Small Cap Value Report (14 Oct 2016) - INL, EHG

14th Oct '16 by Paul Scott

32 comments 17933 reads

Good evening,

Apologies for my running late today, this is due to it being Friday, and there being hardly any news of interest today, so I had a lie in.

I'm delighted to read that Tesco & Unilever have resolved marmitegate, although no details of the compromise deal have been released. I think Tesco has played a PR blinder here - setting itself up as the consumers' champion by resisting inevitable price rises from suppliers, which are being triggered by weaker sterling.

We have to prepare for the inevitable higher inflation, and therefore probably a consumer spending slowdown. I'll be sifting through the market over the weekend, making a list of things to open some small short positions on.

I'll update this on Sat or Sun, too tired now, sorry.

OK, here goes, second attempt (it's now Sunday lunchtime):

Elegant Hotels (LON:EHG)

Share price: 64.5p
No. shares: 88.8m
Market cap: £57.3m

Trading update & new management contact - this is my first commentary here on this particular company. I did glance at it when it floated, in May 2015. However, seeing as though its operations are overseas, and it was listing on AIM, that was enough to put me off - that type usually seem to go wrong. Also there's debt on the balance sheet.

I'm very suspicious of all IPOs to begin with - why does the existing owner want to sell, if things are supposedly going so well? Often there's an ulterior motive behind IPOs - the vendor wants to get out because either the price is too high, or the business model is likely to worsen in some way in future. Therefore I'm not usually interested in taking the other side of the trade from the person who knows it best (the existing owner).

Looking back at the first RNS, in May 2015, there is some interesting info. The IPO was done by Zeus Capital, and sought to attract investors with an initial dividend yield of 7%. I got caught on one of these, namely Entu (UK) (LON:ENTU) - also a Zeus float, with a big initial yield. The shares have absolutely tanked, and the divis have been cut.

So already the red flags are mounting, before I've even looked at EHG's figures.

Elegant Hotels describes itself as the;

...owner and operator of six upscale freehold hotels and…

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Crusty

16th Oct '16

Unilever, P&G, Kelloggs and no doubt others seem to have created very successful trading models based on mega-blitz advertising and hoisting prices to give huge margins. Also they have largely managed so far to stifle discount brand competitors such as McBride which I held for a while. Why would supermarkets stock 'own label' products when their thin margins are far outweighed by those allowed them by the industry giants? Tesco have won this spat, but IMO the real war is being fought by Lidl and Aldi where shoppers are voting with their feet and wallets to avoid the high price suppliers in favour of their similar if not better substitutes. .

Connor Davidson

I've been working on Elegant Hotels at the moment as well. If you have not already read it Hardman & Co has a good note here on the share which has some interesting information in it . The resilience argument is worth investigating.

Although an overseas AIM company needs extra due diligence I'm not as worried about EH as usual. The company was listed in the UK (as St James Beach Hotels in the 90's on the main market) before being bought by Credit Suisse and then by Vision Capital (with Goldman Sachs as the lead investor). Furthermore, the best options for listing were London or America. You can see trading reports for the BSE here. The liquidity is awful and EH would have been around 2% of the entire exchange capitalisation. Listing EH in London is not as unreasonable as listing a Greek or Chinese company here.

Although I'm pretty sure the company is trading below its intrinsic value; the risk of a profit warning is very clearly there. It's a tough one...

Paul Scott

Hi John,

Thanks for your comments on the Zika virus. I hadn't spotted that issue, so have included it in the main article now.

Regards, Paul.

Hi Connor,

Sensible comments, thanks.

I agree with you, that whilst I am very wary of all overseas companies listing on AIM, I think Elegant Hotels (LON:EHG) is one that I would make an exception for, due to the follow factors;

Established business, not a start-up.
Profitable, cash generative & (generous) dividend paying.
Previous owner partly cashed-out, but retains a still significant stake, as do management.
Doesn't seem a "dodgy" country, with a history of floating dodgy stuff on AIM (unlike China & India for example)
Asset backed, with freeholds, and acceptable level of debt
Assets can be checked to a certain extent - e.g. through TripAdvisor.

So I think it's a share that is worth adding to my watch list, but not one that I'm going to buy just yet, as I suspect more bad news is likely.

Regards, Paul.

17th Oct '16

Just another point to make on Elegant Hotels (LON:EHG) - I have been trawling through the TripAdvisor ratings for their hotels. I fully understand that reviews can be unreliable, in that some customers are unreasonable, or outliers - maybe they had something go wrong which was a one-off. However, one can adjust for this, when reading review sites, and get a general impression that is usually broadly correct I think.

