LUX - AXYS Group · LUX was the first hotel group to feel the brunt of the crisis and suffered accordingly with losses close to Rs0.5bn in FY10. Since, management was changed, and

Overview

Performance: Review & Prospects

Valuation: Upgraded to Accumulate

Rs 20.45 Rs 42.5

CDS Code:ISIN Code:Bloomberg Code:Reuters Code:

Trading datan n No of Shares:n n Market capitalisation:n n Weight on SEM:

Weight in ALEX-20:Weight in ALCAPEX-12:

Revenue [RsM] Med. daily value traded:EBITDA [RsM] Med. daily volume tradedPAT [RsM] YoY Total Return:R/Occ. Room [Rs] All time high:Adj EPS [Rs] NAV [Rs]Debt/Share [Rs]DPS [Rs]

EBITDA Marg. [%]PER [x]PEG [x]PBV [x]EV/Room [RsM]ROE [%]DY [%]DER [%]

AXYS Stockbroking Ltd, Bowen Square, Dr Ferrière Street, Port-Louis | BRN C07007947Tel (230) 213 3475 | Fax (230) 213 3478 | Email [email protected] | www.axysstockbroking.com

5.84 5.491.146.64

5.11.2

0.00 0.00

0.0 — — 1.0 0.3— 26.0

91.0

Threats

2015F3,933

812224

10,8251.90

37.44

0.50

2015F

5.21 6.26

2012 2013 2014E

20.722.4

0.20.70 1.17

0.00 0.00 0.50

Rating ACCUMULATE

130.8 165.9 154.6 138.6 102.90.0 0.0 0.0 0.0 1.2

-14.1 0.2 0.8 2.8 4.55.36

368.9 78.6 25.2

0.88 0.87 0.65

Rs 114.5(09-Jan-08)

Rs 4.8bn

829

1.8%

NRL MPNRL.MZ

107.7%

30-May-14

1.63

Assuming LUX continues to show strong progress in the Maldives and a steady decline in interest charges,we forecast LUX’s FY14 PER to stand at 26.0x then 22.4x in FY15. While these PER figures are well belowthe Industry PER of 89.3x, it does stand above the ALEX-20 PER (16.3x) and Total Market PER (14.5x).LUX’s FY-13 Price:Earnings Growth (PEG) Ratio stood at 1, and is poised to drop well below 1x in both FY-14 and FY15. Although we would have preferred dividends be used to refurbish LUX* Grand Gaube, DY isestimated to reached 1.2% in FY15. Assuming LUX pays down borrowings at Rs500M per and benefitsfrom the conversion into equity of its bonds, its FY15 DER falls from its current 139% to 91% in FY-15, i.e.with a Debt per Share of Rs34. Based on the above, the group’s willingness to accommodate burgeoningmarkets, and the fact that LUX’s current management has a track record of turning things around, weupgrade LUX’s rating from “Reduce” to “Accumulate”.

0.07 0.25 0.87

-485 13 35 107 193

Improved occ. rate from TUI deal

Sale of hotel in Reunion

Prolongued difficulties in Mauritius

Contraction of Reunion tourism

Loss of management contracts

LUXExecutive Summary

PERDY

NRL.N0000

23.68xLUX

105.3%

4,0733,771

1.24x2.4%

42.5021.80

PBVFP

▲

2010 20112.6%3.3%

MU0049N00000

1.18%

New hotel management contracts

254 19,400

Opportunities

Highlights

Low High— 52-Wk Range —

113.7M

Rs 0.66M

LUX was the first hotel group to feel the brunt of the crisis and suffered accordingly with losses close toRs0.5bn in FY10. Since, management was changed, and debt re-structured through a Rs1bn rights-cum-convertible bond issue. Under its new identity, LUX has embraced the new markets, and has fared betterin relative terms. Results turned around as revenue hovered above Rs3.7bn over the last two years, butPAT improved from Rs35M to Rs107M in part due to the absence of re-branding costs. As for its 9Mthresults, revenue has grown by 10.5%, and PAT by 45% to Rs304M.

