PLYA - Playa Hotels & Resorts: ADR Growth Encouraging But Occupancy Pressures Remain

2023-12-30 06:43:37 ET

Summary

• Playa Hotels & Resorts has seen growth in ADR across its portfolio, but downward pressure on occupancy remains.
• The company appears to be trading at fair value at this point in time.
• I take the view that future growth depends on improving RevPAR across its portfolios and reducing its net debt to EBITDA ratio.

Investment Thesis: I revise my view on the stock from Buy to Hold at this point in time.

In a previous article back in March, I made the argument that Playa Hotels & Resorts ( PLYA ) could see further upside going forward given strong RevPAR growth and an encouraging recovery in earnings.

Since then, the stock has descended to a price of $8.76 at the time of writing:

The purpose of this article is to assess whether Playa Hotels & Resorts has the ability to see a rebound in growth from here taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Playa Hotels & Resorts, we can see that adjusted EBITDA is up by 15% on a nine-month ended basis as compared to the prior year, but down by 9.7% over a three-month period.

We can see that while net package ADR (average daily rate) was up by 9.4% on a three-month ended basis, occupancy also fell by 3.1% and RevPAR saw modest growth of 4.8%.

When looking at a breakdown of the portfolio of Playa Hotels & Resorts in the below bubble chart, we can see that the Dominican Republic is the largest by number of rooms (as denoted by bubble size) - occupancy and ADR remain below that of others. We can see that the Yucatan Peninsula is the second-largest by room size but with a significantly higher ADR and occupancy.

An interactive web-based version of this chart is available here .

With that being said, we can also see that RevPAR for the Dominican Republic was up by 5.7% and Jamaica up by 17.8%, in contrast to a decline in RevPAR for the Yucatan Peninsula and Pacific Coast.

From a balance sheet standpoint, we can see that the company's net debt to EBITDA ratio has increased to 22.40x from 16.50x in the prior year quarter.

Source: Figures ($ in millions except ratio) sourced from Playa Hotels & Resorts Q3 2022 and Q3 2023 earnings reports. Net debt to EBITDA ratio calculated by author.

The reason for the decline in adjusted EBITDA was primarily due to appreciation of the Mexican Peso against the U.S. dollar, which resulted in an estimated $7.8 million drop.

My Perspective and Looking Forward

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I take the view that a recovery for Playa Hotels & Resorts will hinge on 1) the degree to which the company can see a recovery in RevPAR growth across its Yucatan Peninsula and Pacific Coast portfolios, as well as 2) whether the company can reduce its net debt to EBITDA ratio once again.

With reference to the first point, we have seen that the drop in occupancy across the Yucatan Peninsula was down to a lower contribution from the meetings, incentives, conventions and events group, as well as increased demand for European destinations from American sourced guests.

However, it is notable that this had coincided with significant strength in the Mexican peso versus the U.S. dollar:

Should we see a weakening of the Mexican peso in 2024 - depending on macroeconomic conditions - then this could spur demand among U.S. travellers to Mexico once again. As it stands, Mexico remains a popular destination among this demographic, in spite of softened demand following the pandemic.

With that being said, the fact that we have been seeing a boost in overall RevPAR across the Dominican Republic given higher ADR is encouraging - taking into consideration that this region is the largest in the company's portfolio by number of rooms. In my view, such growth has the capacity to continue going forward - given that the Dominican Republic continues to gain popularity as a travel destination, with tourism numbers significantly exceeding that of 2019.

In this regard, continued growth across this market would allow for diversification from potential weakness across the Yucatan Peninsula, and further growth in RevPAR across this segment stands to provide a significant boost to overall RevPAR growth.

From looking at the company's earnings trajectory, we can see that both EV to EBITDA and EBITDA per share are both trading at similar levels to that seen in 2019.

We can also see that price is trading at a similar range to that seen in 2019.

Taking this into consideration, I take the view that Playa Hotels & Resorts is trading at fair value at the current price.

Risks

In terms of the potential risks to Playa Hotels & Resorts at this time, I see the main risk as being a continued decline in occupancy across major segments in the company's portfolio - particularly that of the Yucatan Peninsula, which is the second-largest by number of rooms.

While the Dominican Republic saw growth in RevPAR, occupancy also fell across both this region and the Yucatan Peninsula. This represents a risk in that ADR (or average daily rate) increases can only sustain revenue growth for so long. Should we see softer demand for travel across Mexico on the part of U.S. tourists as Europe continues to see strong tourist traffic post-pandemic, then downward pressure on occupancy could eventually start to outweigh the effects of price increases.

Conclusion

To conclude, Playa Hotels & Resorts has seen pressure on earnings and occupancy across its properties, while overall RevPAR growth has remained modest.

In my view, the company needs to see a rebound in RevPAR growth across the Yucatan Peninsula as well as a reduction in net debt to EBITDA to justify further upside at this point. In this regard, I revise my view on the stock from Buy to Hold at this point in time.

For further details see: