OFFER FOR LUX OUR RECOMMENDATION

Transcription

1 OFFER FOR LUX OUR RECOMMENDATION

2 DISCLAIMER AXYS Stockbroking Ltd (ASL) has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. ASL will not be under any liability for loss or damage of any kind whatsoever arising in connection with the contents of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. ASL makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. ASL is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission. 2

3 CONTENTS EXECUTIVE SUMMARY 4 THE OFFER 5 8 DETAILS 6 APPENDIX KEY METRICS 22 VALUATION 23 CONSIDERATIONS 7 8 ABOUT LUX 9 19 OVERVIEW GOVERNANCE KEY FINANCIALS FINANCIALS BY COUNTRY 17 19

4 EXECUTIVE SUMMARY o o o o IBL Ltd (IBL) bought an additional 10% stake in Lux Island Resorts Ltd (LUX) on Dec 15 th 2017 at Rs71.50 representing a 15% premium to the prevailing market price. 2Mths later, IBL opted to make an offer to LUX minority shareholders for a cash consideration of Rs71.50 per share We recommend that you DECLINE IBL s Offer We Fair Value (FV) LUX at Rs72.25 Our FV takes into account LUX s track-record since 2011, the refurbishment cycle of resort hotels, as well as management fees LUX is expected to generate from its pipeline of hotels RATING HOLD SELL Red. HOLD Acc. BUY LUX FAIR VALUE Rs72.25 ALCAPEX-12 SEMDEX 80 M-15 A-15 N-15 F-16 M-16 A-16 N-16 F-17 M-17 A-17 N-17 F-18 M-18 4

5 MOVE THE PHOTO BACK TO ITS PLACE DEAR COLLEAGUE AND POWERPOINT AFFICIONADO OFFER DETAILS

6 OFFER DETAILS IBL has offered to buy LUX shares at Rs % payable in cash IBL s offer carries an implied PER of 28x and PBV of 1.58x The offer s implied EV/EBITDA stands at 16.9x MOVE THE PHOTO BACK TO ITS PLACE DEAR COLLEAGUE AND POWERPOINT AFFICIONADO Room View 6

7 WEIGHING IBL s OFFER PROS CONS 1 The Rs70.60 proceeds net of fees is close to our FV and thus a fair offer 1 The Independent Valuer (IV) calculated LUX s Equity Value to be Rs90.50 per share which is the price IBL should rather offer. Rs71.50 thus constitutes a bargain. 2 An exit opportunity. Had IBL not made its offer, LUX would likely still be languishing in the low Rs60s. 2 LUX has a well-established brand and has already embarked on an asset-light internationalisation strategy. It is thus not easily replaceable. 3 The tourism industry is sensitive to external shocks such that unexpected events can cause major setbacks 3 LUX is a key investee in IBL s portfolio who will push for growth and does not appear to wish to de-list LUX. 7

8 3. CEO 2. UNDER- WRITING 1. BREAKING RANK OTHER CONSIDERATIONS Offer by on Date Type Board Recommendation Directors' Choice IBL LUX May-18 Voluntary Accept Reject CIEL CTL May-17 Unsolicited Accept Accept Equity Spectrum BEEP Mar-17 Unsolicited Reject Reject ENLL & ROGE NMHL Feb-17 Mandatory Reject Reject CIEL SUN Apr-14 Mandatory Reject Reject OUR VIEW ON THE MATTER In other recent offers made to minority shareholders, Directors of the Offeree have acted in-tandem with their Board s recommendation. Except for Mr de Fondaumière who has been selling his shares since Nov-17, LUX s directors intend to not sell their shares. This suggests its executives believe LUX has upside potential MCB Stockbrokers Ltd (MSL) has agreed to underwrite the transaction and, after completion of the Offer, to purchase and/or cause to be purchased from the Offeror any of the Offeree s Shares that the Offeror may decide to sell. The employment contract of Mr Paul Jones is extended to 30th June Although the Board is confident that under the leadership of Mr Jones, the Company will maintain its growth trajectory the Board is aware of the situation and is taking the necessary measures to follow the established succession planning process. 8 This is a highly peculiar agreement which could either be a contorted way for IBL to finance the offer, or it could simply mean that IBL has limited appetite for additional LUX shares suggesting its intent to keep LUX listed Mr Jones is a passionate, people-centric and charismatic leader who has ushered LUX into a new era with a unique identity. Although he is discussing a contract extension beyond FY-19, his retirement in a not so distant future, if not planned adequately, could be a major setback for the group.