Domestic operating conditions will remain difficult and thus local growth for LUX is expected to stagnatein coming years. Nonetheless, the completion of LUX* Belle Mare’s renovation (funded from sale of villas)might help further improve Rev/Room as from FY15, but its closure will affect FY15 results. LUX cancontinue to grow in the Maldives from increased average room rates, now that its occupancy rate hassurpassed the national average. In Reunion, the industry is suffering, however the sale of hotel shouldhelp alleviate both debt and the adverse impact on P&L. The group’s most promising endeavours involvesthe internationalisation of its brand and using its know-how to manage hotels worldwide. Two projects,namely LUX* Al Zorah in UAE and LUX* Tea Horse Road in China should open for business in the next two

LUX* Resorts & Hotels Ltd (LUX), formerly Naïade Resorts, is among the newer Mauritian hotel groups,however its recent disruptive business model under new management has made of it an innovator. Thegroup offers a harmonised approach in its 5-Star LUX*hotels in Mauritius (3), Maldives (1), and Reunionisland (1). Going forward, LUX has adopted an asset light strategy and intends to take up managementcontracts rather than simultaneously own and run resorts and hotels.

Valuations 2010 2011 2012 2013 2014E

2,315 3,095 3,714

30.04 29.86 30.65 31.62 36.32

665 667 774

5,575 6,670 8,255 9,305 10,055-4.25

39.28 49.55 47.38 43.83 37.36 34.06 Key P&L Trends

11.0 21.5 18.0 20.5 20.4

3.10

3.71 3.77

4.07 3.93

0.07 0.25 0.87

1.63 1.90

3

3

3

3

3

4

4

4

4

2011 2012 2013 2014E 2015F

Revenue [Rs bn]EPS [Rs]

21.5

18.0

20.5 20.4 20.7

EBITDA Marg. [%]

40

60

80

100

120

140

Indi

ces

= 10

0 o

n 1

5-Ap

r-11

LUXALEX-20 TRI

VWAP

1

LUX LUX* Resorts & Hotels Ltd

AXYS Stockbroking Ltd, Bowen Square, Dr Ferrière Street, Port-Louis | BRN C07007947 Jun-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email [email protected] | www.axysstockbroking.com

FINANCIAL PERFORMANCE

I. Revenue

LUX Resorts & Hotels (LUX) operates five LUX* branded hotels in

Mauritius [48% of Turnover], Maldives [32% of Turnover] and

Reunion [20% of Turnover] as well as a few mid-market hotels.

Although Mauritius remains the group’s principal source of income

and profits, Maldives is – by far – a more efficient source.

Mauritius

Following an initial 6% growth to Rs1.83bn in FY-11, local revenue

has since stagnated at Rs1.82bn ±1.0%. This is in-line with arrivals

trends: tourist arrivals grew 7% from FY10 to FY11, and thereafter

stagnated at 966k ±0.4%. Although occupancy rates fell from 74%

in FY11 & FY12 to 68% in FY13, LUX managed to grow1 RevPOR in

MUR to Rs9,400 (+7%) and EUR to €232 (+8%) since FY11; however

rates in EUR varied mildly between €231 and €232 over the last

two financial years. On a 9Mth basis, FY-14 revenue has improved

to Rs1.59bn (+11%) or €38.6M (+6%). In spite of positive signs from

LUX, the macro-level decline in Receipts per Visitor and increasing

competition among hotels compels us to maintain a conservative

stance. This is why we believe LUX will grow local FY14 revenue by

10% in-line with 9Mth results, then expect a 6% dip in FY15 due to

LUX* Belle Mare’s closure for refurbishment2.

Fig 1. LUX’s sales revenue split by destination

Maldives

LUX* Maldives has only been fully consolidated in LUX’s financials

starting FY12. Revenue grew by 9% boosted principally by

improved occupancy rates at the hotel, given that RevPOR stood

slightly lower at $773 (-2%). On a 9Mth basis, FY-14 revenue has

1 at an annualised rate 2 Financed from the sale of LUX* Belle Mare villas under the IHS scheme

grown by 15% in both MUR and USD terms to Rs1.07bn and

$35.1M, boosted by both, growth in rooms rates and occupancy. In

spite of the atoll’s marred history of political Coups and flip-flops

on Spa and alcohol policies, its potential disappearance, and virgin

ocean wilderness, maintains its unique appeal. In addition, the tiny

island state has been proactive and astute at seeking new markets

during of the crisis. It has now overtaken taken Mauritius in terms

of arrivals. LUX* Maldives has operated at occupancy levels below

the national average, which the group has surpassed to reach 80%.

Increased average room rate would be the next step, which is why

we believe LUX should be able to grow its business at an

annualised rate of 10% to Rs1.45bn by FY15.

