That's because around 80 per cent of its customers are from the UK, so the 17 per cent collapse in sterling since the start of 2016 has impacted their spending power and meant that the company needed to discount its hotel rates in a sensible and controlled manner to maintain bookings from this important segment of the market. Factoring in the late timing of Easter this year, which fell after the 31 March period end, and occupancy rates only declined by one percentage point to 68 per cent. However, the impact of discounting resulted in average daily room rates contracting by 5 per cent to $443, excluding last summer's acquisition of Waves Hotel & Spa which has a lower blended average room rate.
That said, the company still delivered underlying pre-tax profit of $12.2m (£9.6m) on revenue down slightly to $35.8m after factoring in the contribution from the newly refurbished Waves Hotel which has been trading ahead of expectations. True, that profit represented a 15 per cent fall on the same period in 2016, but it still leaves the company bang on course to deliver full-year pre-tax profit of $11.4m and EPS of 9.9¢, as predicted by analyst Mike Allen at joint house broker Zeus Capital after reflecting a small seasonal second-half loss in the quieter summer months. It should enable the board to maintain the dividend at 7p a share, albeit cover is only 1.2 times. Importantly, there are good reasons to believe that a profit recovery could be on the cards in the 2017-18 financial year.
Reasons for optimism
Firstly, the company has won two new hotel contracts: to manage the Hodges Bay resort on Antigua when the new hotel opens its doors late this year; and a sales and marketing services contract for The Landings Resort in St Lucia. Combined, these contracts should generate annual cash profits of $700,000, a useful contribution and highlighting the returns to be made on these asset-light contracts. Understandably, chief executive Sunil Chatrani says the board is looking to build up this side of the business.
Secondly, post the half year end the company acquired the 35-suite Treasure Beach Hotel on the island. The property will shortly undergo a refurbishment before re-opening in November for the key holiday season. Mr Chatrani is comfortable with expectations that the hotel can deliver cash profits of around $1m in its first year following refurbishment, rising to $1.45m the following year which takes into account a full 12 months' contribution, a very decent financial return on the $10.6m invested by Elegant Hotels.
Interestingly, Mr Chatrani told me during our results call that the company is "seeing more growth opportunities [management contracts and potential acquisitions] appear in light of the market back drop". The company is well funded to take advantage of such opportunities because its year-end net debt is expected to be around $72m, after factoring in the Treasure Beach acquisition, implying a modest loan-to-value ratio of only 27 per cent.
Thirdly, the company has been streamlining its costs to make savings and will be importing a large proportion of its food and beverages later this year, a move "expected to deliver cost savings of $500,000", according to Mr Chatrani.
Fourthly, the company will benefit from a full 12-month contribution from the Waves Hotel in the 2018 financial year, and average room rates at the property will not be impacted by the initial discounting that took place after it reopened following last year's acquisition and subsequent refurbishment.
Taking all these factors into account suggests that Mr Allen at brokerage Zeus Capital is not being overly bullish in expecting Elegant Hotel's revenues to rise by around 10 per cent to $65.7m in the 2018 financial year to deliver a 21 per cent hike in cash profit to $20.7m. On this basis, pre-tax profit is forecast to bounce back strongly to $14.7m and deliver EPS of 12.7¢, or about 10p at current exchange rates. Joint house broker Liberum Capital is a tad more conservative, but still expects both pre-tax profit and EPS to rise by around 16 per cent to $13.3m and 11.5¢, respectively, in the 12 months to the end of September 2018.
Shrewd investor on board
Clearly serial entrepreneur Luke Johnson, and chairman of private equity firm Risk Capital, sees the recovery potential and value in the business as he picked up 11m shares last autumn, representing 12.5 per cent of the issued share capital, and has just been taken a non-executive role on the main board. The appointment of finance director Jeff Singleton, who held a similar role at luxury hotel group Rocco Forte, looks a sound move, too. I understand the family of the former finance director didn't settle on the island, hence the new appointment.
I continue to view the investment case favourably with Elegant Hotel's shares only trading on 12 times likely earnings for the 12 months to the end of September 2017, offering a 7.4 per cent dividend yield, and rated on a 45 per cent discount to book value of 175p a share. So, having last recommended buying at 83p ('A mandate for gains', 1 Feb 2017), I feel my 105p target price is a solid objective and is likely to prove conservative if the company hits those 2018 forecasts.
