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Elegant Hotels Group plc

Elegant Hotels PLC Treasure Beach Acquisition – Zeus Capital

Elegant Hotels PLC (LON:EHG) has this morning announced it has entered into a conditional agreement to acquire the issued share capital of Treasure Beach Ltd, including the business, the freehold property and assets of Treasure Beach Hotel in Barbados. The company estimates the total consideration plus refurbishment costs will total $10.5m, implying a normalised ROCE on the new asset of 10.2% based on past tax earnings (12.8% pre-tax). We expect the acquisition to be marginally dilutive to earnings in 2017 (-2.1%) due to timing, before generating 4.3% and 7.2% uplifts in earnings in 2018E and 2019E respectively. The group now controls a continuous 300 metre stretch of the Barbados prestigious ‘Platinum Coast’.

Acquisition: Treasure Beach is a 4 star, 35-room resort in Paynes Bay in the Parish of St James in Barbados. The property fits well with the existing portfolio, providing an opportunity for further development as it is located next to Tamarind, Daphne’s and The House. Treasure Beach occupies 1.18 acres of land and includes a swimming pool, spa and restaurant. As a result of this acquisition, four of Elegant’s properties will now account for a continuous 300m stretch of the West coast of Barbados. This acquisition further grows Elegant’s room capacity (+50% since IPO) and share of the premium room stock on the island.

Financing: The acquisition is conditional upon completion of a credit agreement. The company has indicated the total consideration plus estimated renovation costs to be $10.5m. This will be financed through a combination of operating cashflow and c.$8.0m of credit agreements. The hotel will continue to be operated under existing branding, before being closed in July 2017 for refurbishment, with a scheduled reopening of November 2017.
Forecasts: Due to the timing of the acquisition, and the planned closure in July we expect the EPS impact to September 2017 to be marginally dilutive. On a mature basis, we believe the new hotel could contribute up to $2.0m EBITDA. We anticipate this to be 4.3% EPS enhancing to September 2018 and 7.2% enhancing to 2019E, based on cautious RevPar assumptions. This equates to a pre-tax ROCE of 14.3% in 2019E. Net debt to September 2017 EBITDA will be 4.2x (LTV of 37%) with no earnings uplift, but is expected to come back towards 3.4x in 2018E and 3.1x in 2019E, under our conservative assumptions.

Investment view: While the shares have rebounded 34% from the trough point of 63p in August, we believe the valuation remains undemanding trading on a P/E of sub 11.0x trough 2017 EPS falling to 7.8x in 2019E. The shares have significant asset backing and are trading at a c60% discount to NAV (179p). We therefore continue to believe there is good long term value in the shares at current levels.

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