I have had an informative half-year results call with Sunil Chatrani, chief executive of Elegant Hotels (EHG:85p), the largest operator of luxury hotels on the Caribbean island of Barbados, and one that adds weight to my recovery buy recommendation, at 91p, earlier this year (‘Exceeding expectations’, 15 Jan 2018). I first rated the shares a buy, at 105p, when the company floated on Aim ('Checking into an elegant investment', 15 Jun 2015), and the board have paid out 15.75p a share of dividends to date, so the holding is slightly in the red.
Around 72 per cent of bookings at Elegant’s seven upmarket hotels are made by UK visitors, so the sharp recovery in sterling from lows of £1:$1.20 at the end of 2016 has clearly been positive as has the move to target more the North American travel market, which now accounts for 17 per cent of room nights. Mr Chatrani says that “demand is coming back, and we’re holding and looking to build room rates”, noting that “advanced bookings for the 2018-19 financial year are up in double-digits”. He also points out that with 95 per cent of revenue already covered for the financial year to the end of September 2018, he is comfortable with house broker Zeus Capital’s prediction that underlying pre-tax profit can rise from $11.1m to $12.4m (£9.2m) to deliver EPS of 10.7¢ (7.9p). Moreover, given profits are heavily weighted to the winter months, it’s reassuring to hear that the company is trading in line with forecasts which suggest pre-tax profits could recover to $13.1m in the 2018-19 financial year.
His confidence is supported by an anticipated much improved contribution from the company’s Treasure Beach hotel in the 2018-19 financial year. The property only opened in December 2017, later than expected, following a $2.7m refurbishment after extreme weather in Miami delayed the import of materials. Mr Chatrani is budgeting for a 15 per cent cash profit return on the company’s $10.6m investment, which includes the $7.9m paid for it in 2017. Elegant will also benefit from revenue on its first management contract on the Hodges Bay Resort in Antigua in the second half of the 2017-18 financial year. Further management contract are being targeted, as are acquisitions.
So, with Elegant’s shares trading on 10 times forecasts EPS of 11.4¢ for the 12 months to the end of September 2019, underpinned by a 4.7 per cent prospective dividend yield, and rated on a massive 44 per cent discount to net asset value of 199¢ based on the latest exchange rate of £1:US$1.34, I feel the recovery in earnings is being underrated by investors. There is also the chance that the company could attract a suitor again after Spanish hotel operator Meliá Hotels International (BMAD:MEL) made an unsolicited approach last year. Buy.
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Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.