9 MOVE THE PHOTO BACK TO ITS PLACE DEAR COLLEAGUE AND POWERPOINT AFFICIONADO ABOUT LUX OVERVIEW & KEY FINANCIALS

10 OVERVIEW 8 3 HOTELS OWNED MANAGED 1, ROOMS OWNED MANAGED 80% GROUP OCCUPANCY LUX began operations in 1987 as Naiäde Resorts Ltd (NRL) with a single 3-Star hotel. Leveraged rapid expansion during the midnoughties landed the group in serious trouble recording heavy losses and seeing its debt-service time rocket to over 13.5 years CEO Paul Jones has since ushered LUX into a new era. Profitability has been restored to pre-crisis levels and leverage to more manageable levels. LUX has since begun renovating its resorts one at a time. Le Morne & St Gilles are expected to be next as Merville s refurbishment appears to have been postponed by several years Adj Att PAT Debt/EBITDA

11 LUX GOING GLOBAL OWNED 5 in MAURITIUS 2 in RÉUNION 1 in MALDIVES MANAGED 2 in CHINA, Lijiang & Benzilan 1 in TURKEY, Bodrum LUX intends to grow through management contracts; and has signified its intent to split the company into two entities: one for operations; the other for the assets, in a few years in MALDIVES, North Malé 1 in MAURITIUS 1 in CHINA, Organic Escapes ITALY TURKEY UAE CHINA in UAE, Al Zorah 1 in CHINA, Chengdu 1 in VIETNAM, Phu Quoc MALDIVES VIETNAM in ITALY, Tuscany MAURITIUS RÉUNION 11

12 TOP SHAREHOLDERS BEFORE & AFTER IBL s DECEMBER PURCHASE AFTER 1 LUX has an appreciable free-float Others 37% BEFORE 2 IBL effectively controlled LUX prior to its recent purchase 37% 39% 49% IBL 3 LUX is among the most liquid stocks on the SEM, having consistently featured in ALEX 20 * LUX Directors 2% NPF 6% 6% 6% 6% SWANL 10% MCB * index comprising the SEM s 20 most liquid stocks 12

13 CORPORATE GOVERNANCE 9 90% MEN WOMEN 1 10% 3 INDEPEN- DENT % AGE GROUP [Yrs] % NON- INDEPENDENT 0 0 LUX is effectively controlled by a family-owned listed company. Its 10-member board thus consists of family members, executives of IBL (the family holding), longserving directors, and two executive directors. Mr Jones is the only person on the board who has hands-on experience running a resort LUX s board is made up of experienced majority of members aged between 50-60Yrs directors but with limited diversity and few independent members. We expect to see this evolve in-line with the newest Corporate Governance Code which came into effect on July 1 st 2017 The board of LUX Hospitality Ltd, the subsidiary poised to become the post-split management company, has a significantly different board composition consisting of non-mauritian industry professionals with international tourism experience, and key executives

