Elegant Hotels Group PLC

Elegant Hotels Group PLC (EHG) is a Barbados-based owner and operator of seven luxury hotels, consisting of 588 rooms, making the company almost twice as large (by room number) as the closest peer in the Barbados luxury leisure tourist market (four to five star).

Recent News
On 18^th October 2019, Marriott International Inc announced an offer to buy the Caribbean-focused Elegant Hotels, which is backed by Luke Johnson, former chair of Patisserie Valeria, in a £100.8 million deal.

Financial Highlights (for the six months ended 31 March 2019, US$ million)

(Source: Interim Presentation, Company Website)

Driven primarily by Treasure Beach, revenue in the first half of 2019 increased by $1.2 million (3%) to $43.7 million against $42.5 million reported in the corresponding period of the last year. While overall occupancy increased by one percentage point to 68% (H1 2018: 67%), due to reduced rates at Turtle Beach and Treasure Beach, the average daily rate declined by 1% to $532 (H1 2018: $539). Revenue per room available rose by 1% to $364 from $362 in H1 2018.
Adjusted operating profit rose by 8% to $14.2m, and adjusted EBITDA was $16.4 million, up by 7% than the prior year. Reflecting a rise in gross margin of three percentage points to 62.4%, adjusted EBITDA margin rose by one percentage point from 36.1% in H1 2018 to 37.5% in H1 FY19. Adjusted profit before tax rose by 5% in the period to $12.0 million (H1 2018: $11.4 million), mainly due to an increase in finance costs of $0.5 million resulting from movements in the US LIBOR rate.

Reported profit after tax rose from $8.8 million in the prior period to $11.8 million in H1 2019, while adjusted profit after tax rose to $11.8 million from $9.3m in the prior year. Reported basic and diluted earnings per share were 13.3 cents per share compared to 9.9 cents per share in H1 2018, while adjusted basic and diluted EPS rose from 10.5 cents per share to 13.3 cents per share in H1 2019.

Share Price Performance

Daily Chart as at October-21-19, before the market closed (Source: Thomson Reuters)

On 21st October 2019, Elegant Hotels Group PLC shares were trading at GBX 109.57 at the time of writing before the market close (at 12:45 PM GMT), down by 0.39% against the previous day closing price. Stock's 52 weeks High and Low are GBX 110.91/GBX 63. The company’s stock beta stood at negative 0.14, reflecting the negative movement of the stock as compared to the benchmark index.

Valuation Methodology


Key Risks
Exchange rate volatility and UK political uncertainty, reduction in airlift, loss of key tour operator relationships, extreme weather and environmental degradation, Barbados fiscal policies changes, customer demographics and preferences, increase in competition, health and safety impacts, and infrastructure and development execution risks.

Conclusion
The company has taken note of ongoing uncertainty in its core visitor market of the UK and the impact on earnings due to the devaluation of sterling which has increased the cost of holidays in Barbados for UK guests.
The group operates in tough market conditions, and competition remains one of the key risks to the business and adversely affect revenues. An economic downturn could affect demand for the Travel & Leisure industry, and the hotel sector is exposed to global political and economic events and trends, leading to a risk to business operations from external factors.

In the financial year 2019, the company expects another challenging operating environment. Brexit risk signifies the potential impact of the United Kingdom’s decision to leave the European Union on the company’s operations and financial position. The company is facing emerging headwinds and cost pressures. The company’s P/CF multiple is significantly higher as compared to the industry multiple, reflecting overstretched valuations. Currently, the stock is trading near the 52-week high, suggesting that the upside potential might be limited, and the company can face stiff resistance at the current level.

Based on the above rationale and support from valuation done using the above method, we have given a “Sell” recommendation at the closing market price of GBX 110 (as on 18th October 2019) based on 8.90x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*All forecasted figures have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.773646 GBP.
*The “SELL” recommendation is valid for the current price as covered in the report (as on 21-October-19)

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