Action Hotels Plc (LON:AHCG) is a profitable, fast-growing hotel business with a strong management team and proven track record of meeting targets and delivering its pipeline. Zeus Capital have today noted the following: The company serves the undersupplied mid-market/economy segment of the hotel market in the Middle East and Australia and has local expertise in identifying and developing appropriate sites. We believe the current valuation is compelling, backed by a conservative 2014A NAV of 83p, which represents a c.38% discount to the current share price, sector leading growth potential and a dividend yield of 5%.
* Business model overview: Action is a leading owner, developer and asset manager of high quality three- and four-star branded hotels in the Middle East and Australia. The group partners with reputable global hotel brands, giving it access to superior operational expertise, powerful marketing capabilities, distribution and economies of scale. In turn, Action is able to find and develop premium sites (owned and leased) without restriction in the Gulf Cooperation Council (GCC) region. The strategic aim is to get to 5,000 rooms by 2020, which we believe implies adjusted EBITDA in excess of $60m.
* Investment case summary: The current pipeline of hotels is fully funded and the cash-generative nature of these assets should allow Action to deliver sector leading growth. The hotel economics are compelling, having an average occupancy break-even point of 35% and typically profitable after one month. The portfolio is heavily asset-backed, trading at a discount to NAV. The management team has a strong track record adding 1,029 rooms in the 2 years since the IPO in Dec 2013, which has equated to 46% revenue growth, 97% EBITDA growth and 18% NAV growth. The company will report results for 2015 w/c 18th April.
* Forecasts: Our forecast assumptions are based on the current operating rooms (1,928 rooms) and pipeline (1,329 rooms with 104 of these due to open imminently). We anticipate nearly 3,000 rooms by 2018E, with the additional rooms being financed by the current resources. Balance sheet leverage looks high with net debt/EBITDA in excess of 10x in 2015E. However, adjusted LTV (loan to value) on the freehold assets is expected to remain at 50% as of December 2015.
