Choice Hotel International Investment Research Presentation

Transcription

1 Choice Hotel International Investment Research Presentation NYSE: CHH Month Sector: Day, Consumer 20XX Discretionary Senior Analysts: Austin Hsu & Matthew Smith Junior Analysts: Anna Watson, Camryn Difiore, Javier De Urdanibia, Sikta Samal Spring

2 Valuation Summary Recommendation Summary REIT s Choice Hotel International, Inc. CHH Current Trading Price (4/9/18) $ Recommendation HOLD Target Price $ Upside Potential 8.6% Recommendation HOLD 2

3 Agenda Industry Definition & Breakdown Company Overview Revenue Generation Model Industry & Company Trends Risk Analysis Comparable & DCF Valuation Summary/Recommendation 3

4 Industry Definition Hotels & Motels Operators provide temporary lodging in hotels, motels, and resorts. Establishments may also offer services including food and beverage, conference room, laundry, parking, etc.. The industry excludes any hotels that have casinos attached to them. Companies Within this Industry: Marriott International (NASDAQ: MAR) Market Cap: $41.6B Choice Hotels International (NYSE: CHH) Market Cap: $4.5B Hyatt Hotels Corporation (NYSE: H) Market Cap: $7.5 B Hilton Worldwide Holdings (NYSE: HLT) Market Cap: $22.3B Wynn Resorts, Limited (NASDAQ: WYNN) Market Cap: $19.9B Intercontinental Hotels Group (NYSE: IHG) Market Cap: $10.1B Sources: IBIS World, CapIQ 4

5 Industry Breakdown Hotel Industry Overview Market Share Breakdown Hotels Hotels Number of Rooms Countries Represented Brands Marriott 20% Wyndham 8, , Choice 6, , Marriott 6,200 1,200, InterContinental 5, , Other 53% Hilton 13% Hilton 5, , Best Western 3, , Choice 3.1% Wyndham 3.8% InterContinental 6.9% Source: IBIS World, The Points Guy 5

6 Company Overview Founded and based in Rockville, Maryland CEO: Patrick Pacious, CFO: Dominic Dragisich Offers value to consumers across diverse markets including economy, mid-scale and upscale segments Global holdings in over 40 countries and territories Operates on a franchise model which is less capital intensive than outright property ownership Develops cloud-based technology products to the hotel industry, including inventory management, pricing, and connectivity to third party channels and hoteliers Market Capitalization CHOICE HOTELS $4.505 Billion 2017 Revenue $1,007.4 Million Property Count (Domestic & International) 6,866 Properties (5,740 Domestic, 1,126 International) ADR $84.02 Occupancy Rate 62.2% RevPAR $52.25 Source: 10K, Choice Hotel, Reuters 6

7 Revenue Generation Model Revenue Streams Royalty Fees Initial Franchise & Relicensing Fees Fees calculated as a percentage of gross sales or number of rooms in franchised hotels depending on agreement Initial franchise relicensing fees Fees are collected during initial franchise agreement as well as relicensing fees from expired contracts Procurement Services Marketing & Reservations Others Fees from business transactions with vendors and strategic alliance partners Marketing & Reservation Fees are recollected to be reinvested for system wide support activities (Advertising, Maintenance, PMS upgrades) Fees from SkyTouch Technology Other Source: 10K, Choice Hotel 7 7

