Elegant Hotels (EHG:72p), the operator of seven luxury hotels on the Caribbean island of Barbados, has posted a solid set of first half results. Almost four fifths of visitors at its hotels arrived from the UK in the six months to end March 2019, so it’s hardly surprising that all inclusive packages proved popular as holidaymakers looked to ‘lock in’ the cost of their vacation given a weak sterling-dollar exchange rate and uncertain UK economic backdrop.
Indeed, all three of Elegant Hotels’ all-inclusive hotels (Crystal Cover, Waves and Turtle Beach), accounting for half of group revenue, posted high to single-digit revenue growth and on higher occupancy rates too. Combined with a much improved contribution from the newly refurbished Treasure Beach hotel, Elegant Hotels managed to edge up both occupancy rates and revenue per available room (RevPar) by one percentage point to 68 per cent and $364, respectively. Strip out one-offs which subdued the prior half year performance, and adjusted pre-tax profit increased by 5 per cent to $12m on revenues up 3 per cent to $43.7m.
More of these profits are being retained by shareholders after the Barbados government lowered corporate tax rates last autumn from 30 per cent to between 1 and 5.5 per cent. Elegant Hotels corporation tax charge was slashed by more than 90 per cent to only $180,000 which meant that both net profits and earnings per share (EPS) surged by more than a quarter to $11.8m and 13.3c. Moreover, although the Barbados government is set to increase VAT from 7.5 per cent to 10 per cent from 1 January 2020, this is less than a previously proposed 100 per cent VAT increase and it will only be on room revenue rather than on all tourism services, a welcome boost to hotel operators.
Importantly, Elegant Hotels’ cash flow performance is improving with free cash flow increasing from $4.5m to $8.4m in the all important seasonally weighted first half trading period, suggesting that the company should be able to deliver Zeus Capital’s full-year free cash flow estimate of $12.6m after taking into account a second half net working capital inflow. A refinancing of credit lines is scheduled to complete in June and will result in repayment terms being extended to 15 years on syndicated loan facilities of $74.3m, thus easing debt payment obligations. Net debt was cut by $3.3m to $68.9m in the first half, equating to 3.3 times trailing 12-months cash profits, and is secured on property assets worth almost $250m.
So, with cash flow improving analysts at Zeus Capital expect borrowings to be slashed to $63.3m in the second half. The improving cash flow performance is highly supportive of the board maintaining the 4p a share annual dividend which is covered 2.3 times by full-year EPS estimates. It also means that net debt is on course to fall to 3 times cash profits, thus reducing interest payments and freeing up more operating cash flow.
Admittedly, the shares are 10 per cent under water even after taking into account dividends of 19.75p a share paid since I suggested buying the shares, at 105p, when Elegant Hotels floated on Aim ('Checking into an elegant investment', 15 June 2015). They are also unchanged since I covered the annual results at the start of the year (‘Elegant Hotels earnings recovery underpriced’, 15 January 2019). However, I feel the lowly rated shares continue to offer recovery potential backed by ongoing operational progress. Trading on a forward price/earnings (PE) ratio of less than 8, 53 per cent below net asset value of 203¢ (155p), and offering a 5.6 per cent annual dividend yield, the shares rate a buy.
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