Executive Summary Overview (SUN) operates resorts which it either owns or leases in Mauritius (5), each within a subsegment between 4 to 5 stars in Mauritius, as well as a luxury 5-Star resort in the Maldives. The group appointed a new CEO, Mr Philippe Cassis, in Jan-14 with a new vision for the future. Going forward, its business model will evolve into two distinct clusters: operational management which will include the traditional and grow under an asset light model, and asset management which involves the outsourcing of management of select properties. Performance: Review & Prospects SUN s performance since the crisis detoriated as a consequence of the opening of Long Beach and Ambre which have yet to produce net profits, while west coast properties have fared well. Although FY13 Revenue at Rs4.1bn stands at its highest since the split with Kerzner International, losses in Mauritius exceeded Rs110M. In Maldives turnover has plateaued at Rs630M ±1% and PAT at Rs67M ±2% due to the dependence on European clientele which has declined. Only recently has the group started to focus on the Asian market. We believe SUN s turnaround is at least two years away but is increasingly likely under its new management. In order to achieve the re-engineering, SUN will raise Rs1.2bn in equity which would be used to pay down debt, re-structure the business, and renovate hotels. Further, SUN's sale of a 26% stake in Touessrok to Shangri-La shows the group s renewed belief and commitment to the Asian market. Proceeds would be used to refurnish Kanuhura, and Shangri-La expected to pitch-in for Touessrok s refurbishment. Based on a combination of multiple factors which: include a renewed focus on the Chinese market, TUI s guaranteed room block at Ambre, renovations of west coast properties; we believe SUN will fare slightly better this year, worse next year due to uplifiting works at Touessrok and Kanuhura then renew with appreciable profits the year after. Valuation: Upgraded to Hold Given the rollercoaster years ahead for SUN amid a business re-organisation and several renovations, we Rs 27.8 VWAP Rs 47.2 forecast SUN s CY14 PER to stand at a high 67.4x then deteriorate to 594x in a break-even FY15. Although its PER+1 stands below the industry s 89.3x, PER+2 is well above. By contrast, ALEX-20 PERstands at 16.3x CDS Code: SUN.N0000 and Total Market PER at 14.5x. This also results in a negative Price:Earnings Growth (PEG) Ratio until after FY15. Assuming SUN pays down Rs600M in debt from its rights issue proceeds, its Debt:Equity Ratio (DER) ISIN Code: MU0016N00009 falls to 89% in FY14; and Debt per Share from Rs61 to Rs52 by FY15. Based on the above, the group s new strategy under a new CEO, and aware of the fact that a turnaround is at least two years away, we upgrade Bloomberg Code: Reuters Code: SUN MP SUNR.MZ SUN s rating from Reduce to Hold. Opportunities Threats Trading data 30-May-14 Outsource Luxury 5-Star hotel mgmt Prolongued difficulties in Mauritius No of Shares: 93.8M Improved occ. rate from TUI deal Sub-optimal perf. of new hotels Market capitalisation: Rs 3.8bn Turnaround in Maldives Hiccup in Shangri-La or Four Seasons deal Weight on SEM: Weight in ALEX-20: 1.4% 2.1% Highlights 2010 2011 2012 2013 2014E 2015F Weight in ALCAPEX-12: Revenue [RsM] 3,195 3,723 3,650 4,080 4,233 3,770 Med. daily value traded: Rs 0.13M EBITDA [RsM] 764 829 645 304 708 631 Med. daily volume traded 3,800 PAT [RsM] 230 231 16-32 57 6 YoY Total Return: 43.6% R/Occ. Room [Rs] 13,425 11,600 10,050 N/A 11,170 9,785 All time high: Rs 119.75 Adj EPS [Rs] 2.33 1.39-0.05-0.39 0.60 0.07 (09-Jan-08) NAV [Rs] 47.99 49.39 58.32 57.33 61.00 64.11 Debt/Share [Rs] 47.28 52.82 62.29 60.64 54.25 51.58 Key P&L Trends DPS [Rs] 1.15 1.15 0.00 0.00 0.00 1.00 5 Valuations 2010 2011 2012 2013 2014E EBITDA Marg. [%] 23.9 22.3 17.7 7.4 16.7 PER [x] 24.0 34.3 67.4 PEG [x] 16.3 0.6 PBV [x] 1.17 0.96 0.47 0.69 0.66 EV/Room [RsM] 12.36 9.09 6.47 7.06 6.61 ROE [%] 4.9 2.8-0.1-0.7 1.0 DY [%] 2.1 2.4 0.0 0.0 0.0 DER [%] 98.5 106.9 106.8 105.8 88.9 2015F 16.7 594.4 0.63 6.32 0.1 2.5 80.5 4 3 2 2 1 0-1 Indices = 100 on 15-Apr-11 Low Rating SUN 43.6% 120 100 3.72 3.65 22 80 60 40 1.39 40.50 12.30 HOLD PER DY PBV FP 52-Wk Range 18 4.08-0.05-0.39 4.23 0.00% 0.7x 6.3% High 3.77 0.60 0.07 2011 2012 2013 2014E 2015F Revenue [Rs bn] EPS [Rs] SUN ALEX-20 TRI 7 17 17 EBITDA Marg. [%] 1
