Threats. Prolongued difficulties in Mauritius. Contraction of Reunion tourism. Loss of management contracts 1.63

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1 Executive Summary Overview (LUX), formerly Naïade Resorts, is among the newer Mauritian hotel groups, however its recent disruptive business model under new management has made of it an innovator. The group offers a harmonised approach in its 5-Star LUX*hotels in Mauritius (3), Maldives (1), and Reunion island (1). Going forward, LUX has adopted an asset light strategy and intends to take up management contracts rather than simultaneously own and run resorts and hotels. Performance: Review & Prospects LUX was the first hotel group to feel the brunt of the crisis and suffered accordingly with losses close to Rs0.5bn in FY10. Since, management was changed, and debt re-structured through a Rs1bn rights-cumconvertible bond issue. Under its new identity, LUX has embraced the new markets, and has fared better in relative terms. Results turned around as revenue hovered above Rs3.7bn over the last two years, but PAT improved from Rs35M to Rs107M in part due to the absence of re-branding costs. As for its 9Mth results, revenue has grown by 10.5%, and PAT by 45% to Rs304M. Domestic operating conditions will remain difficult and thus local growth for LUX is expected to stagnate in coming years. Nonetheless, the completion of LUX* Belle Mare s renovation (funded from sale of villas) might help further improve Rev/Room as from FY15, but its closure will affect FY15 results. LUX can continue to grow in the Maldives from increased average room rates, now that its occupancy rate has surpassed the national average. In Reunion, the industry is suffering, however the sale of hotel should help alleviate both debt and the adverse impact on P&L. The group s most promising endeavours involves the internationalisation of its brand and using its know-how to manage hotels worldwide. Two projects, namely LUX* Al Zorah in UAE and LUX* Tea Horse Road in China should open for business in the next two Valuation: Upgraded to Accumulate Assuming LUX continues to show strong progress in the Maldives and a steady decline in interest charges, we forecast LUX s FY14 PER to stand at 26.0x then 22.4x in FY15. While these PER figures are well below the Industry PER of 89.3x, it does stand above the ALEX-20 PER (16.3x) and Total Market PER (14.5x). LUX s FY-13 Price:Earnings Growth (PEG) Ratio stood at 1, and is poised to drop well below 1x in both FY- 14 and FY15. Although we would have preferred dividends be used to refurbish LUX* Grand Gaube, DY is estimated to reached 1.2% in FY15. Assuming LUX pays down borrowings at Rs500M per and benefits from the conversion into equity of its bonds, its FY15 DER falls from its current 139% to 91% in FY-15, i.e. with a Debt per Share of Rs34. Based on the above, the group s willingness to accommodate burgeoning markets, and the fact that LUX s current management has a track record of turning things around, we upgrade LUX s rating from Reduce to Accumulate. Rating Rs VWAP Rs 42.5 CDS Code: ISIN Code: Bloomberg Code: Reuters Code: Trading data ACCUMULATE NRL.N0000 MU0049N00000 NRL MP NRL.MZ Opportunities Threats 30-May-14 New hotel management contracts Prolongued difficulties in Mauritius No of Shares: 113.7M Improved occ. rate from TUI deal Contraction of Reunion tourism Market capitalisation: Rs 4.8bn Sale of hotel in Reunion Loss of management contracts Weight on SEM: Weight in ALEX-20: 1.8% 2.6% Highlights E 2015F Weight in ALCAPEX-12: 3.3% Revenue [RsM] 2,315 3,095 3,714 3,771 4,073 3,933 Med. daily value traded: Rs 0.66M EBITDA [RsM] Med. daily volume traded 19,400 PAT [RsM] YoY Total Return: 107.7% R/Occ. Room [Rs] 5,575 6,670 8,255 9,305 10,055 10,825 All time high: Rs Adj EPS [Rs] (09-Jan-08) NAV [Rs] Debt/Share [Rs] Key P&L Trends DPS [Rs] Valuations E 2015F EBITDA Marg. [%] PER [x] PEG [x] PBV [x] EV/Room [RsM] ROE [%] DY [%] E 2015F DER [%] Indices = 100 on 15-Apr-11 Low LUX 105.3% PER DY PBV FP 52-Wk Range Revenue [Rs bn] EPS [Rs] LUX ALEX-20 TRI 23.68x 1.18% 1.24x 2.4% High EBITDA Marg. [%] 1

