Description

Hyatt

Description: Hyatt is one of the largest hotel companies in the world, with 728 hotels under a Hyatt brand, with almost 186,000 rooms worldwide.  Hyatt has multiple sub-brands, including Andaz as well as Hyatt brands - Park, (Grand, Regency, Place, House).  Hyatt’s portfolio leans higher end (50% Luxury 30% upper upscale) and bigger city focused than Hilton and Marriott’s portfolio.  Over 60% of Hyatt’s hotels are located in the US, but its Asian exposure is 18% and growing quickly.  After recent asset sales, about 55% of cash flow is derived from high margin, recurring revenue managed and franchised fees.  Owned and leased cash flow is the balance,

Investment Thesis:  Hyatt recognizes the undervaluation of its equity vs. owned asset and management and franchise stream and is aggressively aiming to improve its valuation.  Over the past 9 months, the company embarked on a $1.5bn asset sale program, of which the company has sold $1.1bn gross.  Owned hotels assets were sold at 15x-20x EBITDA, while retaining management and franchise fees, raising the valuation multiple further.  The company continues to consistently and aggressively repurchase stock, retiring over 10% of the float.  The stock trades under 13x our 2019 EBITDA and we expect the company to continue this arbitrage.

At the same time the company has been selling owned assets and retaining fees, it is organic growing its, Hyatt’s hotel pipeline (built by real estate partners but managed or franchised by Hyatt) has grown faster than Marriott and Hilton.  Of the 70,000 hotels in the pipeline, 73% will be managed by Hyatt, 23% Franchised and only 4% owned.  With better geographic exposures than peers, Hyatt should be able to grow its fee stream revenue double digits for at least the next 5 years.  (slide sources: Hyatt investor presentation).     With the asset sale program complete, along with room growth, the company expects to derive over 60% of EBITDA from the management and franchised business. 

On its fourth quarter call, Hyatt laid out its investment case and earnings algorithm to investors, which we view as conservative.   The company believes it can grow revenue consistently 5%-10% with EBITDA growing 1 point faster, while aggressively returning cash to investors, resulting in mid-teens earnings per share.

Valuation and Price Target

Larger peer Marriot trades at 15x 2019 EBITDA with a 95% franchised mix, but is growing slower than Hyatt.  Hilton trades at 14x EBITDA with a 90% franchise mix and a less attractive portfolio.  We see more opportunity for Hyatt to sell assets opportunistically at high multiples and continue its aggressive share repurchase.  If we value the fee stream at 15x 2020 and the owned piece at 12.5x (conservative), we see upside to $110 (30% upside).  We also see some possibility of Hyatt being acquired by Hilton or Marriott, as it would be a major strategic piece for Marriott against Hilton in its battle for scale.  We believe as acquisition by either would be accretive to both up to $130/share (55% upside).

Catalyst

Potential for additional asset sales at higher multiples

Potential for aggressive share repurchases

Hyatt could be also be a great strategic investment by larger player