FINANCIAL PERFORMANCE I. Revenue Overview & Business Evolution SUN Resorts Ltd s (SUN) principal source of revenue are hotel operations in Mauritius [70% of turnover] and Maldives [15% of turnover], as well as income derived from other 1 sources [15% of turnover]. Under its new CEO, Mr Philippe Cassis, SUN is transforming its business model. As part of the change, SUN will own/lease and operate hotels in 4-Star and entry-level 5-Star segment, own and outsource management of its Luxury 5-Star hotels, and finally take-up management contracts should the opportunity arise. With respect to outsourcing, SUN is in the process of finalising an agreement with Shangri-La which would take up a 26% equity participation at Touessrok which it would then operate, and is also negotiating the acquisition of ALTEO s 50% stake in Four Seasons at Anahita. SUN s deal with Shangri-La demonstrates the group s commitment and increased focus on capturing the Chinese market. These should partially offset the impacts of renovations on the group s west coast properties in 2014. FY15 revenue is then poised to fall to Rs2.6bn (-12%) in anticipation of Touessrok s closure for substantial renovation works prior to re-opening as the Shangri-La. In order to achieve its medium term goals, a highly geared 2 SUN will raise Rs1.2bn through a rights issue, of which Rs600M will be used to pay down bank borrowings, while the remaining half would be used for refurbishments of its existing hotels, as well as investment in technology to achieve the restructure. Mauritius SUN s revenue has grown at an annualised rate of 9% between FY10 and FY13 boosted mainly by the opening of Long Beach (LB) in FY12 followed by Ambre in FY13. Revenue per Room however has declined in both MUR and EUR terms by 10% 3 over the same period. Although tourist arrivals has grown at 2% 4, the lengthier time LB and Ambre are requiring to reach optimal operating levels have pulled SUN s average room rates down and brought occupancy rate below the national average. In Q1-14, tourist arrivals shank by 0.8% and SUN continued to fare worse: average occupancy rates fell further and do did its room rates. Subsequently Revenue fell to Rs721M (-8%), and Revenue per Room to 154 (-10%). In spite of its recent downwards trajectory, we believe SUN s revenue should improve by 5% to Rs3bn buoyed by Ambre s participation in the TUI deal 5. TUI has a room block at Ambre and will guarantee a threshold occupancy in its allocation. Further, 1 We have excluded both income and profits SUN derived from the sale of 90 rooms at Long Beach as these are non-recurrent in nature under the IHS from our discussions in this document 2 Debt:Equity Ratio > 100% 3 at an annualised rate 4 at an annualised rate 5 Thomson Airways has commenced flights to Mauritius in May Fig 1. SUN s sales revenue split by country & segment Maldives The tiny atoll has been proactive and astute at seeking new markets during the crisis and has overtaken Mauritius in terms of arrivals. In spite of which SUN has struggled in an atoll where its Mauritian peers have fared well. Revenue has fallen from $22M in FY11 to $20M in FY13. Q1-14 financials have been no better with turnover slipping from $8M to $6.8M (-15%) QoQ. Management have said a campaign aimed towards emerging markets resulted in lower average rates. SUN s inability to maintain rates on emerging markets 6 is a source of concern and leads to believe Kanuhura will stagnate this year, then experience a fall in turnover in FY15 to Rs0.5bn in anticipation of major refurbishment at the resort next year. That said, given the new management s willingness to cater for the Asian market, Kanuhura is expected to start faring better after renovations. 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 SUN s greatest short term risk. SUN s falling occupancy and room 6 Core European markets have also declined in the Maldives 2