8 Industry Trends REIT s Loyalty Programs Shrinking Independent Hotels 8

9 Industry Trend #1: Loyalty Programs Ranked No.1 in USA Today s Choice Awards and No.3 in the Best Hotel Rewards Programs by U.S. News Includes more than 6,500 participating hotels throughout the United States, Europe, Mexico and the Caribbean Program is divided into four tiers: Member, Gold, Platinum and Diamond Members can earn points at Choice brand hotels that can be used towards future stays at Choice Hotels properties, select Preferred Hotels and Resorts brand properties, airline miles, cruise vacations and gift cards Cornell School of Hotel Administration Study Rewards members: $2400 annual revenue per guest Non-members: $1600 annual revenue per guest Frequency of stays booked by a guest at hotels rose on average by 49% 50% increase in revenue compared to those who did not join the program Programs Membership as Membership as of 2015 of 2014 Membership Percent Change IHG Rewards Club 92M 84M 10% Marriott Rewards + Ritz Carlton Rewards 54M 49M 10.20% Hilton HHonors 51M 44M 15.90% Wyndham Rewards 45M 32.3M 39.7% Choice Privileges 25M 21M 19% Hyatt Gold Passport 20M 18M 11% La Quinta 11M 10M 10% Hotel Loyalty Program = More recurring revenue, Increase stay frequency, Guests Spending Source: Cornell School of Hotel Administration, Deloitte, US World News, USA Today 9

10 Industry Trend #1: Loyalty Programs Hotel Group A: Hotel group with an average ADR of $73 Hotel Group B : hotel with significantly higher ADR of $261. Budget Economy à Midscale Upscale à Luxury Spending habits of eventual Stash members vs Non-members prior to the enrollment period Hotel A Hotel B Non-members Stash Members Non-members Stash Members Average Revenue Per Night $70.19 $97.65 $ $ Total Nights per year Total Stays per year Total Revenue per year $ $ $1, $1, Changes in guest spending due to enrollment in Stash Hotel Rewards program Hotel A Hotel B Numerical Change Percentage Change Numerical Change Percentage Change Average Revenue Per Night $3.62 4% $2.41 1% Total Nights Per year % % Total Stays per year % % Total Revenue per year $ % $ % Increased Revenue Per Night Increased Nights per Year Increased Stays Per Year Increased Total Revenue Source: Cornell School of Hotel Administration 10

11 Industry Trend #2: Decreasing Amount of Unbranded Hotels Due to high fixed costs of hotel industry, becoming a franchise of a larger brand often improves independent hotel financial performance Due to Online Travel Agencies (OTAs) fees: 15% for brands, 25% for independent hotels 20% of branded hotels bookings use OTAs 50% of independent hotels bookings use OTAs Branded hotels occupancy rate 66.8% while unbranded at 62.3% RevPAR $56.00 $54.00 $52.00 $50.00 $48.00 $46.00 $44.00 $42.00 CHH: Growth from Franchises ( ) y = 0.029x R² = $ Number of Domestic Franchises Shifting independent hotels to a brand s umbrella will continue to the disrupt the current system of hotel and brand effectiveness Source: 10K, Hotel Management 11

12 Company Trends REIT s Expansion of Brand Portfolio Growth of IT 12

13 Company Trend #1: Expansion of Brand Portfolio Company-Wide Overview Diversified Target Market: Economy à Upscale Owns 12 Brands, 6866 Properties, 413,015 Rooms International: Operates in over 40 Countries Recent M&A Activity Vacation Rental: Acquisition of Maxxton (2015) SaaS solution for vacation rental companies Partnered with Vacation-Rental Companies Combat Airbnb and Homeaway (Expedia) Economy Extended Stay Segment: Acquisition of WoodSpringSuites (2018) Adding 240 hotels to portfolio in 35 states Industry: Economy Extended-Stay Segment led the hospitality industry in annual RevPAR growth in 2017 WoodSpring: 25% unit growth, 21% RevPAR growth, and 48% gross room revenue growth in last 3 years Hotel Number of Properties Segment Cambria 36 Upscale Ascend 162 Upscale Comfort Inn 1,083 Upper-Mid Scale Comfort Suites 567 Upper-Mid Scale Quality Inn 1,542 Mid Scale Clarion 166 Mid Scale Sleep Inn 384 Mid Scale Mainstay Suites 60 Extended Stay WoodSpring 239 Extended Stay Suburban Extended Stay 61 Extended Stay Econo Lodge 840 Economy Rodeway Inn 600 Economy International 1,126 Combination Total 6866 Diversity in the lodging industry offers conversion opportunities during both industry contraction and growth cycles Source: 10K, Choice Hotel, Maxxton, USA Today, PhocusWire 13