Please note that I first advised buying the shares at 105p when the company floated its shares on Aim ('Checking into an elegant investment', 15 Jun 2015), and although the price is 10 per cent below that level the board has declared total dividends of 14p, meeting their commitment at the time of the flotation, including the recently declared half-year payout of 3.5p which goes ex-dividend on Thursday, 22 June. Buy.
Banking on a recovery
I also feel there is recovery potential in the Aim-traded shares of MXC Capital (MXCP:1.65p), a technology-focused merchant bank run by a management team that backs investee companies they represent, as well as earning lucrative advisory fees.
I initiated coverage 12 months ago when MXC's share price was 2.65p ('Dealmakers', 31 May 2016), and it subsequently hit a high of 3.5p last summer after which the company completed a £3.8m tender offer pitched at 3.6p a share, in line with the board's policy of returning part of the proceeds from investment disposals to shareholders.
However, one of MXC's investee companies, Redcentric (RCN:85p), a leading UK IT managed services provider, dropped a bombshell last November. The problem related to the overstatement of its net assets and post-tax profits, a situation that prompted a forensic review of its accounts. MXC was duly hit in the fallout as it had some valuable call options on Redcentric's equity which accounted for 11 per cent of its own net asset value of £81m at the time. However, MXC's management also thought Redcentric's share price decline was overdone and the company subsequently successfully bought and sold shares in Redcentric, reaping hefty profits running into millions of pounds. However, the profits earned from these trades were still not enough to offset the diminution to the value of MXC's 7m call options in Redcentric which have a strike price of 80p. A fair value adjustment to those options accounted for the majority of the 90 per cent fall in the value of all MXC's warrants and options in the six months to the end of February 2017.
There are positives, though, as the company's investments in five listed small-cap holdings have increased in value by £5.5m to £49.5m since the end of February half year-end, including its investment in Tax Systems (TAX:74p), a leading supplier of corporation tax software to the large corporate sector and the accounting profession in the UK and Ireland. MXC subscribed for £8.7m-worth of new shares as a cornerstone investor in a £45m placing last summer and still holds warrants over 6 per cent of the 76m shares in issue, the majority exercisable at 67p, but some at 61p. These warrants are currently showing a paper profit well over £500,000 and MXC's holding of 15.2m Tax Systems' shares is now worth £11.3m.
The company also has cash of £6m on its balance sheet and has used £210,000 of this since the start of March buying back 11.8m shares in the market. It makes sense to do so because I reckon that spot net asset value is at least £69m, a sum equating to 2.05p a share, after factoring in a private equity investments worth £7.1m, the value of its listed warrants and equity portfolio, and cash on the balance sheet. This means that the shares are rated on a 20 per cent discount to my estimate of book value, a valuation that fails to acknowledge the deal-making ability of its experienced management team nor upside potential from its two major equity investments: a holding worth £13m in Castleton Technology (CTP:69p), a leading provider of technology products and services to the social housing and not-for-profit sectors; and a £14.8m investment in Aim-traded Coretx (COR:34.25p), a provider of IT solutions, cloud and network services, and data centre hosting.
True, MXC's shares have drifted since I last rated them a buy at 1.8p ('A quartet of Aim-traded buys', 9 Jan 2017), mainly due to the fallout from Redcentric. However, from my lens at least it appears the share price has troughed out and should offer recovery potential back towards the 2.05p level. Buy.
Record's bumper payout
It's fair to say that investors warmed to last Friday's annual results from currency manager Record (REC:47p), with the company's share price surging by 15 per cent to a seven-year intra-day high of 48p. It's a business I have been following for some time, having included the shares in my 2015 Bargain Shares Portfolio when the price was 34.3p, since when the board have paid out dividends of 3.37p a share. I was expecting a strong showing, so much so that I advised buying in ahead of the results when the price was 42p ('Investment company watch', 25 Apr 2017). I was not disappointed.
