SELL Price at 31 August 2011 $7.70 Price Target $ Week Range $ $7.70

Transcription

1 Dolphin Cove Limited Ticker: DCOVE Financial Year End: December 31 Majority Shareholder: Stafford Burrowes Date: August 31, 2011 SELL Price at 31 August 2011 $7.70 Price Target $ Week Range $ $7.70 Company Anallysiis DCOVE SHARE PRICE/VOLUME CHART STOCK DATA Market Cap ($ 000) 3,021, Shares Outstanding 392,426,376 Free Float 20.39% Volume 2,000

2 DOLPHIN COVE LIMITED P a g e 2 COMPANY OVERVIEW Dolphin Cove Limited was incorporated in September 1998 as Gabarone Limited and changed its name to Dolphin Cove in March The Group owns and operates the Dolphin Cove marine parks in Jamaica located in Ocho Rios and Lucea. The Group also operates tours of the Prospect Plantation near Ocho Rios and a small dolphin lagoon at the Half Moon resort exclusively for guests at that resort. The group has over 300 employees and keeps on staff a dedicated veterinarian, trainers and handlers to oversee care of the dolphins and other marine animals the company owns. In December 2010, the company offered its shares up to the public through an IPO that was oversubscribed and raised $240 million. Clientele Ninety five percent (95%) of the company s customers are tourists, with 35% of them being cruise ship passengers and 60% being stopovers staying at hotels. The other 5% of customers are local residents. Competition Industry statistics indicate that the company s Ocho Rios marine park is amongst the three most popular tourist attractions in the country, with competition coming mainly from Dunn s River Falls, Mystic Mountain and Chukka Caribbean Adventure tours. The Hanover attraction faces little if any competition. Management & Corporate Governance Dolphin Cove has a 7 member board which is chaired by its founder, CEO and majority shareholder, Stafford Burrowes. The board also consists of business leaders and stalwarts such as Raby Danvers Williams and William McConnell; an encouraging indication of the strength of the company s management. The board does however diverge from international best practice standards relating to corporate governance, as only three of the seven members are independent, as well as having the chairman serving as CEO.

3 DOLPHIN COVE LIMITED P a g e 3 MACROECONOMIC OVERVIEW Dolphin Cove s business is directly related to the performance of the tourism sector, as it is spending by tourists that constitutes the largest portion of company s revenues. Specifically, stopover arrivals, cruise passenger arrivals, and stopover visitor spending are the economic variables that have the greatest effect on Dolphin Cove s performance. STOPOVER ARRIVALS Stopover Arrivals A stopover tourist is defined as one staying in the country at least 24 hours and excluding those arriving by cruise ship. For the 2010 calendar year, stopover arrivals totaled 1,921,678 which represented a nearly 5% increase over the 1,831,097 stopovers recorded in Since 2005, stopover arrivals have grown at an annually compounded rate of 5.4%. The main factors impacting stopover arrivals over the period were an aggressive thrust to maintain airlift capacity and initiate new gateways to the island, and advertising campaigns undertaken by the Jamaica Tourist Board that have enhanced the island s visibility and marketability to various visitor segments. For the first quarter of 2011, stopover arrivals to the country increased by 4.4% to 553,304 compared to 529,934 in Cruise Passenger Arrivals CRUISE PASSENGER ARRIVALS

4 DOLPHIN COVE LIMITED P a g e 4 For only the second time since 2004, Jamaica recorded less than one million cruise passenger arrivals in The 909,619 cruise passengers that arrived last year represented a 1.4% decline when compared to Cruise arrivals have been falling at a rate of 9.2% per year since 2006, and reflect global economic conditions combined with the lack of price flexibility that cruise ship operators posses, which prevents them from decreasing prices to sufficiently counter the effects on consumers of the harsh economic circumstances. For the January to March 2011 period, total cruise passengers to the country was 291,553, an increase of 5.1% over the 277,972 recorded in Visitor Spending Expenditure by visitors to the country has increased on an annually compounded basis by 5.3% per year since Visitor spending increased from US$1.5 billion in 2005 to US$2 billion in Of this amount, an estimated US$241 million was spent by these tourists on entertainment and attractions. Last year, total expenditure by cruise ship VISITOR SPENDING (US$ 000) passengers totaled US$79 million with an average spend per passenger of US$ Of note, is the fact that the percentage spend by cruise ship passengers on attractions has increased from 7.6% in 2005 to 20.5% in This particular statistic has positive implications for Dolphin Cove. TOURIST ARRIVALS BY MONTH

