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Elegant Hotels Group Plc

Elegant Hotels Group On track, current NAV of 153p

Elegant Hotels Group (LON:EHG) has announced FY 2018 results that show good progress vs. last year and are within 3% of our forecasts at the adjusted EBITDA level, and ahead at the adjusted EPS level albeit due to lower tax. The Group is trading in line with expectations in FY 2019 with over 60% revenue visibility for 2019E. We increase our adj. EPS forecast by 12% and 13% in FY19 E and FY20E which is largely driven by changes to corporate tax rates in Barbados. We continue to believe the shares offer strong value.

Final results: Revenue was +5% YOY with REVPAR broadly flat at $225 vs. $227 last year (ADR was +2%, with occupancy dropping 160 bps to 62.3%). Gross profits were ahead of last year by $1.8m reflecting the growth in revenue, albeit on flat margins due to pressures from the National Social Responsibility Levy (NSRL). Adjusted EBITDA was $19.7m vs. $17.8m and +10.6% and -2.5% vs. our forecasts. Adjusted EPS (diluted) actually came in at 11.3 cents per share and +15.9% YOY. This was mainly due to increased capital allowances of $0.7m due to the construction of Treasure Beach, which was not in our forecasts. The full year dividend of 4.0p was in line with our forecasts. Net debt at $72.2m was 5% ahead of our forecast but below $73.1m last year.

Key drivers: Revenues were boosted during the year by the acquisition of Treasure Beach as well as the renovation of The House and continued strong performance of Waves. Beachfront restaurant Daphne’s had a mixed year, and while improved vs. the prior year is facing increased competition. As previously flagged, occupancy fell 1.6 percentage points, and was the key area of underperformance in our forecasts. However, this was largely driven by the impact of Treasure Beach, which was opened in December 2017 and missed the peak tourist season. The modest growth in ADR was largely driven by The House following its refurbishment as well as the increasing popularity of Waves.

Forecasts: We have slightly tweaked our FX assumptions from 1.35 to 1.30 to better reflect current spot rates. However, to offset this, we have also tweaked down our occupancy assumptions reflecting the current underlying run rate of the business (some growth is expected due to the impact of Treasure Beach). We still anticipate modest pricing growth, albeit this largely be determined by FX trends during the course of the year. We also update our effective tax rate assumptions to ac.10% rate to reflect the new corporate tax rates in Barbados resulting in a 12% earning upgrade in FY19E.

Investment view: We believe the valuation remains compelling trading on a 2019E P/E of 7.0x falling to 6.6x in 2020E and an EV/EBITDA of 6.8x and 6.1x respectively. The shares have significant asset backing and are trading at a 55% discount to current NAV of 153p. We therefore believe there is significant long-term value in the shares and are reassured by management’s approach to strengthening its balance sheet given current UK economic uncertainty. The dividend yield of 6.1% in 2019E is also attractive in our