Reunion

Île de la Réunion, being a department of France, is experiencing

tepid growth rates in a market presumably highly axed towards the

French. The island’s tourism industry – albeit mostly domestic –

has thus suffered. Consequently, revenue has stagnated at Rs770M

±0.8% since FY11; which the group achieved by growing RevPOR at

an annualised rate of 3.5% to offset lower occupancies. On a 9Mth

basis, FY-14 revenue has improved to Rs615M (+3%) but decreased

to €14.9M (-1%) in EUR terms. Given the slow growth rates of the

French economy, we expect income from Reunion to slide by 1% in

FY14 and then by a sharper 18% in FY15 assuming LUX sells Le Recif

during the course of FY15.

II. Risk Assessment

The Mauritian tourism industry is experiencing a difficult spell for a

plethora of reasons which we delved into in our industry deep

dive: poor connectivity, large supply of hotel rooms, decrease in

core markets, and principally the absence of a coherent forward

industry strategy. Subsequently a poor home performance remains

LUX’s greatest short term risk. However, we are not overly worried

about the group’s Mauritian business given the turnaround under

the leadership of Mr Paul Jones who was appointed as CEO in Oct-

10. Under a dynamic new leadership, the LUX* brand was created

offering innovative features, and has strived to differentiate itself

from peers. LUX has also invested heavily in upping its service level

through continuous training programmes its employees undergo.

Based on its track record since FY10, we believe LUX will continue

to manage RevPAR in spite of the sub-optimal industry conditions.

Overseas, Reunion represents the greatest threat to LUX. Based on

the state of the French economy, business is likely to worsen

before getting any better. This segment has been a drain on profits

in the past and after a profitable spell, became loss-making once

again in Q1-14. With respect to the Maldives, the socio-political

2



unrest and changing tax regimes are a greater concern than rising

ocean levels. The former could cause major disruptions in arrivals

which would affect revenue, while the latter would directly impact

profits. At the moment, LUX’s management contracts offer an

upside potential, and thus not a material risk factor.

III. Forward Strategy

LUX’s forward strategy involves the “premiumising” of its current

brand. In essence, the group operates at the entry level of among

5-Star hotels, and is aiming to improve its offering to climb higher

by a notch. The group intends to achieve this by completing the

renovation of LUX* Belle Mare3 which would become its new

Flagship hotel; as well as improving customer service through on-

going staff training. The second step in its strategy involves

managing a variety of resorts and hotels globally under its

coherent LUX* brand. LUX is thus poised to manage a series of

boutique hotels – in the backdrop of mountains, rivers and lakes –

along the ancient tea horse road in southern China, as well as LUX*

Al Zorah in Ajman, United Arab Emirates (UAE). Amid this asset

light strategy, and steady repayment of its debt, LUX has chosen to

start paying dividends to shareholders.

Fig 2. LUX’s operating profits split by destination

III. Earnings

Although LUX has managed to grow revenue since FY10, the

group’s profits remain well under the Rs550M peak achieved in

FY07. In FY07, the group’s EBITDA margins peaked at 35% then

rapidly cascaded to 11% by FY10, but have since partially

recovered to the low 20s. A change in management ensued, Rs1bn

was raised from the market through a rights-cum-convertible bond

issue. The latter brought in funds required to repay bank debt

therein easing pressure from banks. Further, LUX increased its

shareholding in Maldives which coupled with the re-branding has

3 We believe an ageing LUX* Grand Gaube is also in need of refurbishment

helped reverse trends. Thus is why we expect PAT to almost double

in FY14, then improve by a further 16% in FY15 driven by growth in

Maldives and declines in interest charges.

Fig 3. LUX’s recurrent PAT evolution & key ratios against the industry

CORPORATE STRUCTURE

I. Overview

LUX* Resorts & Hotels Ltd (LUX) began operations in 1987 as

Naïade Resorts Ltd (NRL) with 3-Star Le Tropical. During the

troubled first few post-crisis years, the latter was sold to Attitude

Resorts, and a new management, led by Mr Paul Jones, was set up.

NRL was re-baptised as LUX under which a brand creation process

began. LUX hotel offerings, colour schemes, innovative features,

and its beverages (Coffee, Tea, & Wines) have been harmonised

across its hotels. LUX owns and operates five 5-Star LUX*hotels in

Mauritius (3), Maldives (1), and Reunion island (1); as well as a

three non-LUX* 3 to 4-Star hotels in Mauritius and Reunion island.