14 Company Trend #1: Expansion of Brand Portfolio Advantages of a Diverse Portfolio Diversity offers conversion opportunities during both industry contraction and growth cycles Different Price points for both franchises as well as lodging customers Average Royalty Rate: CAGR 1.52% Number of Franchisee : CAGR: 1.51% Average Royalty Rate 4.65% 4.60% 4.55% 4.50% 4.45% 4.40% 4.35% 4.30% 4.25% 4.20% Effect of Number of Franchisee on Average Royalty Rate y = 9E-06x R² = Number of Domestic Franchisee What happened from ? Operating Statistics from Cambria Hotel and Suites were not included as a result of recent acquisition The increase in number of franchisee agreements has led to an increase in the average royalty rate Number of Domestic Franchisees Number of Domestic Franchisee vs Average Royalty Rate ( ) E 2019E 2020E 2021E 2022E Year 5.20% 5.00% 4.80% 4.60% 4.40% 4.20% 4.00% 3.80% Average Royalty Rate Number of Domestic Properties Royalty Rate Source: 10K, Choice Hotel 14

15 Company Trend #2: Growth of Information Technology Customer Reservation System (CRS) Optimizes rate, inventory, availability, shopping, booking, and reservations Slight variation due to Advantage redesign Property Management System (PMS) Helps franchises maximize profitability and compete more effectively The increased awareness allows Choice to decrease marketing and reservation fee and increase royalty fees. Source: 10K, Choice Hotel 15

16 Company Trend #2: Growth of Information Technology Development of SkyTouch Technology Launched in May 2013 SkyTouch is a division that develops and markets cloudbased technology to hotel industry Sells this technology to those hotels NOT under franchise agreements Designed to help achieve growth and improve operating performance/guest experience Competes with similar products through functionality, service capabilities, and geography Revenue/Expense in Thousands ($) SkyTouch Technology Since 2014 Final round of sales and marketing investments First full year of operations Year Major investments no longer needed SkyTouch Technology will be an increased and important source of income for Choice moving forward. Revenues Expenses Source: 10K, Choice Hotel 16

17 Risk Analysis Technology Risks Choice Hotels and their franchisees depend heavily on technology and a technological disruption or malfunction could hinder their business operations Reservation platform competition Cyber attacks/ threats Operating Risks Franchise Structure - Deterioration of franchisees financial condition - Failure to make proper investments - Franchise government policies Change in domestic and foreign economic conditions Change in government regulations Consumer desires and employment Competitive Risks Competitors potential to offer better price, room, and location options Competition among franchise lodging brands to attract franchisees Source: 10K, Choice Hotel 17

18 Risk Resilience Technology Maintains distinct reservation platforms with SkyTouch technology and interactive browsing Upgrades technology continuously to support increased volume and boost security Franchise Fee and cost structure eliminates many franchise associated risks Franchisors have significant operating leverage Competitors Maintains a competitive edge through expansion Offers variety from hotel rooms to vacation rentals Source: 10K, Choice Hotel 18

19 Comparable Analysis Comparable Company Analysis LTM data (4/9/2018) Company Ticker EV Market Cap Revenue EBITDA P/E EV/EBITDA EV/Revenue PEG ADR Occupancy Rate RevPAR Choice Hotel CHH 4, , , % 39.2x 16.9x 4.9x 1.0x $ % $52.25 REIT s La Quinta Inn & Suites Extended Stay America LQ 3, , % 14.7x 14.1x 4.0x 4.8x $ % $60.55 STAY 6, , , % 21.9x 10.2x 4.8x 2.0x $ % $50.05 Red Lion Hotels RLH % 408.2x 16.6x 2.1x 11.2x $ % $59.80 InterContinental Hotels Group IHG 13, , , % 19.3x 23.4x 10.6x 1.7x $ % $95.41 High 408.2x 23.4x 10.6x 11.2x $ % $95.41 Mean 116.0x 16.1x 5.4x 4.1x $ % $63.61 Median 20.6x 15.3x 4.4x 2.0x $ % $59.80 Low 14.7x 10.2x 2.1x 1.0x $ % $50.05 P/E LTM EPS $2.02 Implied Price Target $41.61 Upside (Downside) % -0.47% EV/EBITDA LTM EBITDA $ Implied Price Target $71.28 Upside (Downside) % -0.10% EV/Revenue LTM Revenue $1, Implied Price Target $70.43 Upside (Downside) % -0.11% *ADR: Average Daily Rate *RevPAR: Revenue Per Available Room = ADR x Occupancy Rate 19

