|Shares Out. (in M):||20||P/E||0||0|
|Market Cap (in $M):||300||P/FCF||0||0|
|Net Debt (in $M):||324||EBIT||0||0|
|TEV (in $M):||624||TEV/EBIT||0||0|
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This is a higher risk, higher return investment predicated on a better than feared outcome. At current cash burn run-rates, it appears that Viad has only 3-4 quarters of liquidity remaining. The company stated on its Q1 call that it is looking to raise capital, which we believe the market interpreted as particularly dilutive given existing leverage. The business is highly seasonal with the company generating the majority of its cash flow in Q3, which does not provide much latitude should Covid-19 persist for an extended period of time.
Prior to C-19, Viad was an above average business with somewhat irreplaceable assets, shareholder friendly, and executing well. The stock was $70 and traded around 9-10x 2020 EBITDA estimate ($200mm at the time). The thesis revolved around expanding margins in GES via capturing greater AV revenue and growing revenues in Pursuit via making high ROI investments. C-19 put both businesses into a standstill. Today, the stock hovers around $16 and is valued at 4.5x “recovery” EBITDA and 2.5x normalized EBITDA.
The company disclosed on its Q1 call that it had $163 million of cash at the beginning of April and expected $40mm of cash outflow in Q2 (which assumed minimal new revenue and an unquantified collection of receivables). Management also said it was looking to “line up additional sources of capital.”
While the situation is somewhat dicey, we believe it will be better than feared based on 1) the variable cost nature of the business, 2) banks willingness to lend and waive, 3) unencumbered assets held on the books at understated values, and 4) Pursuit generating some profit in Q3.
Brief Company History
Viad operates two seemingly unrelated businesses, GES and Pursuit. GES is a global, full-service live events company. Pursuit is a collection of unique attractions, travel lodges, and sightseeing tours in iconic destinations such as Banff, Glacier Park, and Denali.
Several years ago the company went through a formal strategic process and concluded that the best course of action was to keep the businesses together. While GES is lower margin, it has a high degree of recurring revenue as contracts are 3-5 years and renewal rates are 90%+. In 2019, GES accounted for 94% of revenues and 40% of EBIT. Conversely, Pursuit is high margin, highly seasonal (nearly all of the annual profit is booked in Q3), and the focus of management’s investment program over the last several years.
We believe VVI is a survivor in the long-run but for the stock to work in the next 6-12 months, the company needs to improve its liquidity in a way that is not highly dilutive and/or post better than expected results at Pursuit.
Investment Point #1: Liquidity situation is likely better than feared
This is based on the highly variable cost nature of both businesses and the understated asset value. Pursuit generates 85% of revenue in Q2/Q3 and many properties and staff are mothballed in the off-season. The company has the knowledge and experience to flex its cost structure. In normal times GES is not a seasonal business, but in any case the majority of its costs are subcontracted/variable. The company discloses that 68% of costs are variable, 26% are semi-variable, and 6% are fixed. There is minimal visibility in this business at the moment. While some tradeshows are moving online, many are rescheduling for 2021 or canceling. Suffice it to say, management needs to focus on controlling costs in the interim and we believe they have the structure and experience to do so.
While the current liquidity/cash burn rate suggests a dire situation, we believe the company has ample opportunity to raise debt prior to a dilutive equity offering. The real estate assets of Pursuit are unencumbered (aside from being pledged as general collateral to the revolver). Pursuit generated $82mm of adjusted EBITDA in 2019. We believe normalized EBITDA is higher as the company has spent over $100mm on Flyover Las Vegas, Flyover Toronto, and the Geothermal Lagoon, all of which have yet to open. We think this puts normalized EBITDA over $100mm.
We should note that Pursuit is not directly comparable to a hotel REIT as they have long term ground leases and do not own the land on their international properties. Additionally, part of the business is from attractions (listed above). That being said, we believe there is ample capacity to assume additional leverage. Hotel REIT comps average around 4.5x based on 2019 EBITDA and 7x leverage when looking at 2022E. C-Corps are roughly 3.5x levered on both 2019 and 2022 EBITDA. In the heat of C-19, both Carnival and Royal Caribbean were able to secure debt financing at decent prices. Now there are obviously some caveats and some of the deals required an equity piece. However, for illustrative purposes, CCL announced a $6bn capital raise on March 31, which included $1.3bn of equity. Prior to the deal, Barclays estimated CCL had 3 months of liquidity and post deal, 8 months. For a company in such dire circumstances, CCL was still able to price the senior secured notes at 11.5%.
