PLYA - Playa Hotels & Resorts: Modest Outlook And Lack Of Growth Catalysts

2023-10-02 03:37:50 ET

Summary

• Playa Hotels & Resorts' revenue increased by 12.1%, while operating margin reached 20.1%.
• Recovery in the Jamaican and Mexican segments continues to support the company's revenue growth rate.
• I believe the company's shares are not cheaply priced, while I do not expect additional growth catalysts, so my recommendation is hold.

Introduction

Shares of Playa Hotels & Resorts (PLYA) have risen 18% YTD. Since my previous article , where I talked about limited upside potential, stocks are down 13%, while the S&P is down 5%. In my article, I would like to analyze current trends and update my view on the company's shares.

The company Playa Hotels & Resorts manages all-inclusive resorts. The main revenue segments are Package (84% of revenue) and Non-Package (14% of revenue). The main geographic revenue segments are Yucatan Peninsula (31% of revenue), Pacific Coast (16% of revenue), Dominican Republic (26% of revenue) and Jamaica (25% of revenue).

Investment thesis

Despite the fact that the company continues to show recovery, I believe that it is still not the best time to open long positions. Firstly, despite the decline in quotes over the past three months, the company's shares are still not cheap. Secondly, I do not expect a significant improvement in hotel occupancy or an increase in the revenue growth rate or operating margins of the business, so I do not see any clear growth catalysts/drivers that could propel the share price higher in the coming quarters.

2Q 2023 Earnings Review and expectations

The company's revenue increased by 12.1% YoY. Net Package ADR (total Net Package Revenue for a period divided by the total number of rooms sold during such period) continues to show strong growth at 16.1% YoY, while occupancy (total number of rooms sold for a period divided by the total number of rooms available during such period) showed a slight decrease of 1.6% YoY. The largest contribution to revenue growth was made by the package segment, where revenue increased by 13.7% YoY, while the non-package segment showed a decrease in revenue by 2.5% YoY.

In terms of geographic segments, we saw the largest growth in the Jamaica segment, where revenue growth was 30.1% YoY, while the Yucatan Peninsula and Pacific Coast segments saw revenue growth of 7.5% YoY and 12.7% YoY, respectively. In the Dominican Republic segment, revenue increased by 0.8% YoY. You can see the details in the graph below.

Operating expenses (% of revenue) decreased from 82.4% in the 2nd quarter of 2022 to 79.9% in the 2nd quarter of 2023 due to a decrease in direct operating expenses from 54% to 53%.

Thus, the operating profitability of the business increased from 17.6% in the 2nd quarter of 2022 to 20.1% in the 2nd quarter of 2023.

While the company continues to demonstrate improved operating and financial performance on a lower year-over-year basis, I believe the results for the coming quarters will be neutral and will not support share price growth. On the one hand, hotel occupancy has already recovered, so I do not expect that we will see support from traffic. According to management's comments during the Earnings Call following the release of financial results, hotel occupancy in Q3 2023 will be approximately 70%, which is lower than previous quarters during 2022 and 2023. You can see the details in the graph below.

For the third quarter, we expect reported occupancy to be approximately 70%.

In addition, I do not expect that we may see an improvement in business margins because the weakening of the Mexican peso against the US dollar continues to put negative pressure on the company's Mexican segment revenue in dollar terms.

And we again expect owned resort EBITDA margins to be down, but up year-over-year excluding the impacts of foreign exchange in Mexico.

Risks

FX: a strengthening of the US dollar against the Mexican peso or Dominican peso could have a negative impact on the company's revenue growth in dollar terms.

Macro (general risk): a decline in real consumer incomes and a decline in consumer confidence may contribute to a shift in demand to cheaper resorts, which may also affect revenue growth rates in the future.

Valuation

Valuation Grade is C+. In accordance with the P/E ((FWD)) and EV/EBITDA ((FWD)) multiples, the company is trading at 15.5x and 6.8x, respectively, which implies a premium to the sector median of about 9% and a discount to the sector median of about 27 % respectively. Although the company's stock price has declined over the past three months, I still believe that the company's shares are not cheaply priced, while I do not see any clear catalysts/drivers for growth in the coming quarters.

Conclusion

Thus, I would like to reiterate my HOLD recommendation. On the one hand, I avoid recommending Sell because: 1) the company continues to demonstrate a recovery in its financials 2) I believe that the company's shares do not look overvalued, however, on the other hand, I believe that the company's financials have already recovered and this is already reflected in the stock price, I don't expect the company to demonstrate significant improvement in revenue growth or margins to catalyze growth, so I'm avoiding a buy recommendation.

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