This is my general impression of the TripAdvisor reviews of EHG's properties;

Crystal Cove - reviews generally good, but a regular mention was dated decor, and slow service.

Tamarind - generally good again, but some not happy - suggesting to me that there are some issues here.

Turtle Beach - Mostly good again, but decor needs updating was a point of feedback.

The House - most expensive (by far) of EHG's hotels. Excellent reviews. So if people are paying top whack, and are notoriously fussy, to post such great reviews, it must be terrific.

Waves Hotel & Spa - 5/5, but only 3 reviews. Recent refurb seems to have been well received.

Colony Club - excellent reviews.

So a recurring theme for some of Elegant Hotel's sites seems to be a requirement for upgrading facilities. Poor showers, tired decor, ineffective aircon, were mentioned by a few visitors.
Also, opinion seemed to be polarised about food - some positive, others quite negative.
Poor & slow service seemed to be mentioned by some people too. Although many more people mentioned charming & courteous staff, so who knows?

My overall impression from the reviews is that 3 of Elegant's Hotels (Crystal Cove, Tamarind, and Turtle Beach) sound like they need a refurb, in order to continue charging way more than other places in Barbados.

So quite a bit of capex needed, by the sounds of it.

Although I'm also reassured by how positive most reviews were. A hotel should delight its customers enough to ensure that most feel motivated to post good reviews.

What do other people think about the reviews for Elegant's hotels? Also, have any readers actually stayed in their hotels? If so, do please post a comment here.

Regards, Paul.

BIACS

It's not actually as silly as it sounds - mosquitos tend to behave in clusters and control methods rely on this (I live within spitting distance of a Zika cluster in another country outside of Barbados but not actually in the cluster and it's amazing how little 'travel' there is with these things with effective management). So the fact that their hotels have no cases IS in fact a sensible and relevant point and suggests they have no active Zika clusters near them and/or that control methods are proving effective for those zones. That's not to say that they will never get any cases of ZIka in future of course as these things are not by any means foolproof/watertight (and if they did the effect on that hotel might be severe), but it's not the case that infected mosquitoes are flying around randomly everywhere on the island and that guests of these hotels are just somehow lucky (or privileged by their 5 star status as you say) - it's more a case that the locations of the hotels and/or the mosquito control around them is so far proving an effective safety net and infected mosquitoes are not active in those locations on the island.

That's not to say people won't be put off anyway just by the risk alone of course (headlines are a powerful thing, and how many people will actually bother to look into mosquito behaviour/control to see how safe it is... probably next to none ... and in any case why not just go on holiday somewhere else with no Zika?!). Also longer term who knows how bad the Zika problems will get on the island so from an investment perspective this all a bit irrelevant and provides little comfort that this won't harm the business. If you were planning a holiday there this year then the comments should give you a degree of comfort regarding Zika risk during your stay, but shareholders should remain very wary ...

rhomboid1

Hi Paul
I'm a regular visitor to Barbados and was considering an investment but thought there properties were in the main tired.

There was a thread here;

http://www.stockopedia.com/content/elegantly-lying-under-the-hot-barbados-sun-with-upside-149958/

I can see the obvious yield attraction but am sitting this one out for now as the freehold property assets are only normally valued on the return they generate so any downturn will impact the value as no alternate use is plausible so the comfort of a reasonable LTV is illusory

Trident

I have been a visitor to Barbados over the years, and it has a big British following. The island has an Atlantic Ocean side, which is wilder than the Carribean Sea side. The Carribean sea is the most popular and most populated, as you might expect.

Barbados has grown pretty expensive, and has a number of well known restaurants which have increased their prices to London style pricing, particularly the more upmarket ones.

The Colony Club is a favourite one of mine, though its been some years since I have been there. I cannot recall ever having a problem with mosquitos out there, though I know of one family group of my acquaintance who were due to visit with a pregnant member who cancelled on hearing the news. Why risk it?

I think the people who go there are well-heeled, and Christmas is peak booking time. If its poor this year then there is a problem.

.

JDW72

With regards Elegant Hotels (LON:EHG) I spent 2 weeks on the west coast of Barbados this summer - lucky old me - and I know that part of the island very well having been there 25+ times in the last 30 years.

The TripAdvisor reviews are a pretty decent reflection of the companies estate. Tired in places but very smart in others. After a difficult 5 years or so, the west coast has really come back to life. A fair few mothballed hotels are now being completed and there are (lots) more being built. Things "feel" buoyant.