We believe Pursuit can handle $400-500mm of leverage alone. While not exactly a pure-play real estate investment for the points noted above, Pursuit does have $590mm of assets, which we believe are highly understated given the historical cost, scarcity value (aside from owning properties in very unique destinations, VVI owns the Glacier Skywalk, FlyOver, and the soon to be opening geothermal lagoon in Reykjavic), and nearly $200mm of capex spent over the last 5 years on the business. Even at $450mm of leverage on the understated asset level results in 75% LTV. Again, this is far from perfect but helps to triangulate the balance sheet capacity.
GES EBITDA is roughly $75mm and while the visibility is scant, there is no reason to believe that business alone cannot handle at least 2x leverage. That would add another $150mm of availability for a total of $550-650mm prior to relying on something lower down the capital structure.
The company disclosed on its Q1 call that it had $163 million of cash at the beginning of April after drawing down the remaining portion of its revolver, which would bring debt to $487mm. Pro-forma for the Q2 burn, cash should be around $123mm at the end of June. Q2 should be peak cash burn and given the dynamics listed above along with the health of the credit markets, believe Viad has optionality to improve its liquidity position. We think any information relating to this will be positive for the stock.
Investment Point #2: Pursuit could surprise to the upside
While we are only 3 weeks into Q3, we believe that Pursuit’s results may also turn out to be better than feared. We think there might be a misunderstanding in Pursuit’s customer base. Banff/Jasper is Pursuit’s most important destination, comprising 60% of 2019 revenue. Given travel restrictions to Canada, including the closure of the US border (now through August 21), it’s fair to assume the Banff/Jasper destination is going to take a hit. An interesting point is that only 50% of travel is from international visitation and with people itching to get out during lockdown, we think Banff/Jasper becomes an even more desirable destination for Canadians. Glacier Park (17% of 2019 revenue) is also an interesting destination in that 98% of visitors drive to the destination.
We have been collecting some anecdotal data points and conducting channel checks on some of the key properties, which suggest Banff/Jasper results will not be as bad as feared:
· Vehicle traffic into Banff has continued to improve and now stands at approximately 70% of the level observed in 2019. This is up considerable from the 35% level observed in May and 52% level observed in June. Importantly, despite some research Covid surges in the last week or two, vehicle traffic is still showing improvement.
· While the US-Canada border is set to remain closed to non-essential travel through most of August, we do not expect this to have a significant impact on the company’s Canadian occupancy levels given the most impacted property, the Prince of Wales Hotel in Waterton, represents only 4% of Pursuit’s room capacity.
· As of our latest channel checks the Banff Jasper properties were at or near full capacity beginning with the 3rd weekend of July, a trend that appears to be continuing into the first weekend of August.
· Room rates have stabilized over the past few weeks, though are down in the mid-teens from the rates first advertised ahead of June re-openings. The healthy weekend occupancy levels serve as a positive sign for local Canadian tourism which stands to benefit from restrictions on international travel.
· Bookings at VVI’s properties west of Glacier National Park also appear strong with weekend occupancy at or near full capacity from the 3rd weekend of July. We expect the strength from these properties to be partially offset by the east Glacier lodges, both of which have opted to remain closed for the 2020 season given the partial closure of the park’s eastside.
· VVI’s Alaskan properties (less than 25% of total Pursuit capacity) are off to a slow start, though management alluded to this likelihood in May in pointing out the partial reliance on cruise tourism from the lower 48. In June, VVI’s two largest Alaskan lodges marked down room pricing as much as 10%, although pricing has remained steady throughout July.
All told, we think Pursuit’s results could surprise to the upside should the Q3 trend continue. If the company is also able to add incremental debt to its balance sheet, we think investors will start to value the company off of 2021-2022 estimates. If we assume the company raises $100mm of additional debt and 2021 EBITDA is around $100mm (half of what 2020 estimates were at the beginning of this year), the stock would be valued a $26 (80% upside) at a 10x multiple. We could also envision a situation where Pursuit has a strong Q3, which would lead investors to bake in a much stronger recovery for 2021 ($150mm EBITDA at 10x equates to a $50 stock).
There are clearly downside scenarios, including persistent C-19 surges, extended lockdowns, dilutive financing, or general credit market deterioration. If C-19 infections swell in Pursuit’s key markets the national parks may impose greater restrictions on visitors or close altogether, crippling tourism in the middle of peak season. While we have confidence in management’s ability to manage costs, further intermittent lockdowns would pose a serious challenge to the company’s cost saving efforts. On the liquidity side, while other tourism players have secured financing at manageable rates, significant deterioration in the economic outlook from here could prove Viad to be less fortunate and thus increase the probability of a large equity deal.
1. Additional debt financing
2. Q3 Pursuit results
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