It's a company I know well, having first advised buying the shares at 83p at this time last year ('Check in for a profitable booking', 14 Dec 2015) and last reiterated that advice after the company pulled off a £38m share placing at 100p a share in the autumn ('Investors check into easyHotels', 6 Oct 2016). I have exploited some short-term buying opportunities in the interim by taking advantage of the share price volatility of consumer focused companies. For instance, in the summer I rated the shares a buy at 80p ('Time to check in again', 21 Jun 2016), and also at 83p ('Scaling up for a budget opportunity', 16 Aug 2016).
The capital raise was a significant vote of confidence in the ability of the board led by chief executive Guy Parsons, the former chief executive of leading budget hotel chain Travelodge, to scale up the hotel development programme and deliver a 15 per cent targeted return on capital employed on an unleveraged basis. Investors who backed the placing a couple of months ago will have been impressed by the progress being made. easyHotel's revenues increased by almost 9 per cent to £6m in the 12 months to end September 2016, driven by like-for-like sales growth of 13 per cent in the UK owned estate of hotels, a material outperformance of the UK hotel market and one helped by a strategic use of online travel agents, and the implementation of a dynamic pricing strategy to enhance yields. It's therefore well worth noting that the "UK hotel market has performed strongly in the post Brexit period," buoyed by the weakness of sterling against the US dollar and euro, resulting in an increase in "staycations from UK nationals, and a higher level of in-bound tourism".
The high returns being generated from owned hotels vindicates the board's decision to raise fresh capital to invest in this part of the business. easyHotel currently has a hotel portfolio of 2,033 rooms consisting of two wholly owned freehold hotels, one long leasehold hotel and 19 franchised hotels, boasting a presence in 13 cities across eight countries. Since flotation, the company has acquired five owned hotel development projects, representing 576 committed owned rooms, and is investing £17.4m to develop four hotels in the UK in order to almost double its hotel stock from 390 to 762 rooms by the end of September 2017. These hotels are located in Liverpool, Birmingham, Manchester and Ipswich. The company's fifth opening, a 204-room owned hotel in Barcelona, the 12th most visited city in the world, is by far the largest of the five new owned hotels and is costing €15m (£13m) to develop. The scheduled opening is slated for early 2018. The board have also identified a further nine potential acquisition sites representing 1,175 rooms which are at various stages of evaluation and negotiation.
On the franchise side, the company has 951 rooms in development, representing a significant increase on the current 1,643 franchise room stock at the 19 franchise easyHotels located mainly across Europe. Please refer back to my last article for full details of these new developments ('Investors check into easyHotels', 6 Oct 2016).
Equity undervalued given the growth opportunity
The point is that post the October share placing, easyHotel now has proforma net assets of £70m, a sum worth 70p a share using the increased share count, of which net funds of £43.1m will fund the five aforementioned owned hotel developments. The company has also completed a new £12m five-year bank facility to replace its existing £7.2m facility and at a favourable rate of 2.5 per cent above LIBOR.
In other words, there are no funding issues to hold back a significant ramp up in easyHotel's estate over the coming years and one which analysts Alex Patterson and Alistair Ross at brokers Investec Securities believe has potential to lift the company's revenues by 30 per cent to £7.9m in the current financial year, rising to £12.6m and £21.1m, respectively, in the following two years. Their financial models suggest that easyHotel should be able to increase its cash profits from £1.55m to £2.1m in the current financial year, doubling to £4.2m the year after, and again to £8.7m in the 2019 financial year. If achieved the company is forecast to quadruple its normalised pre-tax profits to £4.6m by the 2019 financial year (September year-end) by which time it will have over 2,152 owned hotel rooms, and over 3,100 franchised room stock.
Clearly, there are execution risks here, but given the company is targeting a mid-teens return on capital employed on an unleveraged basis then the expansion has potential to be hugely accretive to shareholders which is why Investec has a target price of 135p, slightly higher than the 120p target of analyst Wayne Brown at broking house Liberum Capital. I would add that Mr Brown's modelling suggests that easyHotel will be able to fund the roll-out of three owned hotels each year from 2018 onwards solely from internally generated cash from existing hotels, thus highlighting the potential to create value by recycling cashflow in this way. And some of that cashflow is being returned to shareholders after the board have just declared a full-year payout of 0.33p a share.
Trading on a modest premium to book value, I continue to see bright prospects for easyHotel and maintain my 120p target price on the shares. Buy.
Elegant Hotels stakebuilding
easyHotel's is not the only hotel operator on my watchlist in the news. I note that entrepreneur Luke Johnson has picked up 1.65m shares in Elegant Hotels (EHG:76p), the largest hotel operator in Barbados, to take his stake to 11.1m shares, or 12.5 per cent of the issued share capital. Mr Johnson made his maiden purchase of 9.45m shares at the end of October when he acquired his stake from Vision Capital Partners, the fund that brought the company to the London junior market in May last year.
Vision Capital Partners reduced its shareholding to 23.8 per cent at the time of Admission of the shares to the Alternative Investment Market (Aim), having owned the hotel group since 2004, and was subject to a lock-in. That lock-in has expired and in a London Stock Exchange announcement ay the close of trading yesterday, Vision Capital Partners revealed that it has now divested all of its remaining shares so no longer has any interest in the company.