20 DCF Valuation Forecasted EBIT $ $ $ $ $ Taxes $ $ $ $ $ D&A CAPEX (35.44) (22.59) (22.92) (22.98) (22.68) - Δ in NWC Unlevered FCF $ $ $ $ $ Net Present Value $ 1, Perpetuity Growth Method Growth Rate 2.50% Undiscounted TEV $5, Discounted TEV $4, DCF Value $5, Equity Value $ Share Price $82.60 Implied Exit Multiple 12.0x Exit Multiple Method EBITDA Multiple 16.90x Undiscounted TEV $8, Discounted TEV $5, DCF Value $6, Equity Value $6, Share Price $ Implied Growth Rate 4.04% Key Assumptions Cost of Debt: 3.93% Cost of Equity: 8.64% WACC: 8.05% Terminal Growth Rate: 2.20% Exit Multiple: 16.90x Assumed decrease in COGS due to Market and Reservation Improvements 20

21 Recommendation Summary Recommendation Summary Choice Hotel International, Inc. Valuation Summary CHH Current Trading Price (4/9/18) $ Recommendation HOLD Target Price $ Upside Potential 8.6% Method Price Weight Discounted Cash Flow Perpetuity Growth Method $ % Exit Multiple Method $ % Comparable Company Analysis P/E $ % EV/EBITDA $ % EV/Sales $ % Target Price $ Recommendation HOLD Desired Changes to Become a Buy SkyTouch Technology becomes significant revenue stream. RevPAR increases to industry wide averages. COGS able to significantly decrease as technology improves. 21

22 Thank You 22

23 Appendix: Income Statement Historical Forecasted Revenue , , , , , ,380.4 % growth 4.6% 13.4% 7.5% 8.9% 10.1% 7.1% 6.1% 5.1% 4.1% COGS (excl. D&A) 407.6) (412.6) (488.8) (525.7) (567.1) (576.8) (618.0) (643.3) (663.0) (676.4) % of Revenue 56.25% 54.44% 56.84% 56.86% 56.29% 52.00% 52.00% 51.00% 50.00% 49.00% Gross Profit % Margin 43.7% 45.6% 43.2% 43.1% 43.7% 48.0% 48.0% 49.0% 50.0% 51.0% SG&A (111.7) (121.4) (134.3) (142.5) (148.6) (171.30) (183.5) (194.8) (204.8) (213.2) % of Revenue 15.41% 16.02% 15.62% 15.41% 14.75% 15.44% 15.44% 15.44% 15.44% 15.44% EBITDA % Margin 28.3% 29.5% 27.5% 27.7% 29.0% 32.6% 32.6% 33.6% 34.6% 35.6% Depreciation (9.1) (9.4) (11.5) (11.7) (12.4) (14.1) (15.1) (16.0) (16.9) (17.6) Amort. of Intangibles Total D&A (9.1) (9.4) (11.5) (11.7) (12.4) (14.1) (15.1) (16.0) (16.9) (17.6) Other Operating Expenses Total Operating Expenses (120.8) (130.8) (145.8) (154.2) (161.0) (185.4) (198.7) (210.8) (221.7) (230.7) Operating Income (EBIT) % Margin 27.1% 28.3% 26.2% 26.5% 27.7% 31.3% 31.3% 32.3% 33.3% 34.3% Interest Expense (42.5) (41.5) (42.8) (44.4) (45.0) (39.6) (39.6) (39.6) (39.6) (39.6) Interest Income Net Interest Inc. (Exp) (40.0) (39.7) (41.2) (40.9) (39.1) (36.6) (36.6) (36.6) (36.6) (36.6) Other Non-Operating Income 2.4 (1.1) (1.4) 2.0 (1.3) EBT Excl. Unusual Items % Margin 21.9% 22.9% 21.2% 22.3% 23.7% 28.0% 28.2% 29.4% 30.5% 31.6% Unusual Items 1.3 (5.8) (14.8) EBT Incl. Unusual Items Income Tax Expense (45.3) (52.3) (56.0) (60.6) (109.1) (110.2) (121.9) (133.1) (143.6) Earnings from Cont. Ops Earnings from Discounted Ops Extraord Item & Acct. Change Net Income to Company Minority Int. in Earnings Net Income % Margin 15.7% 16.2% 14.9% 15.1% 11.4% 18.8% 18.9% 19.7% 20.5% 21.2% EPS $ 2.00 $ 2.16 $ 2.25 $ 2.45 $ 2.02 $ 3.66 $ 3.95 $ 4.37 $ 4.77 $