Fig 4. Geographical distribution of LUX resorts & hotels

3



II. Business Model

Fig 5. LUX’s resort and hotel segments

LUX’s philosophy is to manage/run hotels instead of

simultaneously owning and running hotels; which has been the

traditional business model. Having established a coherent product

offering, LUX is internationalising its business. As part of this

process, LUX intends to operate in three segments: Beach, City and

Nature. In coming years, will manage LUX* Al Zorah {beach} in

Ajman, UAE; and LUX* Tea Horse Road {nature}, a series of

boutique hotels along the ancient tea horse road in southern

China. LUX is involved during the conception phase of a new hotel

as a consultant prior to taking over the management of the day-to-

day operations. Under its forward mode, LUX will generate income

from consultancy fees, brand licensing as well as management fees

based on turnover and profits.

II. Shareholding

LUX’s primary shareholder remains GML Investissement Ltée;

however, a significant change in shareholding occurred this

financial year, when The Mauritius Commercial Bank Ltd (MCB)

acquired Cie d’Investissement Immobilier de Flacq Ltée’s 6.6% stake

in the company. A slight shareholder dilution is expected on Dec

31st

2014, at which time bondholders could exercise their option to

convert their debentures into LUX shares.

Fig 6. LUX’s shareholding structure

MARKET PERFORMANCE

I. Share price

The Travel & Leisure (T&L) industry outperformed the market in

2013. The sector rocketed by 57% - LUX claimed the SEM top spot

with a massive 143% surge - thus making it 2013’s best performing

sector. Improved tourist arrivals figures turned investor sentiment

around, thus propelling hotel counters up from multi-year lows. On

a Year-on-Year (YoY) basis, LUX (+108%) beat the SEMTRI (+10.6%)

and the ALEX-20 (+10.8%); as well as peers SUN (+43.6%) and

NMHL (+20.4%). On a Year-to-Date (YTD) basis, the picture is

slightly different: the sector has underperformed the broader

market. Profit taking – in the wake of 2013’s strong rally – was

inevitable. Also investor sentiment cooled after Q1-14 arrivals

growth figures turned out to be below expectations. However, LUX

has been among the very few listed hotels to have steadily grown

local revenue per room. The stock has thus continued to

outperform both the market and peers with its 9.4% increase. By

contrast, the SEMTRI lost 0.02%, the ALEX-20 edged up by 1.2%,

and peers SUN (-2.6%) and NMHL (-4.9%) are trading in negative

territory.

Fig 7. LUX’s stock price performance against peers and benchmark

4



Tick-size change

A change in the minimum step-size for price changes was

precipitated by SBM’s out-of-the-ordinary share split in Feb-12.

The smaller 10-cent movement on LUX has given investors greater

wiggle room. Prior to the split, 95% of the time LUX would close

within 5-ticks of its previous price. Since, 31% of the time, LUX

closes either above or below its previous close price by more than

five ticks.

Fig 8. Probability distribution function of day-to-day changes (measured

in tick-sizes instead of Rs or %). Data: 304 sessions prior to and post split.

I. Foreign Participation

The Travel & Leisure (T&L) sector has seen its market share of

foreign investor trades half from 21% in 2010 to 10% in 2013. This

relegation to 3rd

spot is not reflective of a lack of interest for the

sector, but because of the listing of foreign owned companies

investing in REITs and/or Real-Estate. Overseas funds investing in

African & Frontier markets have continued to seek Financial stocks

(blue chip banks) followed by T&L counters. In a sector dominated

by NMHL, LUX lost foreign investor confidence during troubled

times, and has seen its market share fall from 9% to 4%.

Fig 9. Share of foreign activity within T&L sector

The direction of foreign flows into T&L has been dictated by both

Mauritian fundamentals and global direction of flows in-and-out of

asset and sub-asset classes. LUX has recorded net divestment in

recent years due to loss of investor confidence; however the stock

did register positive inflows in 2013 amid a stellar market

performance.

Fig 10. Net portfolio investment on liquid hotels

In recent years, foreign participation on hotel stocks other than

NMHL has been on the decline. This trend has been in-line with the

sector’s sub-par profitability and extreme gearing levels. However,

following the change in management and LUX subsequent

turnaround, participation levels could increase in years to come.

Fig 11. Extent of foreign participation on liquid hotels and SEM

5



VALUATION & RECOMMENDATION

Our fragmented tourism industry is still attuning itself to the post-

crisis operating environment: core markets in decline, poor

connectivity and a stable currency. Revenue per Visitor has fallen

to its lowest in years, and burgeoning Chinese market has made its

way into the Top 5. Hoteliers that have been slow at embracing

this change will continue to struggle. Further, the increasing

presence of global brands in Mauritius will make a complicated

operating environment even harder for local hotels. American

household names such as Hilton, Four Seasons, St Regis, and

Outrigger have opened shop; in addition to the above Asian

behemoths The Oberoi, Angsana and Centara are also present. The

Shangri-La is also expected to take over SUN’s Touessrok in the

near future. In our opinion, swift adaptation to change and product

differentiation/Mauritianisation will be key in driving survival in an

increasingly competitive industry.