2 FINANCIAL PERFORMANCE I. Revenue LUX Resorts & Hotels (LUX) operates five LUX* branded hotels in Mauritius [48% of Turnover], Maldives [32% of Turnover] and Reunion [20% of Turnover] as well as a few mid-market hotels. Although Mauritius remains the group s principal source of income and profits, Maldives is by far a more efficient source. Mauritius Following an initial 6% growth to Rs1.83bn in FY-11, local revenue has since stagnated at Rs1.82bn ±1.0%. This is in-line with arrivals trends: tourist arrivals grew 7% from FY10 to FY11, and thereafter stagnated at 966k ±0.4%. Although occupancy rates fell from 74% in FY11 & FY12 to 68% in FY13, LUX managed to grow 1 RevPOR in MUR to Rs9,400 (+7%) and EUR to 232 (+8%) since FY11; however rates in EUR varied mildly between 231 and 232 over the last two financial years. On a 9Mth basis, FY-14 revenue has improved to Rs1.59bn (+11%) or 38.6M (+6%). In spite of positive signs from LUX, the macro-level decline in Receipts per Visitor and increasing competition among hotels compels us to maintain a conservative stance. This is why we believe LUX will grow local FY14 revenue by 10% in-line with 9Mth results, then expect a 6% dip in FY15 due to LUX* Belle Mare s closure for refurbishment 2. grown by 15% in both MUR and USD terms to Rs1.07bn and $35.1M, boosted by both, growth in rooms rates and occupancy. In spite of the atoll s marred history of political Coups and flip-flops on Spa and alcohol policies, its potential disappearance, and virgin ocean wilderness, maintains its unique appeal. In addition, the tiny island state has been proactive and astute at seeking new markets during of the crisis. It has now overtaken taken Mauritius in terms of arrivals. LUX* Maldives has operated at occupancy levels below the national average, which the group has surpassed to reach 80%. Increased average room rate would be the next step, which is why we believe LUX should be able to grow its business at an annualised rate of 10% to Rs1.45bn by FY15. Reunion Île de la Réunion, being a department of France, is experiencing tepid growth rates in a market presumably highly axed towards the French. The island s tourism industry albeit mostly domestic has thus suffered. Consequently, revenue has stagnated at Rs770M ±0.8% since FY11; which the group achieved by growing RevPOR at an annualised rate of 3.5% to offset lower occupancies. On a 9Mth basis, FY-14 revenue has improved to Rs615M (+3%) but decreased to 14.9M (-1%) in EUR terms. Given the slow growth rates of the French economy, we expect income from Reunion to slide by 1% in FY14 and then by a sharper 18% in FY15 assuming LUX sells Le Recif during the course of FY15. Fig 1. LUX s sales revenue split by destination Maldives LUX* Maldives has only been fully consolidated in LUX s financials starting FY12. Revenue grew by 9% boosted principally by improved occupancy rates at the hotel, given that RevPOR stood slightly lower at $773 (-2%). On a 9Mth basis, FY-14 revenue has 1 at an annualised rate 2 Financed from the sale of LUX* Belle Mare villas under the IHS scheme II. Risk Assessment The Mauritian tourism industry is experiencing a difficult spell for a plethora of reasons which we delved into in our industry deep dive: poor connectivity, large supply of hotel rooms, decrease in core markets, and principally the absence of a coherent forward industry strategy. Subsequently a poor home performance remains LUX s greatest short term risk. However, we are not overly worried about the group s Mauritian business given the turnaround under the leadership of Mr Paul Jones who was appointed as CEO in Oct- 10. Under a dynamic new leadership, the LUX* brand was created offering innovative features, and has strived to differentiate itself from peers. LUX has also invested heavily in upping its service level through continuous training programmes its employees undergo. Based on its track record since FY10, we believe LUX will continue to manage RevPAR in spite of the sub-optimal industry conditions. Overseas, Reunion represents the greatest threat to LUX. Based on the state of the French economy, business is likely to worsen before getting any better. This segment has been a drain on profits in the past and after a profitable spell, became loss-making once again in Q1-14. With respect to the Maldives, the socio-political 2

