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Elegant Hotels Group plc

Elegant Hotels Group Plc New management contract signed + Zeus Comments

Elegant Hotels Group plc (LON:EHG), the owner and operator of six upscale freehold hotels and a beachfront restaurant on the island of Barbados, has today announced that it has signed a management contract with Hodges Bay Resort in Antigua.

The Company had previously announced on 14 October that it had reached an agreement in principle on the contract with the hotel’s owner, JSN Development Group Ltd (“JSN”). The contract has now been signed following the completion of the formal legal agreement.

Hodges Bay Resort is currently under construction and is expected to open its doors in mid to late 2017, when it will be branded as “Hodges Bay Resort & Spa by Elegant Hotels”. It will be a 122-room luxury beachfront resort, spa and residential development in a prime location on the popular north shore of Antigua. It is ideally located for many of the island’s main attractions, and is within easy reach of both V.C. Bird International Airport and the island’s capital, St. John’s. The accommodation choices will include stunning ocean-front apartments and villas, as well as executive suites and penthouses. The property will be a breakfast-inclusive hotel with various high-end dining choices and a self-catering option for the villa occupants.

Other features of the property include a heated ocean-side infinity pool, a heated lounge pool, a luxury five-therapy room spa with advanced technology hydro pool, three dining outlets, a coffee shop, an al-fresco all-day poolside grill, six bars, and a wide range of water-sport and other fitness, leisure and entertainment facilities. In addition, guests will be able to take advantage of the usual Elegant Signature activities, including free water-sports, free Wi-Fi, beach and pool Ambassador service, kids and teens clubs, and bespoke tours and daily activities.

From a strategic perspective, this will be Elegant Hotels’ first hotel offering outside Barbados and its first management contract, and it is expected to be earnings enhancing in FY18. The Board of Elegant Hotels believes that management contracts of this kind represent a compelling opportunity to expand beyond Barbados, given they require far less capital investment than full ownership, and is therefore considering a number of other similar targets.

Commenting on the news, Sunil Chatrani, CEO of Elegant Hotels Group plc, said: “We are delighted to have signed our first ever management contract, which also represents our first foray outside of Barbados. Hodges Bay Resort & Spa will be a chic and distinctive luxury property that, like all of the hotels in our portfolio, offers outstanding accommodation, understated elegance, impeccable service, and the very highest standards of culinary expertise and leisure activities. We look forward to integrating the hotel into our existing operations and to putting our own unique stamp on it, while still retaining the property’s individual characteristics. The hotel will be a highly complementary addition to our collection, catering as it does for adults and families alike.”

 

Zeus Capital Said:

As indicated in October Elegant Hotels has completed on a management contract with a prime property where we would expect them to put their unique stamp on. This is a positive strategic step that will expand the business in an asset light way and potentially improve the quality of earnings. We continue to believe the shares look attractive from a valuation, NAV and dividend yield perspective.

Management contract:  The company had previously announced on 14 October that it had reached an agreement in principle on a management contract with Hodges Bay resort in Antigua. This marks an important strategic step for the company and is their first step outside of Barbados. Management contracts represent a compelling opportunity to expand beyond Barbados without the capital requirements associated with full ownership. Management note in the announcement they are currently considering a number of other similar opportunities. We believe the low investment requirement makes them a good opportunity to accelerate earnings growth and enhance returns.

Features of property: The Hodges bay resort is currently under construction and is expected to open its doors in mid to late 2017, when it will be branded as “Hodges Bay Resort & Spa by Elegant Hotels”.  Upon completion the property will be a 122 room luxury beach front resort, spa and residential development located in a prime location on the north shore of Antigua. The property is located close to the Island’s international airport, V.C. Brid international and the island’s capital, St John’s. Other features of the property include a heated ocean-side infinity pool, a heated lounge pool, a luxury five-therapy room spa with advanced technology hydro pool, three dining outlets, a coffee shop, an al-fresco all-day poolside grill, six bars, and a wide range of water-sport and other fitness, leisure and entertainment facilities. We believe the resort will be attractive to both adults and families.

Forecast assumptions: We expect the contract to be eps enhancing in 2018. Minimal investment (we estimate c$1.5m) means contracts are expected to have a 3 year payback period, based on an estimated $0.5m annual EBITDA contribution. We leave our forecasts unchanged for now and believe these contracts further underpin our forecast earnings growth and supports our expected returns.

Valuation: We continue to believe the current equity valuation is underpinned by significant asset backing, we estimate NAV of $198.4m, (184p per share at 1.21 USD:GBP) based on an independent freehold valuation at IPO of $235.5m, plus $22m for the newly acquired Waves hotel and peak net debt of $59m. The company currently trades at 8.1x FY17 EBITDA, falling to 7.0x in FY18. On a P/E basis the company trades at 8.9x and 7.4x FY17 and FY18 earnings respectively.