rates are a major concern. On the plus side, we believe its participation with TUI will raise occupancy rates in H2-14, however, the group will be unable to raise rates until after it completes the renovation of its ageing local properties. This is why we believe SUN s situation will worsen prior to improving as from FY16. Like LUX, perhaps the arrival of a new CEO will help re-dynamise the group which is expected to return to a growth path. With respect to the Maldives, the socio-political 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. Our main concern for SUN however lies with the group s inability to capitalise on the Chinese market at an adequate price level, which we believe could improve under new leadership. III. Earnings Fig 3. SUN s recurrent PAT evolution (excludes IHS) & key ratios against the industry CORPORATE STRUCTURE I. Overview (SUN) commenced operations in 1975 in partnership with Kerzner International (KZL). SUN split with KZL in 2007 and has operated independently since. Under previous management, the group compensated for the loss of St Géran by replacing 3-Star Coco Beach with 5-Star Long Beach which opened in 2011. In Q4-11, SUN made up for the loss of an entry-level midmarket hotel by securing a lease on Ambre from the troubled Apavou group. SUN operates one hotel in each sub-segment between 4 to 5 stars in Mauritius, as well as a luxury 5-Star resort in the Maldives. Fig 2. SUN s net profits split by segment excluding IHS Although SUN has grown revenue since 2011 owing to the opening of two new hotels, the group s profits have evaporated both in Mauritius and Maldives. The group has reported losses due to suboptimal performance of its east coast properties and to some extent Kanuhura. EBITDA margins peaked at 35% in FY07 and have since steadily cascaded down to 7% in 2013. We believe overall earnings will improve in 2014 on the back of lower losses in Mauritius 7 and continued stagnation in Maldives. In FY15, the year in which its two luxury 5-Star properties will be renovated, SUN is expected to break even. 7 Boosted by deal with TUI Fig 5. SUN s business model transformation II. Business Model SUN appointed a new CEO, Mr Philippe Cassis, in Jan-14 following the retirement of Mr Piccirillo. This change in management has resulted in a shift in business model. SUN will shift from its current 3
own/lease-cum-operate hotels to a two cluster model. The new model involves the traditional 8 hotel operations, but grow this cluster forward under an asset light model 9, and finally in an unorthodox move SUN would outsource the management of a select few properties to 3 rd parties. Going forward with this mixed model, SUN would generate income from hotels operations, rental as well as management fees. Fig 6. SUN change in shareholding which triggered the Take Over rules Fig 4. Geographical distribution of SUN hotels II. Shareholding SUN s main shareholder is CIEL Ltd (CIEL) which is the surviving entity from the merger of CIEL Investment and Deep River Investments. At the end of Q1-14, CIEL acquired GML Investissement s 10% stake in the company, thus taking its shareholding to 39.3%. Having crossed the 30%-mark, CIEL has made an offer to minority shareholders as required by the Securities (Take Over) Rules 2010. CIEL is thus likely to further consolidate its stake in SUN. Conversely, the current 54% free-float level is likely to decrease. 8 i.e. own/lease-cum-operate 9 i.e. taking over the management (day-to-day operations) of un-owned properties MARKET PERFORMANCE I. Share price The Travel & Leisure (T&L) industry outperformed the market in 2013. The sector rocketed by 57% thus making it 2013 s best performing sector. Improved tourist arrivals figures turned investor sentiment around, thus propelling hotel counters up from multiyear lows. On a Year-on-Year (YoY) basis, SUN (+43.6%) beat the SEMTRI (+10.6%), the ALEX-20 (+10.8%) and NMHL (+20.4%); but scurried less than LUX (+108%). 