Sonia Ruiz de Garibay (GVC Gaesco) | Last year, there was a marked dowturn in the stock market performance of Spanish hotel chains NH Hotel Group and Meliá Hotels International. This was mainly due to market uncertainty over their direction and management, as well as the impact of the terrorist attacks in Europe; Melia’s share price lost 9%, reflecting its recent capital hike (via a bond conversion) and the doubts generated by Brexit. All this meant that the hotel firms were trading well below the sector average (EV/EBITDA c. 12x) and their historic average, at a time when their fundamentals could not be better.
Since 2013, the hotel chains’ strategies have been aimed at boosting their revenues and EBITDA, as well as cutting debt. To do this they have repositioned assets (which in NH’s case has been for over 200 million euros) and thus increase the weighting of those rooms in high segments (which are able to generate more revenues via higher room prices). In addition, they have restructured some cost elements by boosting the sub-contraction of staff, direct distribution channels and the novation of rental contracts to obtain more flexible and advantageous formulas.
They have also implemented strict debt control policies which have enabled their financial leverage to fall below 3x EBITDA (in Meliá’s case), and allowed them to have access to financing in the corporate market, which up to then was not a very frequent occurence in the domestic hotel industry. As a result of all the above, both hotel chains have today managed to return to profits which are increasing and more and more significant.
Last year’s results, which were recently published, were very positive in the case of both NH and Meliá, reflecting the fruit of their efforts since 2013. Both companies obtained nearly double digit revenue growth in 2016, an improvement in margins of around 100 basis points and a reduction in debt to record low leverage levels. The two companies have also succeeded in improving RevPar ratios across all their business lines, from the former peak of the hotel cycle and meet achieve two important milestones: in Meliá’s case exceed 100 million euros of net profit (a figure not seen since 2007) and, in the case of NH, obtain positive recurrent net profit after eight years of losses (which has allowed the company to once again reward shareholders with a dividend of 0,05 euros per share, which was suspended in 2006, implying a 55% payout).
As 2017 gets underway, both companies are predicting mid-high digit growth in their RevPar ratio by end-year, as well as continued improvement in operating margins. NH in particular shows greater potential in this area having finalised the repositioning of its assets in more Premium segments in all the European markets. It has also cut the average cost of its debt which allows it to cancel its High Yield bond ahead of time. Apart from the substantial improvement in the companies’ fundamentals thanks to their strategic plans, there are other factors which should be taken into account, including possible corporate moves. In the case of NH and its partner HNA (which owns 29.5% of the Spanish hotel chain), there could be some activity in the wake of HNA’s takeover bid for the 43.8% it doesn’t already own in Rezidor. This is a hotel chain which complements NH in terms of markets, rooms under ownership, size and financial situation. From March 10, this possibility could become clearer.
In conclusion, we can see how the sector is reaping the benefits of its restructuring and the adjustments made in the areas of operating costs and debt reduction. The hotel sector is in a good place at the moment – and the outlook is positive – so we recommend betting on the hotel stocks, locking in profits thanks to their attractive trading ratios.