Paul's comment about whether people will actually be that bothered by the exchange rate at the top end are true. My folks are going to The Waves in February (I think) - they checked it out when we were there this summer and loved it - the exchange rate, whilst annoying, isn't the difference between them going or not going or booking Waves or somewhere cheaper. They just accept the fact that it's a bit more expensive. Lucky old them!

That won't be the case for some of the less pricey places though where I feel that at current exchange rate, there will be a tailing off of bookings and given the new hotel capacity come on stream and the need to fill those hotels up, I suspect there might be something of a price war at lower-mid levels in the next 18 - 24 months. Outside of the accommodation costs, Barbados is not a cheap island. I was surprised this summer at how expensive it has become, even in $US terms, let alone Global Petroleum (LON:GBP).

Like Paul and others, I think there's some wobbliness ahead for EHG but will keep a close eye as at some point it may well be a cracking investment. If only they'd implement a scheme whereby shareholders get a discount.....

JDW72

STOKIE

Paul....Yes Zeus is a definite Red Flag for me...Not Honorable people..just after their own self interest.

sharw

What I noted about the Elegant Hotels (LON:EHG) trading statement was that the word 'Zika' did not appear once. It can't be ignored. Even without any currency concerns, health factors will be a determining factor in where they go for a fair proportion of people, especially if they have read this:

http://www.bbc.co.uk/news/health-37290700

Andrew niven

I think the price they paid for waves was too high, bearing mind the money they have also spent on the renovation.
Property prices generally have dropped considerably in price since 2009 so owning freeholds is great but reduced in value ( as much as 50%)
Zika is really not affecting Barbados ( I live here), chickengunya and dengue has been much worse in previous years.
Regular fogging has to greater extent taken care of mosquito problem here for now.
Barbados is so reliant on tourist trade , I would be very wary !!!!
We moved here from uk in 2009 and the recession followed us over and that season was dreadful for everybody so who knows what the exchange rate will do to next years season which kicks off in December.
The government here have also just added 2% tax to all imports , as if things are not already expensive enough here.
Carabbean is a place to be very very cautious !!! You have been warned.

GrahamF

Have stayed at Crystal Cove many years ago. Generally a good experience but service at the watersports was poor - so laid back not very many guests got to do the water skiing - probably an unintended consequence of being all inclusive (no incentive to get more customers for the watersports). Dine around option with sister hotels was harder than it should have been to arrange. But I must emphasise that this was a very long time ago, so all could have changed now.

The thing I would be concerned about to some extent now is how badly have they been affected by the recent hurricane, which I think was the worst in 10 years.

Wimbledonsprinter

There was an interesting RNS from Telit Communications (LON:TCM) on Friday (which does not show up for some reason on Stokopedia news feed). This stock I believe is on Paul's bargepole list. The company has agreed $110 million of new committed 3 and 5 year bank facilities from HSBC ($75 million) and Bank Hapolim ($35 million). The obvious question is why is a company that has been stating how its FCF is going to improve dramatically over the next few years need such facilities? The RNS's reasoning is generic: to fund acquisitions and organic growth. While there is no reference as to commitment fees or covenants, Telit states that if all lines were fully drawn, it would be paying 2.2% - as it already has a series of highly subsidised loans from the Italian Govt, this implies that that HSBC is prepared to lend to Telit for 3 to 5 years at probably a bit above 3%, which is surpringly cheap to me - and would appear to be a vote of confidence. (I am currently long as a punt.)

ricky65

I'm a holder of CRL and following it with interest. I'm not sure the reason for the recent pullback but note it's on low volume so it looks like profit taking to me. That said, I haven't been able to find any information for the reason for the fairly rapid rise from ~10p to 15.5p. I noticed lots of 100k shares being bought daily during that run up. One to keep an eye on imo.

Fangorn

Unilever products easy to track down..plenty of substitutes available from likes of proctor&Gamble, Reckitt & Benckiser - more so former I think...

Some things seemingly no subsitutes. eg Marmite. Jif?

Food and beverages:

Alsa, Amino, Amora, Annapurna, Aromat, Becel, Ben & Jerry's, Best Foods, Bertolli, Blue Band, Bovril, Breyers, Brooke Bond, Bru, Brummel & Brown, Buavita, Bushell's, Calvé, Chicken Tonight, Choysa, Colman's, Conimex, Continental, Country Crock, Darko, Delma, Du Darfst, Elmlea, Fanacoa, Flora, Fruco, Fudgsicle, Grom, Heartbrand, Hellmann's, I Can't Believe It's Not Butter, Imperial Margarine, Jif, Joko, Kasia, Kecap Bango, Kissan, Klondike, Knorr, Lady's Choice, Lan-Choo, Lao Cai, Lipton, Lipton Ice Tea, Lizano Sauce, Lyons, Maille, Maizena, Marmite, McCollins, Motions, Mrs. Filbert's, Paddle pop, Pfanni, PG Tips, Phase, Planta, Popsicle, Pot Noodle, Promise, Rama, Rani, Red Rose Tea, Robertsons, Royco, Saga, Sana, Sariwangi, Scottish Blend, Sealtest, Slotts, Stork, Streets, Sunce, T2, Telma, Tortex, Tulipan, Turun sinappi, Unilever Food Solutions, Unox, Vaqueiro