14 LUX FINANCIALS

15 LUX ISLAND RESORTS KEY FINANCIALS & RATIOS Revenue [RsM] Adj Att PAT [RsM] 23 4, ,709 3, EBITDA Marg. [%] 6,531 5,076 5, , F 2019F NAVPS [Rs] ROE [%] F 2019F DER [%] 139 Debt/EBITDA [x] F 2019F In the 5Yrs to FY-17, Revenue has grown at an annualised (ann.) rate of 7.5% - given exceptionally high group occupancy rates of 80% - in spite of refurbishments having been carried out. We expect Maldives to drive the growth in FY-18 and a fully operation Grand Gaube to do the same in FY-19 EBITDA Margins have declined since peaking at 23% in FY-15 in-line with the refurbishment of Belle Mare, South Ari, & Grand Gaube. We expect a pickup in FY-19 from the absence of closures ROE has averaged 6.5% over the last three years and is expected to remain low in 2018 in-line with renovation works, thereafter picking up in 2019 when none are expected NAV growth is expected to remain slow given that the renovation works have been mostly financed through bank debt LUX has tackled its indebtedness as evidence by its Debt-Equity Ratio (DER) which peaked at 169% in 2011 has fallen to under 70% in recent years. Debt repayment capacity as measured by the Debt- EBITDA Ratio has also fallen to under 4Yrs LUX has effectively contained its debt in spite of several renovations; and even sold an asset, Tamassa, so as to free cash for Grand Gaube s refurbishment 15

16 SEGMENTAL REVENUE PRODUCT 2017 GEOGRAPHY % Other 9% % Réunion 11% % Mauritius 12% % 55% 37% 54% 57% +11% Room 14% % 59% 16% 51% 66% +8% F&B 34% 34% +15% Maldives 23% 35% Albeit slight, the fact that Food & Beverages (F&B) revenue has shrunk from 37% to 34% since 2011 at the expense of Room demonstrates LUX s ability to raise rates in times when the competition has found it difficult to do so. 16 The dramatic drop in Maldives share of revenue reflects the closure of South Ari for renovations therein over-inflating the Mauritian performance. A situation which we expect to see normalise as from FY-18 with Maldives poised to constitute about a third of turnover. The 4% ann. drop in Reunion stems in part from a few difficult years but mainly as a consequence of the sale of Réçif in Apr-15 which has since (in Oct-17) been repossessed

17 MAURITIUS LUX KEY FINANCIALS MAURITIUS Mauritian Tourism experienced difficult post-crisis years during which Arrivals stagnated and spending per visitor decreased. The adoption of a more flexible air connectivity policy has boosted arrivals and spending crossed the 110-mark in 2017 for the 1 st time in 5 years Rev/Rm [ ] EBIT Marg [%] Revenue per Room (Rev/Rm) for LUX stagnated up to 2014, then climbed significantly starting 2015 in-line with the premiumisation of the LUX brand. The dip in FY-17 likely stems from the closure of Grand Gaube in May-17; while the 9M figure stands higher than FY-18 due to the cyclical nature of operations with FY-Q4 being the weakest quarter In terms of margins, EBIT averaged 16% up to 2015 except FY-12 affected by rebranding related write-offs and have since improved further M 110 Receipts per Viz. per Diem [$] Arrivals [k] , ,151 1, ,

18 MALDIVES LUX KEY FINANCIALS MALDIVES While Mauritius was struggling as a destination, Maldives was booming driven by the Chinese market. Asians stay for shorter durations compared to European counterparts which implies that resorts require more clients in order to maintain occupancies. Shorter stays combined with 10 new resorts opening all at once in 2016 has led to a fall in occupancy rates. This could trigger a rate war similar to the one Mauritius experienced in the aftermath of the 2008 crisis and from which the industry has not yet fully recovered. Piling on to its woes, political turmoil resulted in several counties advising their citizens not to travel to the Maldives. We therefore expected LUX to struggle, but its 9M results proved us wrong. Instead we expect FY-18 Rev/Rm to stand close to FY14-15 levels; which shows how strong LUX has become. Dips in FY16-17 are explained by the partial followed by the full closure of South Ari. Rev/Rm [$] EBIT Marg M Receipts per Viz. per Diem [$] Arrivals [k] 1,390 1,286 1,234 1, ,

