VALAMAR RIVIERA d.d. 2019

FIMA analysis and valuations

A brief overview of the report of analysis and valuations for Valamar Riviera d.d. Pore? in numbers, letters and pictures. // Kratki prikaz izvje??a s analizama i procjenama za poduze?e Valamar Riviera d.d. Pore? u brojkama, slovima i slikama.

BUY recommendation confirmed

We are updating our Valamar Riviera d.d. (Valamar) model post 1Q19 earnings with a BUY rating and a price target to HRK 47 vs. HRK 48 in the previous report. The stock offers 18% upside potential from the current price level. The shares of RIVP also enjoys a dividend yield of 2.5%. Our price target decrease is mainly driven by higher CAPEX. On the positive side we expect RIVP to demonstrate strong and steady revenue growth along with healthy operating margin on the backdrop of well executed investment plan and continued aggressive portfolio expansion strategy.

Valamar Rivera continues its successful run in the backdrop of sustainable growth and development led by the principles of corporate social responsibility. It is reflected in: (i) aggressive portfolio investments, (ii) acquisitions and partnerships (the process of acquiring the company Hoteli Makarska in Croatia and the first Valamar hotel in Austria was successfully finalized in 2018) and (iii) the development of employees and destinations. Valamar invested circa HRK 1,58bn in 2017 and 2018 and benefited with a double-digit EBITDA growth rate (+15%) in 2018. Encouraged by the development, RIVP planned investments of HRK 793mn in 2019, all of which has already been invested in this summer season. The prudent move should help the company generating positive revenues and profitability in 2020 and 2021. Inspired by the positive results of the acquisition of Hotel Obertauern in Austria, RIVP is targeting suitable ski-resorts of Austria, Italy and Slovenia. We believe, this kind of geographic expansion and diversification strategy will allow the company to use synergies from the existing business and to level its summer seasonality. RIVP’s plan to increase competitiveness and improve the quality of its tourist properties and services should bode well for its topline growth.

Valuation and risks

Given the relative visibility of cash flow and decent clarity on operating margins we continue to value Valamar using DCF methodology and reduce our target price to HRK 47, owing to the shift of the explicit forecast period by two years and lower WACC, caused by the lower risk-free rate. The decrease in Croatian sovereign bonds yields consequently lowered our Risk free in the explicit forecast period from 2,8% to 1.7% and in perpetuity from 4.25% to 4%.

Key risks remain: slowing down of the popularity growth Croatia has been enjoying as a tourist destination, macro-economic weakness in the main markets (Western Europe), lower-than-expected synergies from the recent acquisitions and lower RevPAR growth. 

Revenue analysis

As already outlined, both our updated and the old model reside on a key assumption that Croatia will become a top European holiday destination and that Valamar, as the largest hospitality company in Croatia, will be a key component of that. Total revenues in Q1 FY19 amounted to HRK 53 million, representing a 20% y-o-y decline. Of the total revenues, HRK 46 million refer to the sales revenues representing 87% (59% in FY18). The remaining part primarily refers to financial income which recorded sharp decrease of HRK 22 million (from HRK 24 million to HRK 2 million) mainly due to the absence of unrealized positive exchange rate differences regarding long-term loans. Sales revenue grew 19% y-o-y to HRK 46 million mainly due to this year’s consolidation of Obertauern destination. We expect the revenue to grow annually by large single digit in the near to mid-term on account of geographical expansion and aggressive portfolio investment.

The Risk of being wrong

The key risk to our valuation comes from the fact that we might be wrong about the future of Croatian tourism. We believe that Croatia is in the early stage of a process we would call a re-invention of Croatian tourism.

Numerous factors such as: 1) VAT and the rate of total contributions to salaries (both among the highest in the Mediterranean), 2) the still unresolved issue of tourism land, 3) skilled labor shortages, 4) the likely introduction of property tax and tourist tax increase could reduce the competitiveness of Croatian tourism and hinder further investment potential .

DISCLAIMER

FIMA analysis and valuations is a publication issued by FIMA Securities Ltd. It is provided for general informational purposes only and should not be relied on for any other purpose. It is not, and it is not intended to be, research, a recommendation or investment advice. This publication uses publicly available records published by the selected relevant sources and public information services (Zagreb Stock Exchange, Bloomberg, Reuters, publicly available financial reports of the Issuer, publicly available opinions of representatives of the Issuers etc.).

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