LUX’s forward growth will stem from its overseas properties which

coupled with an asset light strategy will generate additional

income without capital expenditure. This bodes well for the

group’s Debt:Equity Ratio which it is paying down at the rate of

~Rs500M per year after peaking at Rs5.7bn in FY-11. Under the

leadership of Mr Jones, LUX’s local operations have turned around.

They have been the only group to have consistently improved

margins in recent quarters as well as grow revenue per room. LUX

believes in the Chinese market which it has embraced, innovated

its product, and achieved double digit growth in RevPAR thus far in

FY-14. Although the local conditions remain tepid, LUX is poised to

fare better than peers in relative terms given its evolving model

and dynamic management. The thorn in LUX portfolio is its hotel in

Reunion which it is in the process of selling.

Assuming LUX continues to show strong progress in the Maldives

and a steady decline in interest charges, we forecast LUX’s FY14

PER to stand at 26.0x then 22.4x in FY15. While these PER figures

are well below the Industry PER of 89.3x, it does stand above the

ALEX-20 PER (16.3x) and Total Market PER (14.5x). LUX’s FY-13

Price:Earnings Growth (PEG) Ratio stood at 1, and is poised to drop

well below 1x in both FY-14 and FY15. Although we would have

preferred dividends be used to refurbish LUX* Grand Gaube, DY is

estimated to reached 1.2% in FY15. Assuming LUX pays down

borrowings at Rs500M per and benefits from the conversion into

equity of its bonds, its FY15 DER falls from its current 139% to 91%

in FY-15, i.e. with a Debt per Share of Rs34. Based on the above,

the group’s willingness to accommodate burgeoning markets, and

the fact that LUX’s current management has a track record of

turning things around, we upgrade LUX’s rating from “Reduce” to

“Accumulate”.

6



Appendix A

I. Calculations Methods

Bottom-line profit figures, e.g. Profits after Tax, Attributable

Earnings, and EPS among, have all been adjusted for non-recurrent

exceptional items.

All ‘per Share’ metrics or calculations requiring the ‘No. of Shares’

have been computed using a single constant. AXYS has used the

total number of issued shares by the company excluding treasury

shares as given by its latest annual report.

II. Price to Earnings Growth (PEG) Ratio

PEG Ratio

0 ≤ PEG < 1 Under-valued

PEG = 1 Fair-Valued

PEG > 1 Over-valued

III. Turnover per Room

∑

∑

III. Revenue per Occupied Room

∑

∑

IV. Enterprise Value per Room

(∑ ) ∑

∑

References

Bank of Mauritius, Monthly Statistical Bulletin, Jul 2007 –

Apr 2014.

LUX Resorts & Hotels Ltd, Annual Report, 2007 – 2013.

LUX Resorts & Hotels Ltd, Interim Results, Q1-07 – Q3-14.

Disclaimer

AXYS Stockbroking Ltd has issued this document without

consideration of the investment objectives, financial situation or

particular needs of any individual recipient. Recipients should not

act or rely on any recommendation in this document without

consulting their financial adviser to determine whether the

recommendation is appropriate to their investment of this

document. This document is not, and should not be construed as,

an offer to sell or the solicitation of an offer to purchase or

subscribe for any investment. This document has been based on

information obtained from sources believed to be reliable but

which have not been independently verified. AXYS Stockbroking

Ltd makes no guarantee, representation or warranty and accepts

no responsibility or liability as to its accuracy or completeness.

AXYS Stockbroking Ltd and its officers, directors and

representatives may have positions in securities mentioned in this

document, or in related investments, and may from time to time

add to or dispose of such securities or investments. AXYS

Stockbroking Ltd is a member of the Stock Exchange of Mauritius

and is licensed by the Financial Services Commission.

Authors

Bhavik Desai

Head of Research

Melvyn Chung Kai To

Trader

Vikash Tulsidas

Manager

7

Documents

LUX - AXYS Group · LUX was the first hotel group to feel the brunt of the crisis and suffered accordingly with losses close to Rs0.5bn in FY10. Since, management was changed, and