3 unrest and changing tax regimes are a greater concern than rising ocean levels. The former could cause major disruptions in arrivals which would affect revenue, while the latter would directly impact profits. At the moment, LUX s management contracts offer an upside potential, and thus not a material risk factor. helped reverse trends. Thus is why we expect PAT to almost double in FY14, then improve by a further 16% in FY15 driven by growth in Maldives and declines in interest charges. III. Forward Strategy LUX s forward strategy involves the premiumising of its current brand. In essence, the group operates at the entry level of among 5-Star hotels, and is aiming to improve its offering to climb higher by a notch. The group intends to achieve this by completing the renovation of LUX* Belle Mare 3 which would become its new Flagship hotel; as well as improving customer service through ongoing staff training. The second step in its strategy involves managing a variety of resorts and hotels globally under its coherent LUX* brand. LUX is thus poised to manage a series of boutique hotels in the backdrop of mountains, rivers and lakes along the ancient tea horse road in southern China, as well as LUX* Al Zorah in Ajman, United Arab Emirates (UAE). Amid this asset light strategy, and steady repayment of its debt, LUX has chosen to start paying dividends to shareholders. Fig 3. LUX s recurrent PAT evolution & key ratios against the industry CORPORATE STRUCTURE I. Overview (LUX) began operations in 1987 as Naïade Resorts Ltd (NRL) with 3-Star Le Tropical. During the troubled first few post-crisis years, the latter was sold to Attitude Resorts, and a new management, led by Mr Paul Jones, was set up. NRL was re-baptised as LUX under which a brand creation process began. LUX hotel offerings, colour schemes, innovative features, and its beverages (Coffee, Tea, & Wines) have been harmonised across its hotels. LUX owns and operates five 5-Star LUX*hotels in Mauritius (3), Maldives (1), and Reunion island (1); as well as a three non-lux* 3 to 4-Star hotels in Mauritius and Reunion island. Fig 2. LUX s operating profits split by destination III. Earnings Although LUX has managed to grow revenue since FY10, the group s profits remain well under the Rs550M peak achieved in FY07. In FY07, the group s EBITDA margins peaked at 35% then rapidly cascaded to 11% by FY10, but have since partially recovered to the low 20s. A change in management ensued, Rs1bn was raised from the market through a rights-cum-convertible bond issue. The latter brought in funds required to repay bank debt therein easing pressure from banks. Further, LUX increased its shareholding in Maldives which coupled with the re-branding has Fig 4. Geographical distribution of LUX resorts & hotels 3 We believe an ageing LUX* Grand Gaube is also in need of refurbishment 3

4 II. Business Model Fig 6. LUX s shareholding structure Fig 5. LUX s resort and hotel segments LUX s philosophy is to manage/run hotels instead of simultaneously owning and running hotels; which has been the traditional business model. Having established a coherent product offering, LUX is internationalising its business. As part of this process, LUX intends to operate in three segments: Beach, City and Nature. In coming years, will manage LUX* Al Zorah {beach} in Ajman, UAE; and LUX* Tea Horse Road {nature}, a series of boutique hotels along the ancient tea horse road in southern China. LUX is involved during the conception phase of a new hotel as a consultant prior to taking over the management of the day-today operations. Under its forward mode, LUX will generate income from consultancy fees, brand licensing as well as management fees based on turnover and profits. MARKET PERFORMANCE I. Share price The Travel & Leisure (T&L) industry outperformed the market in The sector rocketed by 57% - LUX claimed the SEM top spot with a massive 143% surge - thus making it 2013 s best performing sector. Improved tourist arrivals figures turned investor sentiment around, thus propelling hotel counters up from multi-year lows. On a Year-on-Year (YoY) basis, LUX (+108%) beat the SEMTRI (+10.6%) and the ALEX-20 (+10.8%); as well as peers SUN (+43.6%) and NMHL (+20.4%). On a Year-to-Date (YTD) basis, the picture is slightly different: the sector has underperformed the broader market. Profit taking in the wake of 2013 s strong rally was inevitable. Also investor sentiment cooled after Q1-14 arrivals growth figures turned out to be below expectations. However, LUX has been among the very few listed hotels to have steadily grown local revenue per room. The stock has thus continued to outperform both the market and peers with its 9.4% increase. By contrast, the SEMTRI lost 0.02%, the ALEX-20 edged up by 1.2%, and peers SUN (-2.6%) and NMHL (-4.9%) are trading in negative territory. II. Shareholding LUX s primary shareholder remains GML Investissement Ltée; however, a significant change in shareholding occurred this financial year, when The Mauritius Commercial Bank Ltd (MCB) acquired Cie d Investissement Immobilier de Flacq Ltée s 6.6% stake in the company. A slight shareholder dilution is expected on Dec 31 st 2014, at which time bondholders could exercise their option to convert their debentures into LUX shares. Fig 7. LUX s stock price performance against peers and benchmark 4

