Zeus Capital note the recent weakness in Elegant Hotels Group PLC (LON:EHG) share price, which is down 18% since the interim results and now at the lowest point since December 2016 when the shares were recovering from a c.30% downgrade to forecasts as the company faced a variety of trading headwinds post Brexit. In our view, the market is beginning to stabilise and the current share price, which is significantly below the recently mooted bid price of 110p and at a large discount to the sector, represents significant value. In our view, trading patterns are now beginning to stabilise and we believe the shares offer good long-term value at this level given the NAV of 147p per share (GBP:USD of 1.35), attractive yield of 5.7% and undemanding multiples at a significant discount (c.50%) to the sector. We expect a trading update from the company in the first week of October.
Tax changes: Barbados’ newly elected government recently introduced a new tax to be levied on tourists which will range from $2.50 – $10.00 per room per night, depending on the class of their accommodation and a $70 increase in the exit tax. While it is unlikely to have a positive impact on demand across the island, the incremental cost for a guest of Elegant Hotels, of under £200 (for a 10 night stay), is low compared to the average £4k – £5k cost per couple per week of a booking. The increase in cost of c.4.0% – 5.0% is in line with a number of European destinations including Berlin, Amsterdam, Vienna and Budapest which all have tourist taxes at similar levels of between 4.0% – 5.0%. A number of other operators including Kuoni and Virgin Holidays have already stated their intention to pass this cost on to the consumer. We are confident that given the low relative cost of the tax for consumers, and the already stated intention of a number of operators to pass this on to the consumer the impact on Elegant from both a demand and margin perspective should be limited.
Forecasts unchanged: Elegant Hotels Group PLC noted “a strong pipeline of bookings for the remainder of the financial year”, at the time of the interims. We therefore leave our forecasts unchanged and will review our assumptions at the next update – which we expect will be in the first week of October. We base our Sterling EPS forecast on an assumed GBP:USD rate of 1.35 vs the current spot rate of 1.29. We leave this assumption unchanged for now and will update at the company’s year-end or if there is a more significant movement in the rate.
Investment view: We believe the valuation is undemanding at the current share price, which is at the lowest level since December 2016. At the current price Elegant is trading on a P/E of 9.1x to 2018E EPS falling to 8.6x in 2019E. The shares have significant asset backing and are trading at a c.53% discount to NAV (147p per share). We therefore continue to believe there is good long-term value in the shares at current levels, and its better positioned to capitalise on its consolidation strategy taking into account current market conditions.