I have had an informative full-year results call with Sunil Chatrani, chief executive of Elegant Hotels (EHG:72p), the operator of seven luxury hotels on the Caribbean island of Barbados. The company has just reported a 6 per cent rise in adjusted pre-tax profits to $11.4m for the financial year to end September 2018 and a 15 per cent hike in adjusted EPS to 11.3¢.
Importantly, Elegant has 60 per cent sales visibility for the current financial year, and at slightly higher room rates, according to Mr Chatrani. True, UK economic uncertainty and sterling weakness against the US dollar – the currency is 10 per cent down since April 2018 – are hardly helpful given that 72 per cent of its customers arrive from the UK. But occupancy rates are holding firm at the 64 per cent level if you adjust last year’s occupancy figures for the soft opening of its Treasury Beach resort following refurbishment post-acquisition. Mr Chatrani expects the hotel to generate a 15 per cent annual cash profit return on the $10.6m capital invested.
He also said that the anticipated $5m headwind resulting from the government’s planned doubling of VAT rates in January 2020 will be more or less offset by the removal of both the Room Levy and Direct Tourism Services Levy. Changes to corporate tax rates means that Elegant Hotels could save up to $2m a year, according to Liberum Capital, prompting analysts to raise their 2019 and 2020 EPS estimates by 5 and 8 per cent, respectively, to 12.2¢ and 13.1¢.
Cash flow generation is expected to improve too. Free cash flow is predicted to rise from $7.8m to $10.8m, more than enough to cover the $4.5m cost of the 4p a share annual dividend. Also, Elegant is actively looking at refinancing its credit lines which are currently priced off US Libor and cost 5 per cent a year. Net debt of $72.2m secured on property worth $249m offers ample asset backing. It makes sense to do so given that Elegant could cut its interest bill by a fifth by borrowing domestically, boost profits, and reduce the debt amortisation charge too.
It hasn’t been plain sailing since I first rated the shares a buy, at 105p, when Elegant floated on Aim ('Checking into an elegant investment', 15 Jun 2015), since when the board has declared total dividends of 19.75p a share. However, rated on a forward PE ratio of 7, on less than half net asset value of 200¢ (156p at current spot rates), and offering a 5.5 per cent dividend yield, I feel the lowly rated shares offer real recovery potential backed by operational progress. Buy.
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