market folly

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Zach George of FrontFour Capital who pitched a long of Marriott Vacations Worldwide (VAC).


Zach George's Capitalize For Kids Presentation: Long Marriott Vacations

•    Largest global Upper-upscale and luxury branded vacation ownership company, premier resort, club and exchange program operator
•    100% upside from current levels
•    VAC closed the transformational of ILG
o    Pushed by FrontFour
o    Serious synergies being discount

•    VAC’s performance has been terrible this year, driven by
o    Concerns that consumer spending has peaked
o    Quarate retail selling its large stake in VAC
o    Management focused on integration
o    Yet to report its first Clean Quarter post deal close
o    $1bn+ in FCF in 2 years on 6bn EV

•    Reviews the timeshare biz model
o    Claims points model has fixed previous issues with timeshares
o    Better amenties versus standard hotels
•    High quality customers, $130k+ HHI, High home ownership rate, high FICOs, mostly married

•    Deal closed Sept 1
•    CEO bought shares with his own money
•    $75mm in targeted annual cost savings in 2 years
•    Some rev synergies
•    $1.60 / share annual dividend
•    Recurring revs, low capex
o    60% is recurring, fee based streams
o    Synergies are ~10% of 2019 EBITDA
•    CEO thinks cost synergies will “pale” in comparison to revenue synergies
•    Thinks $195 in 2020. 15x 2020 Earnings
•    VAC ROIC and FCF conversion > market averages
•    Large, impressive brand portfolio
•    Deal is leader in branded vacation ownership
•    Established an industry duopoly

•    Why does this exist?
o    Concerns timeshare biz has peaked
o    Initial synergy guidance below expectations
•    Wanted $100mm in cost synergies + rev synergies guidance
o    Investors have had to digest significant timeshare equity supply
o    Wyndham WW $5bn spinoff
o    Hilton Grand Vacations HNA has sold $1bn block
o    Qurate retail block sale
o    Niche space has lot to do
o    Management being conservative on guidance until deal closed
•    2020 -> $13/share FCF
•    Some sell side models haven’t been updated for the deal closing
•    Thinks 15x PE multiple on 2020 pro forma eps = $195
•    Cheapest among its peers on FCF Yield

•    Risk
o    Regulatory risks as regulated on state level
o    Substitutes like Airbnb
o    Cancellation of HOA management contracts
•    Unlikely to be cancelled due to the number of votes needed
o    slowdown in credit securitization market
•    Slows ability to churn inventory
o    insufficient timeshare inventory
•    $6.5bn of VOI sales inventory


Be sure to check out the rest of the presentations from Capitalize For Kids 2018.