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, and investor sentiment cooled after Q1-14 arrivals growth figures turned out to be below expectations. SUN gave up 2.6% performing better than NMHL (-4.9%) but worse than LUX (+9.4%), the ALEX-20 (+1.2%) and the SEMTRI (-0.02%). Fig 7. SUN s stock price performance against peers and benchmark 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 5-cent movement on SUN has given investors greater wiggle room. Prior to the split, 93% of the time SUN would close within 5-ticks of its previous price. Since, 34% of the time, SUN closes either above or below its previous close price by more than five ticks. In addition to which, SUN s non-traded days have decreased by 12.5%. 4
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. SUN has recorded net divestment in recent years due to loss of investor confidence in the wake of its decreasing PAT. 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. II. 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 2013. 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, SUN has seen its share of trades increase from low single-digits to low double-digits amid foreign divestments. 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 at SUN and potential for business turnaround, participation levels may increase 10 in years to come. Fig 11. Extent of foreign participation on liquid hotels and SEM Fig 9. Share of foreign activity within T&L sector 10 Above average participation in 2012 and 2013 was the result of FI divestments. 5
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. SUN s forward growth is more than two years away, i.e. after the renovations which would allow the group to increase rates of Pirogue, Sugar Beach, Touessrok and Kanuhura are completed. The group s decision to outsource management of its upper echelon hotels bodes well for the group. The move also suggests this segment is becoming increasingly difficult to operate in without the backing of a major brand s global network. The arrival of Shangri-La as a partner also indicates that SUN is now fully embracing the emerging Asian markets on which it can capitalise forward. In the short term, the group will continue to struggle with balancing occupancy and room rates, nevertheless the TUI agreement should help EBITDA margins. While its prospects are murky, we appreciate the fact that change is happening under new management. Perhaps SUN can become the next LUX, i.e. experience a return to a sustainable growth path. Given the rollercoaster years ahead for SUN amid a business reorganisation and several renovations, we forecast SUN s CY14 PER to stand at a high 67.4x then deteriorate to 594x in a break-even FY15. Although its PER+1 stands below the industry s 89.3x, PER+2 is well above. By contrast, ALEX-20 PER stands at 16.3x and Total Market PER at 14.5x. This also results in a negative Price:Earnings Growth (PEG) Ratio until after FY15. Assuming SUN pays down Rs600M in debt from its rights issue proceeds, its Debt:Equity Ratio (DER) falls to 89% in FY14; and Debt per Share from Rs61 to Rs52 by FY15. Based on the above, the group s new strategy under a new CEO, and aware of the fact that a turnaround is at least two years away, we upgrade SUN s rating from Reduce to Hold. 6
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 References Bank of Mauritius, Monthly Statistical Bulletin, Jul 2007 Apr 2014. SUN Resorts Ltd, Annual Report, 2007 2012. SUN Resorts Ltd, Interim Results, Q1-07 Q1-14. SUN Resorts Ltd, A Reply Document, May 2014 Ernst & Young, Valuation of SUN Resorts Ltd at 31 Dec 2013 in connection with Mandatory Offer, May 2014. 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 ( ) 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