OneSpaWorld: In Deep Waters – OneSpaWorld Holdings Limited (NASDAQ:OSW)

Thesis

OneWorldSpa (OSW) is a short given a series of headwinds that include COVID-19 demand headwinds, an over-leveraged balance sheet, and false hope around bailout money from the new $2 trillion bill.

Background

OneWorldSpa operates 163 cruise ships to 70 destinations globally. It claims to have an 80% market share in the “outsourced maritime health and wellness” market, per a recent filing.

Demand Headwind

Given recent horror stories with cruise ships, I believe the same sentiment will impact OSW. Demand will shrink in the short and medium term, which will dramatically impact the company.

Given recent changes, the company has taken the following steps per its press release:

• Closed all spas on cruise ships where voyages have been cancelled;

• Closed all U.S and Caribbean based destination resort spas;

• Closed the majority of Asian based destination resort spas;

• Withdrawn its first quarter and full year 2020 guidance issued on February 26, 2020, noting that it continues to expect a meaningful negative impact from cancelled voyages and resort spa closures, but cannot provide a reasonable basis for guidance at this time

Given these dramatic changes, it is reasonable to assume significant demand headwinds for the next quarter and for the full fiscal year. Given high operating leverage, OSW will have to do much more than it has to survive.

Liquidity Issues

The company furloughed 25% of cruise ship staff (majority of staff) and 96% of resort staff. But if we look at the debt position of the company in the most recent 10Q filing, we find a debt-laden company with $224m of long-term debt and $24m of accrued expenses. Include capital expenditures of $3m a year and the runway decreases further without outside capital.

Source: 10Q

Compare that with $15m of cash on hand – the company has drawn down on revolvers to fund liquidity. I believe lenders will not be willing to lever even further. As of this writing, the market cap is $260m.

As you can see below, the company has relied on significant liquidity from private placement investors and term loans. The company stated that they believed they had enough runway to last for 12 months in November 2019, and that situation has materially deteriorated after COVID-19.

Source: 10Q

These conditions combined result in a situation where the company needs to take dramatic steps to downsize. I believe there is a significant existential, liquidity threat to OSW that is not priced into the business today.

The second issue is that the world does not know how long demand will be muted for OSW. The current picture does not look positive, which could further reduce the multiples investors are willing to award OSW for its existing revenue.

Disclosure: I am/we are short OSW. 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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