Equity Analysis /
Croatia

Arena Hospitality Group: Ramping up Istria’s hidden gem

    Tea Pevec
    Tea Pevec

    Head of Research

    Follow
    InterCapital
    19 February 2020
    Published byInterCapital

    Our latest update of the model for the Arena Hospitality Group values the company at HRK438 per share, making it a Buy recommendation. Our target price represents a forward 11.3x EV/EBITDA and 19.3x P/E (2020e results). The implied valuation prices the company above the forward EV/EBITDA multiple of their peers which we attribute to stronger growth prospects due to refurbishment potential of existing assets, strong balance sheet (net debt/EBITDA of 1.9x) and internationalised revenue structure in comparison to domestic (Croatian) peers. 

    Arena Hospitality Group is stepping up the pace of investments as it announced in October that it will soon start renovating its prime-location hotel that has not been refurbished – Hotel Brioni. It will also further its investment in Kažela Camp where all old mobile houses will be exchanged with new ones, and the resort will be renamed Kažela Grand Camp after. 

    We envisage in our business model that the company will invest more than HRK1bn over the projected period. The company owns hotels and camps on prime locations in Istria – in the town of Pula and in its environs. These locations have beautiful nature and very favourable traffic location – the airport is nearby, and the expressway connects Istria with the whole of western Europe. By further investing in Croatian capacity, Arena will take advantage of natural resources it has under concession – beautiful seaside, crystal clear sea and unrivalled Mediterranean views. At the same time, it will also enjoy the favourable momentum that Croatian tourism is experiencing – upscale and premium average daily rates have seen single-digit growth and our stance is that they will continue growing in the projected period. During an SPO in 2017 the company gathered HRK788mn in gross proceeds. The reason why the company didn’t deliver an expected growth in profitability in 2018 and 2019 was the prolonged capex cycle announced during the SPO. 

    According to our estimates, it will be shifted to the following year when the company will see an increase in operating profitability. EBITDA margin is expected to grow to 29.7% in 2020 as we see positive development on the demand side for higher yielding refurbished properties. Despite recent downward pressures from increased labour costs and doubling of concession fee in 2021 (that will take place as drafted legislation comes into force), the EBITDA margin is estimated to grow gradually and reach 30.1% in 2024. 

    Acquisitions can be expected in any business segment and targeted geography – something we have been waiting to see since the SPO, but the acquisition in Belgrade is showing that the company’s acquisitive strategy has started to materialise. As we do not have a clear picture on the rate at which the company can add new units to its portfolio via acquisitions, we remain careful on the company’s ability to utilise its strong balance sheet potential in the projected period. Such a view on one hand implies stability of the company since, compared to the sector, Arena remains un-levered and more prone to potential external shocks in demand. Based on our model (excluding potential future acquisitions), the company can finance the entire capex cycle from its operating cash flow. Such a scenario leaves the company with a potential to increase its dividend payout and/or to intensify the share buyback programme. We already see the initiation of such a strategy since Arena started to pay out dividend in 2019, which has amounted to HRK5 per share (1.5% dividend yield) and has performed a share buyback of 45,169 shares. We expect the amount of dividend paid to increase gradually over the projected period and a dividend yield to amount to 2.6% at the end of 2024.