Recently appointed finance director Richard Jones made a maiden purchase of 40,000 at 63p last Friday, and non-executive chairman Simon Sherwood purchased over 22,500 shares at 66.2p each a few weeks earlier to take his holding to 1.87m shares, or 2.11 per cent of the issued share capital. Shares in Elegant Hotels fell below their 100p IPO price after the company warned on profits in mid-June at the time of the half year results ('Cloudy outlook for Elegant Hotels', 16 Jun 2016). I rated them a hold at 83p at the time and they have drifted downwards since then.
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. 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 analyst earnings downgrades.
I had a lengthy results call with chief executive Sunil Chatrani and Mr Jones at the time of those interim results and discussed the specific reasons behind the lowering of guidance, full details of which I outlined in the aforementioned article. Clearly, the 13 per cent plunge in sterling since the EU Referendum is an issue as the UK accounts for 70 per cent of Elegant's annual revenues, so is a key market. The spread of the Zika virus to Florida is hardly good news either, albeit 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. However, the fear factor is having an impact in the luxury market nonetheless.
Putting the valuation into perspective
That said, Elegant Hotel's shares are now trading more than a third below their initial public offering (IPO) price and are discounting a substantial amount of bad news. To put the current valuation into some perspective, based on the board's reduced full-year cash profit guidance to a range of between $20m to $21m, analyst Mike Allen at house broker Zeus Capital expects Elegant Hotels to report full-year pre-tax profit of $14.8m and EPS of 13.3 cents, down from $16m and 14.7 cents a year earlier. However, with the sterling-US dollar exchange rate 14 per cent lower than at the September 2015 year-end, what this means is that in sterling terms EPS of 10.2p are actually 5 per cent higher than those recorded in the previous financial year.
The board are also keeping to their guidance to pay a full-year dividend of 7p a share, of which half was declared in the interim results. This means that the shares offer a 9 per cent prospective dividend yield.
There is also hidden value in the balance sheet. That's because the portfolio of hotels was valued at $235m (£181m) by commercial property valuers CBRE in April last year. Since then the company acquired The Waves Hotel & Spa resort on the island and which was valued by Terra Caribbean at $22m in the interim accounts. Using these valuations, the company's properties have a combined valuation of $257m, implying a net asset value (NAV) of $202.7m. That's way above the end March 2016 NAV figure of $117m, and implies a NAV per share of 228¢ which, based on an exchange rate of £1:$1.30, equates to 175p a share. This means Elegant Hote's shares are rated on a 63 per cent discount to book value.
Furthermore, the company's balance sheet is lowly geared as net debt of $56.8m (£42.1m) at the end of March 2016 implies a loan-to-value ratio of 22 per cent against the £257m worth of property assets. Also, an enterprise value of £98m (market capitalisation of £56m plus net debt of £42.1m) equates to only 6.5 times cash profit estimates, around a third less than Elegant Hotels' peer group.
I would also flag up that analysts are factoring in an $4.3m uplift in Elegant Hotels' cash profits in the 2016/17 financial year, of which $1.8m will come from The Waves acquisition. This means that if bookings for the forward season fall short, and clearly there is a risk here albeit one that's impossible to quantify at this stage, then the company could still deliver profits in line with the current financial year even if it missed analysts 2016/17 targets by 20 per cent.
And of course with the shares trading 63 per cent below adjusted net asset value, there is even the possibility that a rival hotel operator will be tempted to try and buy the company on the cheap. So after taking all the above factors into consideration, it's my considered view that Elegant Hotels' shares are well worth holding for recovery.