Home and personal care:
All, Ala, Andrelon, Aviance Cosmetics, Axe, Ayush, Baba, Badedas, Biotex, Block & White, Breeze, Brilhante, Brisk, Brylcreem, Caress, Cif, Citra, Clear, Clinic, Close-Up, Coccolino, Comfort, Cream Silk, Degree, DERO, Dimension, Dollar Shave Club, Domestos, Dove, Dove Spa, Dusch Das, Elidor, Eskinol, Fair & Lovely, FDS, Gessy, Glorix, Good Morning, Impulse, Ioma, Lakmé, Lever 2000, Lifebuoy, Linic, Lux, Lynx, Lysoform, Master, Matey, Minerva, Mist, Neutral, Noxzema, Omo, Origins, Organics, Pears Transparent Soap, Pepsodent, Persil, Pond's, Prodent, Quix, Q-Tips, Radox, Rexona, Rinso, Robijn, Sedal, Shield, Signal, Simple, Skip, SR, St Ives, Suave, Sun, Sunlight, Sunsilk, Sure deodorant, Surf, Swan Soap, Thermasilk, Tholl, TIGI, Timotei, Toni & Guy, TRESemmé, Ultrex, Vaseline, Vibrance, Vim, Vinólia, Viso, Wheel, White Beauty, Williams, VO5, Xedex, zendium, Zhonghua, Zwitsal

http://www.dailymail.co.uk/news/article-3835034/Major-brands-axed-Tesco-shelves-row-supplier-Unilever-demanded-10-cent-price-rise-falling-pound.html

gsbmba99

I spent a little bit of time looking at Elegant. There's an interesting slide in their 1H results presentation (http://www.eleganthotelsgroup.com/media/1123/elegant-hotels-h116-results-presentation-final.pdf). If you look at slide 16, it says that arrivals to the island are +7.4% but demand for luxury accommodation down 3.7%. They appear to have done a bit better. They maintained their REVPAR (revenue per available room) by increasing the rate but their occupancy dropped 2 pp. I think I read elsewhere that Airbnb was popular amongst some of the US visitors who appear to be behind some of the increased arrivals. Might explain why they don't seem to be able to capture any of the increasing number of visitors to the island.

They say that prudence suggests they should budget for flat revenues. I don't follow the company closely enough but how are they treating the acquisition of Waves in that statement? When was the refurb finished? Is the flat revenue on the 483 hotel rooms ex Waves or is it on the 483 + 70 rooms (including Waves)? If the latter, that's not a great outcome on a 70/483 uplift in room stock especially if Waves is open during the busy season this year when it wasn't (or wasn't owned) last year.

18th Oct '16

Hurricane hArdly touched barbados thank god

Mark Tughan

28th Oct '16

news just in (28th Oct) - serial leisure entrepreneur and investor Luke Johnson (and chums) have picked up over 10% of Elegant Hotels. Opinion can be split on LJ. I followed him into what was Eclectic Bars - it soon became Brighton Pier and significantly re-rated. It's a punt, I grant you. If the dividend holds though?

jonno

The phrase 'follow the money' borrowed from the 1970'S movie, 'All the Presidents Men' is generally a truism insofar as investing is concerned. On a medium term risk reward basis Elegant Hotels at the current price is in my view a convincing investment opportunity provided that the information presented by the Company is a fair and accurate description of the present situation. I would add that I have no reason to believe that this is not the case and hold a long position. Clearly Luke Johnson agrees as he would not have purchased a 10% holding without completely significant due diligence

In addition to the recent purchase by Luke Johnson, the list of institutional investors with sizeable holdings is impressive and includes Slater Management, Miton, Artemis, River and Mercantile and Schroders, which brings me back to where I came in....'follow the money'?

They could all of course be wrong, but a least if this ultimately proves to be the case there will be some solace in knowing that people much wiser than me have also messed up.

As always DYOR.

Small Cap Value Report (14 Oct 2016) - INL, EHG

Elegant Hotels (LON:EHG)

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Paul Scott

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