2023-07-13 10:19:23 ET
Summary
- Playa Hotels & Resorts stock has risen 34% YTD as tourism traffic and booking prices recover.
- The company posted a recovery in operating margin to a record 28.1% on the back of a 27.4% YoY price increase.
- Despite the strong current trends, my recommendation is HOLD, because, I believe, the company's shares are already fairly priced, and I see no additional growth catalysts.
Introduction
Shares of Playa Hotels & Resorts ( PLYA ) have risen 34% YTD. Despite the fact that the company posted strong results in 1Q 2023 and the current trends in the travel industry are favorable for Playa Hotels & Resorts, for the moment I stick to a HOLD recommendation for the company's stock.
Investment thesis
I believe that the shares of travel companies, including Playa Hotels & Resorts, were an excellent bet for the lifting of COVID restrictions and the restoration of tourist traffic, however, in my personal opinion, this investment idea has already been realized in the shares of Playa Hotels & Resorts. Firstly, the current value of quotes is already approximately at the pre-covid level. Secondly, at the moment the ADR indicator (revenue for a period divided by the total number of rooms sold during such period) is at a high level relative to historical data due to the geographical positioning of the company, however, the removal of restrictions and the opening of other geography may lead to price normalization. Thirdly, the current expectations from the company's operating and financial performance are already at a high level and, in my personal opinion, are already priced in, so I do not see additional growth catalysts that could contribute to a faster rate of growth of the share price than the S&P 500.
Company overview
Playa is the operator of all-inclusive resorts. Company's resorts are located in Mexico, the Dominican Republic and Jamaica. According to the results of the 1st quarter of 2023, the company's portfolio includes 9,756 rooms.
1Q 2023 Earnings Review & expectations
The company reported better than investors expected . According to the results of the 1st quarter of 2023 , the company's revenue increased by 24.7% YoY due to the growth of Net Package ADR (total Net Package Revenue for a period divided by the total number of rooms sold during such period) by 27.4% YoY and a slight decrease in occupancy (total number of rooms sold for a period divided by the total number of rooms available during such period) to 70.8%. The largest contributor to revenue growth was the package segment, which grew by 25% YoY, while the non-package segment showed revenue growth of 17% YoY. You can see the details in the chart below.
In terms of revenue geography, we see the largest growth in the Jamaica segment, where revenue increased by 42% YoY, while in the Yucatan Peninsula and Pacific Coast segments, revenue increased by 29% YoY and 39% YoY, respectively. In the Dominical Republic segment, revenue decreased by 1% YoY. You can see the details in the chart below.
Direct operating expenses (% of revenue) decreased from 49% in Q1 2022 to 47% in Q1 2023, and SGA expenses (% of revenue) decreased from 17% in Q1 2022 to 16% in Q1 2023. Thus, the operating margin of the business increased from 24.6% in Q1 2022 to 28.1% in Q1 2023. You can see the details in the chart below.
The company's management expects strong trends to continue in the remaining quarters of 2023. So, in the second quarter of 2023, according to management comments during the Earnings Call after the publication of the results for the 1st quarter of 2023, the average occupancy (total number of rooms sold for a period divided by the total number of rooms available during such period) will be about 70%, and ADR will continue to grow at a double-digit pace.
We continue to expect double digit year-over-year ADR growth in the second quarter, as demand for the remainder of the year has remained steady despite macroeconomic concerns. Our MICE business for 2024 is pacing well ahead compared to the same time last year, providing a strong base of business for the coming high season.
At the end of 2023, the company expects adjusted EBITDA of about $265 - $285 million, which implies an increase of 9% -17% compared to 2022.
However, in my personal opinion, the current value of the stock is already 1) at a relatively high level and 2) taking into account the company's strong results (relative to the previous year) in the following quarters, while at the moment I see additional risks to the company's revenue in terms of increasing competition and changing consumer demand in favor of cheaper resorts, following the explosive rise in prices in Mexico and the Dominican Republic.
Risks
FX: strengthening of the US dollar against the Mexican peso or the Dominican peso could put pressure on the company's dollar-denominated revenue.
Demand: decreased demand due to increased competition from resorts in Latin America or lower real incomes could drive down booking prices and therefore lower revenue.
COVID: the return of restrictions on tourism could have a major impact on both the company's revenue and the level of business profitability.
Valuation
The current Valuation Grade of the company is at the C+ level after the increase in its stock price during 2023. Thus, the current P/E ('FWD') multiple is about 15.5, which is approximately at the level of the sector median. According to the EV/Sales multiple, the company looks overvalued, but the increased value is due to the relatively high leverage. So, at the moment, I believe that the company's shares are priced fairly after rising on the back of a recovery in tourist traffic, occupancy of rooms and a recovery in booking prices.
Conclusion
On the one hand, I like the current operational and financial trends of the business, and the company's valuation, in my opinion, is not too high. On the other hand, at the moment, I believe that the company's stock is fairly priced, and the future strong results of the next quarters relative to the previous year are already priced in. In addition, I do not see new catalysts and growth drivers for the stock price. Thus, for the moment, I'm sticking with the HOLD recommendation for the company's shares.
For further details see:
Playa Hotels & Resorts: Still Strong Trends But Upside Is Limited