The luxury hotel operator operates six high end hotels on the island - Colony Club, Tamarind, The House, Crystal Cove, Turtle Beach, and recent acquisition, Waves Hotel & Spa - all of which are situated along the prestigious west and south coastlines. These hotels have a total of 553 rooms, or 29 per cent of the island’s 'high end' hotel stock. The company makes most of its profit during the six months to end March 2016, the peak tourist season on the island, and delivered a 12 per cent increase in pre-tax profits to $14.4m (£10m) on flat revenues of $36.5m in the period. However, bookings for the second half are down on last year due to a number of factors which have led to earnings downgrades.
Firstly, the negative PR surrounding the outbreak of the Zika virus in Brazil has forced some operators on the island to panic and aggressively cut rates to drive up their occupancy rates for bookings in the seasonally quieter second half between April and end September. There have only been a small number of reported cases of the virus on the island, and none at all at Elegant’s top-end hotels, but the fear factor is having an impact in the luxury market nonetheless.
Secondly, the economic and political uncertainty surrounding the forthcoming EU Referendum has dampened demand for luxury holidays. The UK accounts for 70 per cent of Elegant’s annual revenues, so is a key market. The luxury segment of the Barbados hotel market declined by 3.7 per cent in the first quarter of 2016 even though total arrivals to the island increased 7.4 per cent. Elegant’s room revenue was essentially flat, so it’s outperforming rivals, but it’s clear that the additional traffic, mainly from price sensitive US holidaymakers, is being focused on lower cost accommodation. Also, the weakness of sterling may be subduing demand from more price sensitive UK holidaymakers.
Thirdly, there is growing demand for villas on the island as alternatives to staying in a hotel. That’s important because price sensitive tourists renting lower cost accommodation take up seats on flights, so keeping air ticket prices high, but take capacity away from the hotel market.
Fourthly, the refurbishment of Sugar Bay and Sandals resorts, rival hotels which neighbour Elegant’s 161-room Turtle Beach hotel has made pricing more competitive, albeit the hotel has fared well so far. Elegant plans to carry out some refurbishment work on both its Tamarind and The House hotels which suffered declines in occupancy in the first half, a sensible move considering that its Colony Club resort enjoyed an 8 per cent rise in average revenue per room in the six month period post refurbishment.
However, with forward bookings falling short for the second half, and the board reducing full-year cash profit guidance to a range between $20m to $21m, analyst Mike Allen at house broker Zeus Capital has cut both his full-year cash profit and pre-tax profit estimates by $3m to $20m and $14.8m, respectively. The downgrade to EPS is far less in sterling terms due to the strength of the US dollar and Zeus now expect EPS of 9.4p, virtually all of which was earned in the first half, down from 10.3p in the previous financial year.
Seeing the positives
There are positives though. The board are keeping to their guidance to pay a full-year dividend of 7p a share, of which half was declared in these interim results. This means that the shares, which fell below the placing price of 100p to 83p post results, are supported by a forward dividend yield of 8.2 per cent.
The company is also using its lowly geared balance sheet – net debt of $54.8m represents less than half shareholders funds and a loan-to-value ratio of only 23 per cent on the freehold estate – to buy quality complementary hotels on the island, completing the $18m acquisition of The Waves resort in March. Following refurbishment a soft launch is planned for the final quarter this year. Also, chief executive Sunil Chatrani revealed in our results call that the company has been approached by other hotels owners on the island with a view to Elegant Hotels taking on the management contracts. That's another potential revenue stream.
I would flag up that in terms of forward guidance, and admittedly much is dependent on bookings for the 2016/17 high season, at this stage analysts still expect the company to deliver growth. Around $1.8m of the $4.3m uplift in cash profits Zeus predicts in the 12 months to September 2017 reflects the contribution from the Waves acquisition. Moreover, with sterling weak the negative impact on their EPS estimate, downgraded from 12.2p to 11.6p post results, is less than 5 per cent. It’s also worth pointing out that the company is heavily asset backed and owns freehold property assets worth more than 200p a share.
So, although the short-term trading outlook is mixed, and the forthcoming EU Referendum introduces a degree of uncertainty as undoubtedly a Brexit would lead to further weakness of sterling against the US dollar, I do feel that the shares are worth holding onto if you followed my advice to buy at 105p post-IPO (‘Checking into an elegant investment’, 15 June 2015), or when I updated my view earlier this year at 118p (‘Check in for a profitable stay’, 6 January 2016), I would hold onto the shares.
Indeed, after factoring in borrowings, the shares are rated on half underlying net asset value of 161p and some analysts believe at this level the company could be a bid target. An earnings multiple of less than nine times depressed earnings for the year to September 2016 is hardly exacting either. Add to that the commitment of the board to make the 7p a share full-year payout and an 8.4 per cent dividend yield is supportive too.
Furthermore, some of negative factors that have impacted second half bookings should reverse in the event of a leave result. The shares are massively oversold too with the 14-day relative strength inidcator (RSI) on the floor. Hold.