5 Tick-size change A change in the minimum step-size for price changes was precipitated by SBM s out-of-the-ordinary share split in Feb-12. The smaller 10-cent movement on LUX has given investors greater wiggle room. Prior to the split, 95% of the time LUX would close within 5-ticks of its previous price. Since, 31% of the time, LUX closes either above or below its previous close price by more than five ticks. Fig 9. Share of foreign activity within T&L sector The direction of foreign flows into T&L has been dictated by both Mauritian fundamentals and global direction of flows in-and-out of asset and sub-asset classes. LUX has recorded net divestment in recent years due to loss of investor confidence; however the stock did register positive inflows in 2013 amid a stellar market performance. Fig 10. Net portfolio investment on liquid hotels Fig 8. Probability distribution function of day-to-day changes (measured in tick-sizes instead of Rs or %). Data: 304 sessions prior to and post split. I. Foreign Participation The Travel & Leisure (T&L) sector has seen its market share of foreign investor trades half from 21% in 2010 to 10% in This relegation to 3 rd spot is not reflective of a lack of interest for the sector, but because of the listing of foreign owned companies investing in REITs and/or Real-Estate. Overseas funds investing in African & Frontier markets have continued to seek Financial stocks (blue chip banks) followed by T&L counters. In a sector dominated by NMHL, LUX lost foreign investor confidence during troubled times, and has seen its market share fall from 9% to 4%. In recent years, foreign participation on hotel stocks other than NMHL has been on the decline. This trend has been in-line with the sector s sub-par profitability and extreme gearing levels. However, following the change in management and LUX subsequent turnaround, participation levels could increase in years to come. Fig 11. Extent of foreign participation on liquid hotels and SEM 5

6 VALUATION & RECOMMENDATION Our fragmented tourism industry is still attuning itself to the postcrisis operating environment: core markets in decline, poor connectivity and a stable currency. Revenue per Visitor has fallen to its lowest in years, and burgeoning Chinese market has made its way into the Top 5. Hoteliers that have been slow at embracing this change will continue to struggle. Further, the increasing presence of global brands in Mauritius will make a complicated operating environment even harder for local hotels. American household names such as Hilton, Four Seasons, St Regis, and Outrigger have opened shop; in addition to the above Asian behemoths The Oberoi, Angsana and Centara are also present. The Shangri-La is also expected to take over SUN s Touessrok in the near future. In our opinion, swift adaptation to change and product differentiation/mauritianisation will be key in driving survival in an increasingly competitive industry. turning things around, we upgrade LUX s rating from Reduce to Accumulate. LUX s forward growth will stem from its overseas properties which coupled with an asset light strategy will generate additional income without capital expenditure. This bodes well for the group s Debt:Equity Ratio which it is paying down at the rate of ~Rs500M per year after peaking at Rs5.7bn in FY-11. Under the leadership of Mr Jones, LUX s local operations have turned around. They have been the only group to have consistently improved margins in recent quarters as well as grow revenue per room. LUX believes in the Chinese market which it has embraced, innovated its product, and achieved double digit growth in RevPAR thus far in FY-14. Although the local conditions remain tepid, LUX is poised to fare better than peers in relative terms given its evolving model and dynamic management. The thorn in LUX portfolio is its hotel in Reunion which it is in the process of selling. Assuming LUX continues to show strong progress in the Maldives and a steady decline in interest charges, we forecast LUX s FY14 PER to stand at 26.0x then 22.4x in FY15. While these PER figures are well below the Industry PER of 89.3x, it does stand above the ALEX-20 PER (16.3x) and Total Market PER (14.5x). LUX s FY-13 Price:Earnings Growth (PEG) Ratio stood at 1, and is poised to drop well below 1x in both FY-14 and FY15. Although we would have preferred dividends be used to refurbish LUX* Grand Gaube, DY is estimated to reached 1.2% in FY15. Assuming LUX pays down borrowings at Rs500M per and benefits from the conversion into equity of its bonds, its FY15 DER falls from its current 139% to 91% in FY-15, i.e. with a Debt per Share of Rs34. Based on the above, the group s willingness to accommodate burgeoning markets, and the fact that LUX s current management has a track record of 6

7 Appendix A I. Calculations Methods Bottom-line profit figures, e.g. Profits after Tax, Attributable Earnings, and EPS among, have all been adjusted for non-recurrent exceptional items. All per Share metrics or calculations requiring the No. of Shares have been computed using a single constant. AXYS has used the total number of issued shares by the company excluding treasury shares as given by its latest annual report. II. Price to Earnings Growth (PEG) Ratio PEG Ratio 0 PEG < 1 Under-valued PEG = 1 PEG > 1 III. Turnover per Room III. Revenue per Occupied Room IV. Enterprise Value per Room Fair-Valued Over-valued ( ) References Bank of Mauritius, Monthly Statistical Bulletin, Jul 2007 Apr LUX Resorts & Hotels Ltd, Annual Report, LUX Resorts & Hotels Ltd, Interim Results, Q1-07 Q3-14. Disclaimer AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment 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. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission. Authors Bhavik Desai Head of Research Melvyn Chung Kai To Trader Vikash Tulsidas Manager 7