LON:EHG | Elegantly Lying Under The Hot Barbados Sun - With Upside?

10th Sep '16 by oscar247

7 comments 5473 reads

In common with many recent launched IPO’s to Aim this company hasn’t enjoyed the most auspicious start to its public career, either. However, this hasn’t been due to poor management performance or disappointing trading but with a pesky fly - namely, Mosquitoes!

The fear is how this bothersome fly infected with Zika virus may disrupt and deter tourism to Barbados and the Caribbean. Perhaps, though, for the patient investor this event is an opportunity?

Elegant Hotels (£EHG) admitted to the market May 2015. Shares priced @ £1.00. Mkt Cap £88.8million. Those dividend hungry investors note “It is the Directors’ intention that the total annual dividend payable will equate to an ongoing annual dividend yield of 7% (calculated on the basis of the Placing Price).” The companies current profile, reads thus:-

“Elegant Hotels 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.”

“The Group’s shares were admitted to trading on the London Stock Exchange’s AIM in May 2015. Its objective now is to leverage its position as a leading hotel operator in Barbados and to expand both on Barbados and further into the Caribbean.”

“Together, the Group’s six hotels - Colony Club, Tamarind, The House, Crystal Cove, Turtle Beach and Waves Hotel & Spa - offer styles encompassing classic and contemporary, family-friendly and adults-only.”

Investor website: http://www.eleganthotelsgroup.com/

Commercial website: http://www.eleganthotels.com/

The Half Year Results Statement and Trading Update, June 2016 give insights to the companies ambitions and current trading challenges.

With the share currently trading @ 0.77p on the ask, forward P\E 7.5 and prospective dividend 9.00%. NAV of 161.00p a share.

Some readers may conclude the shares oversold and worthy of deeper research.

Note:- I hold…

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Carcosa

10th Sep '16

Zika virus is not spead by flies but Aedes species of mosquito.

I held Elegant hotels up to the announcement of them acquiring the Wave hotel back in February.

The negatives that I see is not only the Zika virus but also currency risks. Furthermore the company is dead set on increasing debt to finance new property purchases with questionable pay-back periods, adding a lot of intangibles to the balance sheet and providing property valuations which are somewhat questionable given that the universe of buyers for a property like that in a location like that is small. The property prices are only as good as the hotel related revenue it can generate.

The company was brought to market by Venture Capitalist who, if I recall correctly, have a 20% shareholding which is locked in for a certain period (end of this year?) so they will also, presumably, be wanting to dump their holding.

Overall though I'm just very suspicious of management and their quick land grab post IPO which I see putting the whole business at risk, with or without the Zika virus.

rhomboid1

This was suggested in another thread and I said;

"In reply to jonno, post #22

I travel regularly to Barbados and considered Elegant Hotels but 2 things put me off, some of their properties look "underinvested" in in terms of their physical structure, secondly some major developments on the so called "Gold Coast" where EH operate have been mothballed eg Ritz Carlton since the GFC , at some point these or others will revive and create some serious competition. In the meantime visitor numbers are constrained by the number of flights that GA airport can handle at peak times , 2 hr plus security queues do not make for a happy holiday maker.

So it looks cheap but I'm sitting this one out"

Rusty2

A mosquito is not a fly?

I was tempted by this earlier this year, it was a Simon Thompson's share tip, glad I did not invest as it's down about 40%. Yes debt is high, also not very recession proof.

oscar247

11th Sep '16

Carcosa

Those are good points which add to a bearish view on the company and its stratagem. What were the positives that convinced you to make your original investment, prior selling on the Zika news? Are there any circumstances that would make you feel comfortable enough to consider re-investing?

rhomboid1

Thanks for those observations. Guess nothing helps as much like physical experiences, as you’ve commented, in helping to evaluate the proposition prior making an investment. I’m holidaying at an Elegant hotel, the end of October and hoping the event will confirm my decision to invest was good.

A mosquito is indeed a fly; although in my defense, in terms of common usage where I live it is not (okay, that's me being stubborn lol!)

Oscar, from my notes:
-----
Jan 29/16: Good for Preservation of Capital/Security. See http://www.hardmanandco.com/sites/default/files/research_papers/ElegantMay15-2.pdf?utm_source=Email+Campaign&utm_medium=email&utm_campaign=29208-287779-Elegant+Hotels+
New IPO May 2015. Brought to market by Venture Capitalist
4/5 Star Hotels in Barbados. Market leader (not dominant)
In last 20 years the fall in visitor levels due world catastrophes has been small
2015 general market rising this season
Hotel assets increasing 5-7% per year
9% return post tax on assets
At 100p float price = 70% Adjusted NAV. The EV/EBITA 8.2x
20% Loan to Value (good)
7% yield at 100p with a progressive policy. Covered 1.5x
24% holding by VC. Maybe getting out in a year. Other holders are quality companies
Don't expect rapid share price growth. Good for income and moderate capital growth

Feb 8/16: Acquisition of Wave hotel. Gut feel is its expensive and may wreck balance sheet.
-----

Punters will probably forget about the Zika virus in 12 months (seems to be the usual timespan given history of such things).

Andrew niven

16th Sep '16

I actually live in Barbados and elegant hotels are one of my clients.
They have a good management team headed by the CEO and the acquisition of waves will help secure their position as one of the leading hotel groups on the island.
2015 was a fantastic season and 2016 is promising to be just as good.

jonno

On valuation metrics I think that elegant hotels, despite the issues with the Zika virus and local competition makes a compelling investment. A view that I expressed in an earlier post. My initial purchase was just after the IPO and I doubled my holding at 63p, which hopefully will be the nadir for the share price. I agree with Carcosa that the Zika virus will in time no longer be an issue and if the management team is competent as I believe and Andrew confirms, Elegant hotels should prove a successful investment over time. Alternatively the deep discount to NAV must make the business a potential takeover target for a larger hotel group.

In the short term it is possible the £/$ exchange rate may adversely impact business as I understand that 60% or more of its clients are from the UK, although this may in part be offset by the fact that he company reports in dollars and will gain on translation into sterling. This latter point is also a positive for NAV which is reported in dollars.

My assessment could of course be overly optimistic. As ever it is down to the individual.

Good luck to all.

Elegantly lying under the hot Barbados sun - with Upside?

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Oscar247

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