Fixed Income Analysis /

Grupo Posadas: High-quality company struggling with industry headwinds; Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    16 January 2020
    Published byTellimer Research

    Grupo Posadas (POSADA) is one of Mexico’s leading hospitality chains. It owns, manages and franchises hotels and vacation properties across the country, catering to a very diverse range of tourists through its well-established portfolio of brands.

    The company recorded revenues of cUS$433.14mn in the 12 months (LTM) to end-Q3 19, and reported EBITDA of cUS$83.75mn. In 2018, revenues were cUS$407.77mn and EBITDA cUS$125.40mn.

    At end-Q3 19, Grupo Posadas had total debt of cUS$389.42mn, mostly comprising its outstanding US$392.605mn (of an originally issued amount of US$400mn) 7.875% senior unsecured bonds due 2022 (B2/B/B). The bonds trade at cUS$92.277 (ALLQ) to yield c11.57% (g-spread 998bps; z-spread 993bps).

    Although this yield might seem attractive to some investors given the company’s quality, tourism in Mexico has been struck by a number of headwinds in recent times: 1) the security situation; 2) gasoline shortages, affecting tourism and business travel; 3) the algae problems in the Caribbean, which have hit occupancy rates in places like Cancun; and 4) the stagnant economy, which has undermined travel in general. These factors have been reflected in the company’s declining EBITDA, occupancy rates and cash. In addition, the government has cut its spending on tourism promotion.

    The security situation and economic stagnation remain sources of concern, but the other headwinds should dissipate in 2020. Moreover, sales of vacation properties have been growing, and the company’s expansion plan is impressive. There were seven new openings in the first nine months of 2019 (1,921 rooms) and, as of end-Q3, 14 were planned for Q4 19. Grupo Posadas expected to conclude 2019 with 190 properties, up from 175 at end-18, and to open another 32 hotels over the next three years. This expansion program should enable Grupo Posadas to maintain a stable stream of revenues through the tourism slump.

    We believe there is a real possibility that tourism will continue to perform below its potential in Mexico in the short and medium terms, as some of the headwinds will probably persist, and we could see EBITDA and liquidity deteriorating slightly in Q4 19 (even if there is a slight sequential improvement, there could be a substantial drop from Q4 18). However, we expect a gradual but steady recovery to start in Q1 20, expectations of which could be confirmed when the company reports its guidance for 2020 during the Q4 19 results conference call on 27 February.

    Because 1) we might see additional downside in the price of the bonds (albeit not substantial, in our view) and 2) we await the materialisation of this recovery, we begin coverage of POSADA with a Hold recommendation.