Zeus Capital Q&A: Elegant Hotels Group PLC (LON:EHG)

Elegant Hotels Group Plc

Elegant Hotels Group PLC (LON:EHG) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.


Q1: Elegant Hotels announced their full-year results 2018 which I see you actually published a note on. Can you run us through those results?

A1: The results showed some very good operational progress versus last year, revenues was up 5% year-on-year with REVPAR broadly flat versus last year as well which was broadly in line with our expectations. A little bit of margin pressure there due to pressures from the National Social Responsibility Levy as previously flagged. Adjusted EBITDA was up 11% year-on-year and adjusted EPS was up 16% year-on-year due to a lower tax rate, mainly due to increased capital allowances. The full year dividend of 4p was in line with our expectations and net debt at $72.2 million was below last years’ level as well.


Q2: So, how would you describe the outlook for the company?

A2: Clearly, there is some economic concern related to the UK consumer at present however, booking trends are ahead of last year. They’ve actually got just over 60% revenue visibility fore the forthcoming financial year which is good news and management are talking about trading in line with expectations.


Q3: I see you’ve made some changes to your forecasts, can you talk us through those?

A3: We’ve tweaked our FX assumption on the pound to dollar from 1.35 to 1.30 to better reflect the current spot environment. We have tweaked down our occupancy assumptions on the business as well due to some pf the Brexit uncertainty and stronger dollar to reflect that but we’re still reasonably confident of modest pricing growth given what the business has delivered to date.

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The big impact on our forecasts is the change in the affected tax rates, about 23% to about 10% to reflect the corporate tax rates in Barbados at the moment. The upshot of all these changes is the 2% reduction of adjusted EBITDA by 12% uprate to earnings which is largely tax-rate driven.


Q4: Finally, what are your thought on Elegant Hotels Group valuation?

A4: We think the valuation is compelling. The stock on our advice forecast is trading on a September 2019 PE of about 7 times price earnings and there’s a yield of just over 6% on offer as well. If you look at the current net asset value of the business based on the 2018 outturn, it’s in excess of 150p a share and I think the company is paying down its debt fairly rapidly at the moment as well. So, we think the NAV of the shares could well increase there in excess of 160p over the next couple of years which will be a 60% discount to the market cap of the business.

So, to our minds, it’s a strong operator in an interesting market with a very significant discount to some of its peers in the hotel sector, also of a decent yield on offer and a significant, discount to NAV.

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