That's actually good news as it removes a stock overhang. And it's not difficult to see why Mr Johnson has been stakebuilding as the luxury hotel operator has some very valuable property on its balance sheet including 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 portfolio of hotels was valued at $235m by commercial property valuers CBRE in April 2015, since when the company acquired The Waves Hotel & Spa resort on the island and which was valued at $22m in the interim accounts. Using these valuations, the company's properties have a combined valuation of $257m (£202m), implying an adjusted net asset value (NAV) of $202.7m and a NAV per share of 228¢ which, based on an exchange rate of £1:$1.27, equates to 179.5p a share. This means Elegant Hotel's shares are rated on a 58 per cent discount to book value.
Of course, one of the reasons the shares are trading so far below book value is because the company cautioned on the outlook for next year due to the impact sterling's devaluation is having on affordability of its offering - the UK market accounts for 70 per cent of Elegant's bookings. Given this uncertain outlook I rated the shares a hold for recovery at 64p in the summer ('Insiders check into Caribbean hotelier, 9 Aug 2016), and subsequently reiterated that advice at the same price ('Value plays', 18 Oct 2016), having first advised buying at 105p at the time of the Aim listing ('Checking into an elegant investment', 15 Jun 2015).
Admittedly, it's still too early to say how much the devaluation of sterling will impact consumer demand for luxury holidays in the Caribbean, but analyst Mike Allen at brokerage Zeus Capital expects the business to turn in cash profits of $17.2m on flat revenues of $58m in the financial year to end September 2017 based on a reduced occupancy rate of 60 per cent. On this basis, expect pre-tax profits to fall from $14.7m to $11.7m to produce EPS of 10.1 cent. At current exchange rates, that's around 8p a share or enough to cover the dividend of 7p, suggesting the shares are currently rated on 10 times earnings estimates and offer a 9 per cent dividend yield.
Clearly, if the company can deliver on these estimates, and after taking into account the hefty asset backing, then there should be upside to the share price which is why I maintained my view that the shares are worth holding for recovery. The fact that a shrewd investor has picked up a 12.5 per cent stake in the company in the past six weeks is a further indication of the value on offer. Indeed, I still hold the view that at the current level the company could become a bid target given its real estate assets are effectively in the price for half their open market value. I also hold the view that the pessimism embedded into the current share price may in all likelihood prove to be overdone. That's because overseas holidays may be more expensive than they were 12 months ago, but UK consumer confidence is holding up well and I certainly don't expect demand for luxury breaks to fall off a cliff.
The chart formation is worth considering too as Elegant Hotel's share price seems to have formed a double bottom and a move above the 78.5p key resistance level that has capped rallies at both the end of August and October would be a bullish sign indeed. If this overhead resistance can be taken out, then there is a return back to the 100p listing price is a real possibility.
Trading on a bid-offer spread of 74p to 76p, valuing the equity at only £67m, I now rate the shares a speculative buy and have a target price of 100p. Buy.
WH Ireland capital raise
Aim-traded WH Ireland (WHI:123p), a small-cap broking house and asset manager, has just raised £1.58m through a placing of 1.29m shares at 123p each. The new shares issued equate to 4.6 per cent of the enlarged share capital and were acquired by the company's three largest shareholders who now control 62.5 per cent of the company. Their shareholdings are as follows: Oceanwood Capital Management has a 15.78 per cent stake; Polygon Global Partners Limited owns 23.09 per cent stake; and KEH Group owns 23.76 per cent.
KEH is a holding company for a group of businesses focused on the financial services, leisure and healthcare sectors. The business was set up in 2008 and is owned by a prominent Kuwaiti family. KEH purchased 6.03m shares at 140p three months ago ('Broking for capital gains', 20 Sep 2016) and its chief executive, Humphrey Richard Percy, a former Global Head of Futures at ICAP (ICAP), has just been appointed a non-executive director on WH Ireland's main board. I would flag up that the Financial Conduct Authority has approved a "change of control" allowing KEH to buy up to 29.9 per cent of the issued share capital, so this is not a takeover situation. However, there are obvious benefits of having the backing of a wealthy shareholder and one with a presence on the main board including access to capital to fund attractive acquisition opportunities, and providing investment advice to high net worth individuals in the Gulf states and Kuwait.
WH Ireland's share price is unchanged since I noted the initial stakebuilding by KEH, albeit it is still 80 per cent higher than when I initiated coverage ('Broking for success', 1 Aug 2011), and significantly up on the 94p level at which I rated the shares a buy in the summer ('The inside view', 2 Aug 2016). Importantly, there is still value on offer here.
That's because even if one ascribes nil value at all to WH Ireland's corporate broking activities, and ignores the value in its advisory and execution-only mandates which have total assets under management (AUM) of £1.7bn, then net of £11.5m cash on the company's balance sheet post the receipt of the £1.58m placing and the disposal of its Manchester head office, discretionary AUM are in effect being valued at £22.2m, or 2 per cent of AUM. Analysts John Borgars and Gilbert Ellacombe at equity research firm Equity Development have a sum-of-the-parts valuation almost double the current share price based on a valuation of 4 per cent of discretionary funds under management, 2 per cent for advisory and 0.5 per cent for execution-only.
So, if you followed my earlier advice, I would continue to run the hefty profits on your holdings and see how this unfolds. Run profits.