Record's assets under management equivalent increased by 10 per cent to $58.2bn in the 12 months to the end of March 2017, the highest level in the company's history, which in turn pushed up revenue and underlying pre-tax profit by 13 per cent to £23.9m and £7.9m, respectively. Revenue from passive hedging mandates now account for more than half of its management fees, having risen by 29 per cent in the 12-month trading period, and now cover all the operating costs of the business excluding performance-related remuneration. That's not only reassuring for future profitability of the business, but has a bearing on the payout for shareholders too. That's because Record's own cash already accounts for £29.2m of money market and cash deposits totalling £37.2m on its balance sheet, a sum that easily covers regulatory capital and is more than double annual overheads of £11.7m.
As a result, the board is now adopting a strategy to return excess earnings over ordinary dividends in the form of special dividends where appropriate. So, having raised the full-year payout from 1.65p to 2p a share for the year just ended, the directors are also declaring a special dividend of 0.91p, the total payout equating to Record's basic EPS of 2.91p. This means the dividend yield is 6.2 per cent.
This generous payout looks well underpinned by trading prospects given that the divergence of monetary policy pursued by the world's central banks, coupled with a sequence of major political events, both of which have driven volatility in currency markets and are supportive of demand for Record's range of currency hedging products. For example, the start of Brexit negotiations this week, the forthcoming German elections, and ongoing geopolitical instability in the Middle East and South East Asia, are all having an impact on currency markets.
Trading on a cash-adjusted forward PE ratio of 11 after accounting for Record's own net cash, offering a 6.2 per cent dividend yield, and with no end in sight to the political uncertainty which is underpinning demand for Record's products, I am happy running profits on this holding. Please note that the final dividend of 1.175p a share and the special dividend of 0.91p a share are both paid on Wednesday 2 August and the shares go ex-dividend on Thursday 29 June. Run profits.
CareTech hits target price
Shares in care home operator CareTech (CTH:440p) have hit the target price range of 412p to 450p I outlined when I last recommended buying them at 362p ('Five small-cap buys', 29 Mar 2017), and have increased 91 per cent in value since I initiated coverage ('Time to take care', 16 Mar 2015). It's provided a quickfire return for investors who backed a £39m oversubscribed placing at 355p a share at the end of March to fund a pipeline of potential bolt-on acquisitions.
Alongside yesterday's solid set of half-year results which support the 11 per cent forecast rise in full-year pre-tax profit to £29.3m as predicted by analyst John Cummins at broker WH Ireland, and Mark Brewer and Alex Pye at broker finnCap, CareTech announced the £16.9m acquisition of Selborne Care, a provider of specialist residential care, supported living and day care services for adults with learning disabilities and challenging behaviours. Selborne is based in Droitwich in Worcestershire and operates 57 residential beds across eight homes in the Midlands and the south west. It looks a decent geographic fit and an asset rich one too as Selborne owns freehold property worth £12.4m. The purchase price equates to seven times cash profits and a price-to-book value ratio of 1.25 times, both reasonable multiples in my view. CareTech used a further £3.8m of the fundraise acquiring a children's education and residential facility near Preston, and plans to release a further £11.5m from debt facilities to make further bolt-on acquisitions.
After factoring in these two acquisitions, CareTech's pro-forma net borrowings are now around £143m, implying a comfortable loan-to-value ratio of below 50 per cent on the £300m-plus freehold value of its estate. An enterprise value (market value plus net debt) to cash profit multiple of 11.9 times this year's likely cash profit of £39.8m, falling to around 10.7 times' analysts cash profit forecasts of between £43.6m to £44.5m for the 2018 financial year, is a reasonable rating too. Moreover, those multiples will fall as more properties are acquired using CareTech's low cost and refinanced debt facilities.
Importantly, CareTech's operating cash flow remains robust and equated to 86 per cent conversion rate of underlying cash profit in the latest six-month trading period, thus enabling the directors to invest in the estate, service borrowings, and maintain a progressive dividend policy. In fact, since I initiated coverage in March 2015, the board has paid out annual dividends per share of 8.4p for the 2015 financial year, 9.25p for the 2016 financial year and has just raised the interim payout by 10 per cent to 3.3p. Analysts expect a full-year payout of between 9.6p (WH Ireland) and 10.1p (finnCap) covered 3.5 times by EPS estimates of around 34p.
