Dalata: Lower Occupancy Levels Apply Pressure (OTCMKTS:DLTTF)


Lower hotel occupancies hit Dalata (OTC:DLTTF) hard in H1, with 3 months of disruption significantly affecting their numbers. For Dalata, it isn’t simply a matter of weathering the recent storm, but also how long the lag on operations will last for. Dalata finds themselves in one of the most affected industries (hospitality) which will most likely see a slow recovery to pre-COVID-19 levels. Over its history, Dalata has been a solid hotel company with strong sustainable growth over the long run, but the recent crisis has completely turned that on its head. Dalata had actually started to experience issues in the year prior to the pandemic, but these conditions have been worsened to a larger extent with the virus. Due to this uncertainty and lack of real near-term catalysts, I am not weighing into Dalata.

Source: irishtimes.cpm – Clayton hotel chain owned by Dalata

H1 results

Revenue fell dramatically in H1 2020 with Dalata reporting revenues of £71 million – this was down a colossal 60% from the prior year. Loss before tax also fell in comparison to the prior year to £62 million – down 287% from the prior year. It is fairly obvious to see why these numbers have come about when looking at Dalata’s occupancy levels in the first half. Occupancy was just 34.3% compared to the 80% occupancy of the prior year. Due to the decreased demand, Dalata also had to decrease the average price for each room which fell to £84 compared to £97 last year.

It wasn’t just a lockdown that affected Dalata’s numbers but also a lack of international travel. Dalata is the largest hotel operator in Ireland and thus relies on international tourists for a substantial amount of its revenue. Dalata described the occupancy levels as a ‘record low’. Dalata has now reopened all of its hotels, but occupancy levels at this point in time are still only 40%. To me this alone proves how slow the pick-up in demand will be over the coming months. Other industries such as housebuilders and airlines have actually seen the demand for their services pick up quicker than that of hospitality. Even as offices start to reopen and workers go back to work, the majority of business meetings will still remain online so Dalata will not benefit from any business travel to Ireland or the UK. Leisure travel has seen an improved pick-up but is still nowhere near the pre-COVID levels, this has been shown by the poor performance for many holiday providers such as TUI (OTCPK:TUIFF).

To make matters worse for Dalata, due to the sheer size of the hotel group, the versatility of the company is not high. In these uncertain times, having high fixed costs is unwanted and leads to high cash burn as Dalata experienced in H1. The virus has also slowed Dalata’s expansion plans to form a greater move into the UK market. Of course, investors’ focus should not be on expansion right now but rather how defensive Dalata can be during this period and ensuring that they are maintaining the necessary liquidity for the uncertain period ahead.

Debt levels

Dalata had a high net debt to EBITDA ratio even before the crisis actually took hold. This net debt to EBITDA ratio increased quite substantially in the FY2019 from 2.3x to 2.8x – before that Dalata had been managing this debt ratio well. This debt position was then worsened with the onset of COVID-19, so much so that Dalata had to get an extension for their net debt to EBITDA covenants until June 2022. This removes any near-term risks that they may breach these debt covenants. At the end of June, the net debt to EBITDA ratio was 4.9x which is an unhealthy level. The majority of companies want to see this statistic closer to the 2x level. Due to Dalata’s continued low occupancy levels, this ratio won’t significantly improve any time soon. That is why Dalata obtained an extension for its testing date instead of significantly relaxing the requirement which its lenders may not have allowed.

Along with the H1 results, Dalata is also going to raise additional capital to increase financial headroom. The placing will represent 20% of the company’s existing capital. Management said that one of the reasons for the placement was to take advantage of opportunities that arise from COVID-19; however, as I previously highlighted, I doubt this as a viable strategy. I believe that Dalata should instead be focusing on weathering the current storm which they also cited as a reason for the placing. I believe the majority of the capital will be deployed into this area. This placing will bolster Dalata’s total liquidity with more than £100 million taking the total cash position to over £200 million.

Dalata’s total assets still stand at £1.2 billion, though this figure is down 12% since December. The company actually wants to continue its expansion into the UK with 5 of its next 7 hotels opening in the UK. Before, the UK expansion was an exciting opportunity for Dalata, but in the current environment, gaining traction with these hotels will prove difficult through such a turbulent period. The company expects a recovery over the medium term but increased unemployment rates may put this thesis under threat as fewer people go on holiday. Occupancy will for sure improve from lockdown as it was virtually zero throughout the period, so even any small improvement from this would still make Dalata a loss-making entity.

Looking ahead

Analyst consensus estimates have Dalata falling to a loss of 30p for the full year 2020 with revenues expected to come in at just £164 million. More specifically this means analysts project revenues of £93 million in H2, a slight improvement on H1. These forecasts will mainly be formed on the projection that far greater demand is seen by the end of the year. The loss for H2 is also projected to be 5p, far improved from the half just seen. Whilst these forecasts pin down improvements, it is difficult to make forecasts for companies like that of Dalata where the uncertain nature of these times has the ability to severely affect their numbers. I doubt their ability to achieve such a minimal loss in H2, as even in the first couple months of the second half the occupancy levels only stand at 40%. Even if Dalata did report a loss of 5p, that would still put the company in cash burn and represent a value of £12 million.

Looking even further ahead in 2021, Dalata is forecasted to report a slight profit of just 7p over the full year. Whilst no longer in cash burn, it does prove the significant headway the company must make to get to the level of profitability seen before the pandemic. I do not believe that their shares will see much upside until greater stability is seen within the core business. Of course, Dalata’s performance is heavily linked to the broader market and demand for leisure and travel which will most likely see a slow pick-up anyway as fears regarding a second spike still remain prominent. I believe investors should wait to see more clarity on improved occupancy levels than they have been given so far before even considering a position in Dalata.

Conclusion

Like many other UK listed shares, Dalata has entered deep value territory on a historic basis with a P/E of just 6. COVID-19 has significantly affected this with high fixed costs pushing Dalata into heavy cash burn for the first half. Dalata will not see the type of earnings made in 2019 again for a substantial period. On a forward basis (2021), Dalata has a P/E of 34, quite pricey when considering the numerous headwinds the company faces. However, I do not believe it is fair nor appropriate to use either metric to value Dalata precisely at current times. It does give investors an idea of what value they may be trading on in the future.

With the recent capital raise, the company has reduced any near-term cash risks with a large cash runway now in front of them. The recent capital raise was necessary to help Dalata through this extremely testing period where any pick-up in demand will be slow. Due to this slow pick-up in demand and Dalata finding themselves in one of the worst sectors with a heavy link to the leisure industry and poor versatility, I am staying away from shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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