Elegant Hotels Group plc (LON:EHG) CEO Sunil Chatrani caught up with DirectorsTalk to discuss a recent acquisition, Waves Hotel and Spa which is now open for business. Sunil tells us how the hotel been received by guests and travel agents, how the refurbishment and re-positioning has gone, the facilities and activities that a Waves guest can expect, what Waves Hotel offers that differs from the other hotels in the portfolio, its position on the island & what makes the location so special and finished with an insight into the acquisition strategy, and what to look for in a potential acquisition opportunity.
Elegant Hotels Group Plc owns and operates six luxury hotels and a beachfront restaurant, Daphne’s, on the island of Barbados. The Group’s portfolio comprises 553 rooms, which represents around 29% of Barbados’ quality leisure tourist room stock. Five of the six Group hotels, including the recent acquisition Waves Hotel & Spa, are situated along the prestigious west coast of Barbados commonly known as the “Platinum Coast”. The properties are all freehold, with a total aggregate plot size of approximately 22 acres and an aggregate beachfront of 2,500 feet. In the year ended 30 September 2015, the Group achieved revenues of $60.1 million and EBITDA before non-recurring items of $22.2 million.
Zeus Capital Comments:
Elegant Hotels have announced this morning the soft opening of the recently acquired Waves Hotel and Spa with full opening to follow in 2-3 months, which is in line with the original plan. This was the company’s first acquisition since listing in May 2015 and we think this will represent a good example of the company’s ability to enhance returns from assets by refurbishing, re-positioning and repricing. At the current price the shares have significant asset backing with a NAV of 157p per share vs the current share price of 69p with a dividend yield of 10%, which management are committed to paying to September 2016.
Waves Hotel and Spa: The company announced the acquisition of Waves in February 2016, financing the transaction primarily through existing debt resources provided by the group’s bank. Waves comprises 70 bedrooms, two restaurants, a destination spa with 8 treatment rooms and is located in 1.8 acres of freehold land. The asset fits well with Elegant’s existing portfolio and it paid $18m (including debt) with a further refurbishment investment of $4m, it has therefore been extensively upgraded.
Waves assumptions: Due to the timing and re-launch of this new hotel, we anticipate the impact to September 2016 results to be broadly neutral at the EBITDA level. The historical performance reflected under-investment in ongoing maintenance and limited senior management resources, boosting short term historic performance, in our view. We anticipate this to be EPS enhancing in FY17, during its first full year of ownership and expect its contribution to build beyond this in future years.
Forecast assumptions: Since revising our assumptions in June, we expect EBITDA in 2016E of $20m and PBT of $11.9m, down c.10% on 2015A, reflecting a difficult trading environment in H2 2016E. We note the 24% decline in the share price since we cut our forecasts. Based on revised forecasts 2016E net debt/EBITDA will be 3x, but interest cover remains strong at 9x and the LTV remains a low 23%. The property value of the assets is $257.5m ($235.5m for the core business and $22.0m for Waves) and has not been revalued giving significant asset backing which has improved as a result of the sterling depreciation post Brexit. Based on our year end net debt forecast we expect an NAV of 157p (170p based on current spot rate) per share. The shares currently trade at a 56% discount to this. Management remain committed to the FY dividend of 7.0p paying 50% in H1, currently yielding 10% (with dividend cover of 1.5x).
Valuation: Based on our forecasts, which were struck at a GBP:USD rate of 1.42 (pre Brexit), the shares currently trade on an FY16E EBITDA multiple of 7.3x, falling to 5.8x in FY17E. While earnings forecasts have been revised, we believe the opening of Waves is an important milestone for the company and represents good progress in delivering its strategy. The shares are asset backed, trading at a 56% discount to FY16E NAV and at current level the shares have a sector leading dividend yield of 10.1%. While trading conditions are likely to remain difficult in the near term, we believe the asset backing and dividend yield more than compensates for this at present. The next scheduled newsflow from the company will be a pre closed trading update in mid/late October where we will look again at our trading assumptions in the core business.