In the circumstances, I recommend you run your hefty profits on this holding as CareTech's share price could well run up to a range between finnCap's newly upgraded target price of 465p (from 425p previously) and WH Ireland's upgraded target price of 500p (from 450p) if investors continue to warm to the acquisition opportunities that are under active consideration by the company. Run profits.
Alpha surge to record high
Alpha Real Trust (ARTL:127p), an investor in high-yielding property and asset-backed debt and equity investments in western Europe, has reported a 15 per cent increase in its year-end net asset value to an all-time high of 158.9p. However, even this eye-catching financial performance underestimates the current book value of the company.
That's because post Alpha's financial year-end, the company sold off its 18.7 per cent stake in small-listed property company Industrial Multi Property Trust (IMPT:330p) to FTSE 250 property group Hansteen (HSTN:126p) and realised £400,000 more than the £4.9m carrying value in the annual accounts published last Friday. Alpha also received £10.9m in cash after a five-year subordinated loan to Industrial Multi Property Trust was redeemed in full, or £200,000 more than the carrying value in the accounts, reflecting an exit fee.
In addition, Alpha has sold a 70 per cent equity interest for £30.2m in its wholly owned H2O shopping centre in Madrid to CBRE European Co-Investment Fund. The property was in the books for €120.4m (£105m), so after taking into account a new €65m debt facility secured on the property, and the fall in sterling against the euro since Alpha's 31 March year-end, by my reckoning it adds at least £800,000 to the company's net asset value of 158.9p. In other words, the corporate activity at H20 and Industrial Multi Property Trust has boosted Alpha's net asset value by at least 2p a share. Importantly, these sales have released £46.2m of cash for the company to invest in its two major build-to-rent schemes which account for £9m of its net asset value of £110m.
In central Birmingham, Alpha owns Unity and Armouries, a development with planning consent for 90,000 sq ft comprising 162 residential apartments with ground floor commercial areas, and which has a gross development value of £33m. In Leeds, Alpha's Monks Bridge project has been granted detailed planning consent for 307 residential units plus commercial development and has a gross development value of £55m. The site also has outline planning consent for a further 300 residential units. I understand that discussions are under way with potential partners to investigate joint funding opportunities, and the directors' estimate that alongside debt financing up to £16m could be invested to undertake the development of its private rental sector sites as part of its build to rent investment strategy.
Portfolio weightings
I would also flag up that the company has some rock-solid investments including a ground rent portfolio that accounts for 18.8 per cent of the portfolio, and high-yielding equity in property investments which now has a similar portfolio weighting after recent asset sales. Cash equates to over 40 per cent of the portfolio following the H20 and Industrial Multi Property Trust asset sales, and given that a chunk of this is going to be used to invest in residential property then I feel that there is scope for the 22 per cent share price discount to my estimate of spot net asset value to narrow further. A 1.9 per cent dividend yield reflects a quarterly payout of 0.6p a share, so there is a modest income, too.
There is the potential for further cash to be released from Alpha's other investments, too. For example, the company initiated arbitration proceedings against its joint-venture development partner, Logix, in order to protect its investment at the Galaxia project, a development site extending to 11.2 acres located in NOIDA, an established suburb of Delhi and one of the principal office micro-markets in India. The Delhi High Court has issued a warrant of attachment against the primary residential homes owned by the promoters of Logix, and Alpha has had these properties independently valued at £6m.
This offers assurance that the £5.5m carrying value of the award in Alpha's latest accounts will be recouped, a sum equating to 5 per cent of Alpha's net asset value, and perhaps significantly more on top. The value of the award is now £14m, but Alpha's directors have been prudent in their valuation due to the timing of the final value likely to be recouped and uncertainty over the timing. But clearly progress is being made here.
So, although Alpha's shares have now surged by more than 50 per cent since I initiated coverage ('High-yield property play', 10 Feb 2016), the advice I gave to run profits ahead of last Friday's annual results ('Small-cap trading updates', 24 May 2017) still holds. Run profits.
Finally, I published an indepth property column yesterday which included no fewer than five post results company updates.
MORE FROM SIMON THOMPSON...
A comprehensive list of all the investment columns I have written in 2017 is available here.
The archive of all the share recommendations I made in 2016 is available here
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