24 Appendix: Balance Sheet Historical Forecasted Cash And Equivalents , ,306.2 Accounts Receivable Other Recievables (6.9) (7.4) (7.7) (7.9) (8.1) Total Receivables Inventory Prepaid Exp Other Current Assets Total Current Assets , ,486.5 Gross Property, Plant & Equipment Accumulated Depreciation (82.4) (92.7) (113.0) (130.5) (153.4) (167.5) (182.6) (198.7) (215.6) (233.1) Net Property, Plant & Equipment Long-term Investments Goodwill Other Intangibles Deferred Tax Assets, Current & LT Deferred Charges, LT Other Long-Term Assets Total Assets , , , , ,058.1 Accounts Payable Accrued Exp Curr. Income Taxes Payable Unearned Revenue, Current Other Current Liabilities Total Current Liabilities Long Term Debt Capital Leases & Current Portion Unearned Revenue, Non-Current Def. Tax Liability, Non-Curr Other Non-Current Liabilities Total Liabilities 1, , , , , , , , , ,239.6 Common Stock Additional Paid In Capital Retained Earnings , , , ,704.3 Treasury Stock (918.0) (982.5) (1,052.9) (1,070.4) (1,064.6) (1,064.6) (1,064.6) (1,064.6) (1,064.6) (1,064.6) Comprehensive Inc. and Other (6.2) (7.0) (8.8) (8.5) (4.7) (4.7) (4.7) (4.7) (4.7) (4.7) Total Common Equity (452.8) (428.9) (396.0) (311.3) (212.1) (47.0) Minority Interest Total Equity (452.8) (428.9) (396.0) (311.3) (212.1) (47.0) Total Liabilities and Equity , , , , ,058.0 Balance Check OK OK OK OK OK OK OK OK OK OK 24

25 Appendix: Sensibility Tables DCF - Perpetuity Growth Sensitivity Terminal Growth Rate WACC $ % 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 3.5% $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ DCF - EV/EBITDA Exit Multiple Sensitivity Terminal EBITDA Multiple WACC $ % 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 18.9 x $ $ $ $ $ $ $ $ x $ $ $ $ $ $ $ $ x $ $ $ $ $ $ $ $ x $ $ $ $ $ $ $ $ x $ $ $ $ $ $ $ $ x $ $ $ $ $ $ $ $ CompCo - Price/Earnings Sensitivity Implied Share Price Price/Earnings Multiple 22.6 x $ x $ x $ x $ x $ x $ CompCo - EV/EBITDA Sensitivity Implied Share Price $71.28 $ EV/EBITDA Multiple 17.3 x $ x $ x $ x $ x $ x $ CompCo - EV/Revenue Sensitivity Implied Share Price EV/Revenue Multiple 6.4 x $ x $ x $ x $ x $ x $