Wexboy
29 Dec 2016
TGISVP - Dalata Hotel Group 2016 – The Great Irish Share Valuation Project (Part IV):Company: Dalata Hotel Group (DHG:ID)Last TGISVP Post: HereMarket Cap: EUR 821 MPrice: EUR 4.485Back in 2014, Dalata was still essentially an uninvested Hotel SPAC – valuing it accordingly, i.e. based primarily on its net cash, I tagged it (probably unfairly) as overvalued. Fortunately, management has since lived up to its pedigree & delivered a burgeoning hotel empire – spending, within a year, over €550 million on 16 hotels in (primarily) Ireland & the UK, the transformational deal being the acquisition of the Moran Bewley’s Hotel Group. The company then replenished its war chest in Sep-2015, raising another €160 million from a placing & open offer. Since then, the portfolio’s been expanding steadily (to over 6,600 rooms) with a focus on rebranding & refurbishment as Clayton and Maldron Hotels, RevPAR has increased significantly (to €74.90), while occupancy’s reached 79.0%, with new & existing hotel development opportunities also now being actively exploited. Dublin remains the main profit engine, enjoying 46% EBITDAR margins, followed by the UK (on 36% margins), with the Regional Ireland portfolio the laggard on sub-22% margins. As per today’s trading update, trading remains brisk, with no sign of a Brexit impact – fortunately, a majority of the UK portfolio is hedged with sterling liabilities, so sterling weakness isn’t that significant in terms of return on capital/equity.Which is very relevant, as I’d prefer a return on equity (RoE) valuation approach here (vs. most analysts & their focus on earnings/EBITDA multiples), reflecting DHG’s deliberate asset-heavy investment policy…which is now far less usual in the sector. H1-2016 net profit (exc. acquisition costs) was approx. €17.5 million, which equates to an annualised 6.3% RoE. However, I suspect H2 net profit will move significantly higher, so FY average RoE might come in closer to 7.5%. But that obviously includes a large depreciation expense, a significant portion of which wouldn’t necessarily be considered economic – so, somewhat arbitrarily (& I think conservatively), if we add-back 50% of the €14 million annual depreciation charge, we’re looking at something more like an underlying 8.8% RoE. [I should highlight that leverage (sub-30% Net LTV) poses no undue risk]. Of course, increasing property values (H1 comprehensive income actually included a €42 million revaluation bump!) could also significantly inflate underlying RoE – accounting for such revaluation potential, current operating performance trajectory, additional debt capacity, plus likely development gains to come, a 1.33 Price/Book multiple should adequately reflect a likely double digit underlying RoE:EUR 578 M Equity * 1.33 P/B / 183 M Shares = EUR 4.20Dalata looks pretty much fairly valued here. Its attractiveness as a potential buy will be dependent on whether you’re encouraged by the underlying supply-demand equation (apparently, a substantial under-supply of rooms in Dublin & select UK cities), or are more fearful of the ongoing Brexit implications (I suspect sterling volatility’s more of a risk to tourism flows/patterns than Brexit itself). Longer-term, the impact of Airbnb (& similar services) needs to be evaluated, especially as Clayton & Maldron are more value-biased/budget-conscious brands. Meanwhile, Dalata’s low leverage gives it the flexibility to take a more defensive or offensive stance, as appropriate.Price Target: EUR 4.20Upside/(Downside): (6)%For related links/graphs/files, plus other TGISVP analyses/price targets: Google the Wexboy investment blog.
