8x EBITDA or 13-15x 2015-2019 average FCF. We believe the recent business model changes will reduce cyclicality and enhance margins that approach double-digits, particularly in years with strong exhibition schedules.

Risks

  • Covid resurgence
    • Another COVID resurgence would be a clear negative for Viad. The company has liquidity through the end of September 2022 but would likely need to raise additional capital if there was another long lockdown, which we don’t believe is a likely outcome
  • Event and conference budgets do not return
    • Promising early results for World of Concrete, the first large US event, with ~50% of exhibitors vs. 2019
    • We believe remote work and zoom meetings will persist in the future, but we believe this will impact low value business travel rather than high value exhibitions
    • Exhibitors cite large conferences as one of their highest ROI marketing spends and GES revenue is driven by large events with 20% market share among the Top 100 events
    • The Chinese domestic exhibitions market has returned to pre-COVID levels for large exhibitions
  • Management allocates capital poorly at scale
    • With the share price improving, and an attractive opportunity set for travel and leisure assets, we think there is potential for Viad to deploy significant capital at Pursuit within M&A. While there is risk in any deal, Viad has a very good acquisition track record with Pursuit transactions generating a 20% IRR
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Successful execution of World of Concrete starting 6/7
  • US / Canada Border Announcement
  • Strong summer leisure travel
  • Evidence supporting the return of budgets for exhibitions and conferences
  • Longer term, the split of GES and Pursuit
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