In the 12 months to end September 2015, the company expects to deliver the 18 per cent rise in pre-tax profit to $15.7m on revenues up 6 per cent to $61.5m as predicted by analyst Mike Allen at house broker Zeus Capital. There is a significant first half bias to the numbers, reflecting the autumn and winter holiday season when Elegant Hotels makes around three quarters of its annual profits. This year was no different. More important for the share price are prospects for the upcoming holiday season, which look promising.
Tourism trends positive
That’s because Elegant Hotels derives about 70 per cent of its revenue from tourists from the UK and USA, two of the fastest growing economies in the western world and where consumers are enjoying decent real wage growth in a low inflation environment. The latest numbers back this up with the Barbados Tourism and Marketing Agency reporting 14 per cent growth in visitors to the island in the eight months to end August 2015, driven by significant increases in tourists from the U.S.A. (up 26.9 per cent), Canada (19.4 per cent) and United Kingdom (12.1 per cent).
This positive trend is set to continue as both airlift and cruise capacity are being increased, with more flights being added from North America, UK, Germany, and Brazil. For instance, Thomas Cook has added a weekly flight of 321 seats from Glasgow and three new flights from Manchester with a combined total of 963 seats. In addition, cruise capacity is forecast to rise by six per cent in 2015/16 to bring an estimated 800,000 visitors to the island. The port expansion is expected to complete by the end of this month and will enable P&O Britannia (UK), Fred Olsen (UK) and the new Mein Schiff 3 (Germany) to visit Barbados this season. I understand that two of these ships have a carrying capacity of 4,000.
The combination of increasing arrival numbers, active promotion of the island by the Barbados Tourist Board, and better infrastructure are all supportive of a positive pricing environment for upmarket hotel groups in my view. Elegant Hotels is a major player, accounting for almost 25 per cent of the quality leisure room stock in Barbados.
Operating five luxury hotel resorts with a total of 150 bedrooms and 333 suites, and having spent $24m (£15.6m) refurbishing its five hotels since 2010, all of which are situated along the prestigious west and south coastlines - Colony Club, Tamarind, The House, Crystal Cove, and Turtle Beach - the company has high occupancy rates, and at premium prices. Average revenue per room increased by over 7 per cent to in excess of £200 a night in the first half of the year and occupancy rates edged up over two per cent to 71 per cent. Rack rates vary between $304 and $546 depending on the resort.
Lowly rated value play
In light of these positive dynamics, I am very comfortable with analyst forecasts that Elegant Hotels’ revenues will rise by a conservative looking 4 per cent to $64m in the fiscal year to end September 2016 to drive up pre-tax profits by 17 per cent to $18.3m. On this basis, expect EPS of 10.4p, up from 9.2p in the year just ended. The net profit figure reflects the corporate tax changes outlined by the government of Barbados in its latest budget which explains why EPS growth of 13 per cent lags slightly behind the forecast profit growth rate.
I am also happy with the dividend forecasts too. Having listed on the Alternative Investment Market (Aim) in late May this year, Elegant Hotels will pay out a maiden interim dividend of 1.75p a share on 30 October 2015 (ex-dividend date of 8 October), and expects to make the same payment again at the time of the full-year results. The plan is to target a 7 per cent dividend yield based on the 100p a share placing price in the new financial year, in-line with the guidance given in the company’s Aim Admission document, so expect a doubling of the dividend per share to 7p in future.
So not only do Elegant Hotels’ shares offer an attractive prospective dividend yield of 6.5 per cent, but they are rated on a modest 10 times earnings estimates and 25 per cent below their likely year-end net asset value of 144p. Net debt is currently about 20 per cent of shareholders funds, so finances are not stretched either with operating profit covering interest costs almost seven times over, so leaving cash available to return to shareholders.
It’s worth noting too that the shares are being priced on a deep earnings discount to peers, priced on a 40 per cent discount to Millennium & Copthorne (MLC: 482p) and on a 60 per cent discount to the ratings of Marriott International (MAR:NSQ - $73.83) and Starwood Hotels & Resorts (HOT:NYQ - $64.78). On an enterprise value to cash profits basis the rating discount is around 29 per cent to larger peers. In my book that offers value.
Importantly, I am confident that as the winter season unfolds, and the factors driving arrival numbers come into play, then we could be in for some decent trading news from Elegant Hotels. We are also likely to see the company utilise its lowly geared balance sheet to make acquisitions. Add to that the fact that the shares are a geared play on the ongoing UK and US economic recoveries, then I can see scope for a decent re-rating emerging in the next six months.
On a bid-offer spread of 105p to 108p, valuing the equity currently at £96m, I rate the shares a buy and have a fair valuation of between 130p to 135p. Buy.
Please note that I have written articles on three companies today, and on 13 companies in total since the start of last week, all of which are listed in chronological order below.
MORE FROM SIMON THOMPSON...
I have published articles on the following 45 companies in the past four weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ MS International: Buy at 180p, initital target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p (‘Valuation anomaly worth exploiting’, 20 October 2015)
■ Greenko: Hold at 87p, new target 100p (‘Greenko’s cash return’, 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p (‘An elegant investment’, 20 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
