Earnings Report /Croatia
Valamar Riviera: Valamar Riviera Q2; Growth of Overnights Above Croatian Average
Same as with any other Croatian tourism company, H1 is not an indicative period for operating profitability due to the high seasonality of the hospitality sector (64% of 2018 sales was realized in Q3). Also, the company acquired Hoteli Makarska and Hotel Obertauern in 2018 due to which periods are not completely comparable. In H1 2019 the company realized solid results and sales increased 13.0% supported by the increase in ADR of 7.6%, improved sales mix towards higher margin accommodation and additional capacity stemming from acquisitions. Number of units sold in H1 has increased by 5.3% while overall number of units offered (capacity) has increased 3.4% yoy. Overnights increased by 5.3% yoy which is above Croatian average (3.02% yoy).Valamar’s operating revenue increased by 12.7% YoY in H1 2019, due to more premium and upscale capacity sold and additional capacity from acquired hotels despite negative effect of shifted Easter holidays to the Q2 and later opening of newly invested resorts Valamar Collection Marea Suites 5 * and Istra Premium Camping Resorta 5 * in early June. Overall ADR increased by 7.6% (to HRK 503) due to better capacity mix as premium capacity offered has increased by 7% yoy, and upscale capacity for 13% yoy. The strongest ADR growth in the period was in the segment of camping (+14.3% yoy) and upscale hotel accommodation (+10.3% yoy). Premium hotel units sold achieved growth of 9.6% yoy while the biggest growth was in the hotel economy segment where 10.6% more units were sold than in H1 18. Economy hotel segment was the only one who reported a decrease in ADR (-5.3% yoy), but board revenue has increased by 4.7% yoy. Overall occupancy rate in the period increased by 0.6pp to 28.0%. Operating costs recorded a higher relative growth, as a result of the increase in staff costs (something the entire industry is dealing due to the challenging situation on the hospitality labour market) and growth in material costs. Consequently, EBITDA margin decreased. The adjusted EBITDA amounted to HRK 86.5m (-17.2% yoy), giving a margin of 12.7% (vs 17.3% in H1 2018). Valamar highlighted that the recorded decrease in adjusted EBITDA of HRK 18 million is due to the change in the accounting policy of monthly provisioning of employees’ unused annual leave hours and earlier costs dynamics. By normalizing the aforementioned impact, the adjusted EBITDA recorded a growth of 7% to HRK 111.5m. Further decrease in results below EBITDA is understandable and expected considering the investment cycle and an increased level of debt (D&A and financial expenses grew). Q3 should compensate and reverse the change on the bottom line. Valamar has invested HRK 793m in the season 2019 and the plans for 2020 shows that sizeable investments will continue. The Supervisory Boards granted their general prior approval for the investments in 2020 of HRK 599m in Valamar and HRK 112m in Imperial Riviera. The final investment amount will be rendered within this year. Pical Hotel 2** in Poreč will be transformed into a luxury year-round 5-star Pinea Valamar Collection Resort with app. 500 keys that will have many facilities including congress center. The construction is staring this year and opening is planned for 2021, when it is expected to significant impact growth in sales and profitability. In July it was also published that bankruptcy procedure of Helios Faros was concluded. As a result, Valamar has acquired full membership rights as a holder of 23.61% stake in the company, while pension fund PBZ CO has acquired 70.83% shares. We expect that Valamar will start making plans for redevelopment of Hvar destination in the following period. The top line and profitability development are in line with our expectations, so we remain positive on the share. The current price level seems as a nice entry point and shows upside of around 9% to our target price of HRK 41.6 per share.