19 RÉUNION LUX KEY FINANCIALS RÉUNION In Réunion a very heavily French dominated (~80%) market tourist arrivals had been declining following a series of shark attacks which scared-off mainland compatriots. A recent re-emergence of visitors who stay for extended periods (over half stay with family or friends) likely explains the dramatic plunge in revenue per visitor per day; also being a hikers paradise only ~20% of visitors stay in hotels Given the difficult operating environment, LUX has struggled most in Réunion even selling-off Réçif in Apr- 15. This explains the surge in Rev/Rm in FY16-17; while the subsequent repossession of Réçif in Oct-17 likely explains the drop in Rev/Rm. This was however more than compensated for by a renewal with profits Rev/Rm [ ] EBIT Marg M Receipts per Viz. per Diem [$] Arrivals [k]

20 MOVE THE PHOTO BACK TO ITS PLACE DEAR COLLEAGUE AND POWERPOINT AFFICIONADO APPENDIX KPIs & VALUATION

21 If you do a valuation right, there should be no need to apply discounts and premiums for most items to the estimated value A. Damodaran, Kerschner Family Chair in Finance Education, Stern School of Business, New York University

22 Ratios Key Financials KEY METRICS Metric F 2019F Rev/Rm [Rs] 7,162 7,467 8,719 10,058 11,863 12,831 12,609 Revenue [RsM] 3,709 3,867 4,516 5,076 5,199 5,948 6,531 EBITDA [RsM] ,054 1,123 1,089 1,151 1,314 EBITDA Marg. [%] Adj Att PAT [RsM] EPS [Rs] DPS [Rs] NAVPS [Rs] Debt/Share [Rs] EV/EBITDA [x] EV/Rm [RsM] PER [x] DY [%] PBV [x] ROE [%] DER [%] All Financial indicators for LUX have shown improvements over the years Any recent deteriorations are transient which have been caused by a refurbishment spree spanning three hotels over three years 22

23 VALUATION ABOUT OUR MODEL & ASSUMPTIONS o o o o We derive Fair Value consensus through a linear combination of valuation methods: Market Ratios, Discounted Cash Flow, Net Assets and Dividend Growth. We applied prevailing ratios (PER 27x, DY 1.4%, PBV 1.95x, EV/EBITDA 11x) derived from a peer group obtained from Bloomberg; calculated WACC to stand at 7.9% using an effective borrowing rate of 6.1%, and a 7% premium on the prevailing 10Y GMB; a 20% discount on fixed assets less goodwill reflecting duress under the Net Assets method; and ignored the cost of debt in the Dividend method Based on the IV s report, we have also assumed major renovation works will be undertaken at Le Morne and St Gilles in FY In addition to which we have included a couple of softrefurbishments as part of the resort cycle, estimated management fees from pipelined resorts, and the inclusion of the new 60-key hotel as from Our algorithms include Monte Carlo methods which help simulate more realistic bumper and difficult years resulting fluctuations that will contrast with conventional monotonic growth rates Method per Share Value [$] [$M] Market Ratio ,140 Net Assets ,276 Cash Flow ,682 Dividend ,639 Consensus , F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F EPS DPS NAVPS

24 REFERENCES & AUTHORS REFERENCES AUTHORS TRADING IBL Ltd, Offer Document, 05-Apr-2018 LUX Island Resorts Ltd, Reply Document, 17-Apr-2018 LUX Island Resorts Ltd, Annual Reports Statistics Mauritius, International Travel & Tourism Ministry of Tourism, Maldives, Statistics Observatoire Régional du Tourisme, Île de la Réunion, Fréquentation Touristique Bhavik DESAI Head of Research Alexis CORSON Investment Analyst For buying or selling stocks, bonds and ETFs please liaise with: Adlette RIOUX or Damien MALLIATÉ or Melvyn CHUNG KAI TO 24

25 CONTACT US 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, (230) research@axys-group.com