5 DOLPHIN COVE LIMITED P a g e 5 Seasonality of Tourist Arrivals The tourism industry is characterized by a peak winter tourist period which sees the highest number of tourist arrivals between the months of December and March inclusive. As a result of this, Dolphin Cove s revenue performance exhibits results of this seasonality with the first quarter of the financial year usually showing strong performance numbers that are not replicated in the subsequent quarters. Outlook Looking ahead, total visitor arrivals to the island may be somewhat volatile given the current uncertainty surrounding economic conditions in the US and in Europe, visitors from which account for approximately 80% of total visitors to the country. There is a possibility that these countries may slip into a recession and the any such occurrence will have a very real and visible negative effect on the local tourism industry. Also, it is estimated that there will be an 8% reduction in airlift seats for 2011 from North America and this may prove an impediment to tourist arrival growth. Positively however, cruise passenger arrivals are expected to see a boost with the recent completion of the new Falmouth port, which is projected by the Port Authority of Jamaica to result in roughly 1,000,000 additional cruise passengers per year. Given this, Dolphin Cove must remain cautious as it seeks to navigate the near term given the precarious state of the local and global economies.

6 DOLPHIN COVE LIMITED P a g e 6 INDUSTRY ANALYSIS Porter s Five Forces Competitive Force Rating Reasoning Threat of Entry Low The capital expenditure necessary to set up competing operations are significant. Threat of Substitutes Low There are little if any substitutes for tourist attractions. Bargaining Power of Buyers Low to Medium Buyers of the company s products have little bargaining power due to the lack of direct competitors offering the same products/services. Bargaining Power of Suppliers Low The tourist attraction industry does not have any significant suppliers. Rivalry among Existing Competitors Medium Rivalry in the industry comes in the form of companies offering attractions that vary in nature such as waterfalls, nature tours and adventure excursions.

7 DOLPHIN COVE LIMITED P a g e 7 COMPANY ANALYSIS SWOT Analysis STRENGTHS The company has well established relationships with cruise ship and hotel operators which it uses to drive business through its doors. It operates in a niche market, being the only company to offer dolphin attractions and faces little risk of its business model being replicated due to the high startup costs and the difficulty in sourcing and acquiring dolphins. The majority of Dolphin Cove s revenues are derived in US dollars which should provide a hedge against local currency devaluation in the long run. WEAKNESSES The company is hugely dependent on the performance of international economies, factors over which they have no control. Tourist arrivals to the country are seasonal and as such the company may find it difficult to sustain sales in the off season. OPPORTUNITIES The recently completed Falmouth port is projected to bring in up to one million cruise ship visitors per year which could be substantially beneficial to Dolphin Cove. The new port was a joint venture between Royal Caribbean and the Government, and was built to accommodate the simultaneous docking of Royal Caribbean s two newest and largest ships which carry 11,000 per voyage between them. THREATS Any deterioration in the global economic environment could have a direct impact on the local tourism sector and thusly affect the company adversely.

8 DOLPHIN COVE LIMITED P a g e 8 Segment Overview The company earns revenues from two main business activities, namely Dolphin Attractions and what they classify as Ancillary Services. Dolphin Attractions Dolphin attraction revenues are derived from the sale of dolphin, stingray and shark experiences. This segment has historically accounted for roughly 70% of revenues and generated $519 million in gross profits for DOLPHIN ATTRACTION SALES ($) Total revenues for the dolphin attraction segment have grown at a compounded annual growth rate (CAGR) of 12.9% since 2005, moving from $338 million in 2005 to $620 million as at the end of the 2010 financial year. DOLPHIN ATTRACTION GROSS PROFIT ($) Sales growth throughout the period has been spurred by greater tourist arrivals which have occurred due to increased hotel rooms, brought about in part by the Spanish invasion, and a sustained growth in tourist arrivals to the country.

9 DOLPHIN COVE LIMITED P a g e 9 Ancillary Services Income from the Ancillary services segment is derived from the sale of souvenir photographs and videos, food and beverages, and the use of the company s beach cabanas, nature trail facilities, kayaks, and boat tours offered at its locations. ANCILLARY SERVICES REVENUES ($) Revenues from this segment have grown 13.1% on an annually compounded basis since 2005 and accounted for approximately $260 million or 30% of Dolphin Cove s total revenues as at Gross profits for the segment have moved similarly, growing annually by 15.4% to $212 million in 2010.

10 DOLPHIN COVE LIMITED P a g e 10 Financial Statement Analysis For its first quarter ended March 2011, Dolphin Cove Limited reported net profit attributable to shareholders of $76.6 million, an increase of 153% or $46 million from the corresponding period of Influenced by aggressive marketing, an increase in visitor REVENUES ($) arrivals and the addition of their new Falmouth location, the company recorded a 35% increase in total revenues to $300 million. The dolphin attraction segment posted a 33% increase in revenues to $203 million while the ancillary services segment posted a similarly impressive 39% increase in sales to $97 million for the quarter. The new Falmouth attraction which was opened last year was responsible for 20% of the overall increase in revenues. Total operating expenses increased 27% to $173 million from $137 million, and were attributable mainly to the operation of the new marine park in Hanover. Resulting operating profits experienced a 73% increase to $83 million from $48 million in ROE/ROA Net finance costs increased by 34% when compared to the similar period in 2010 due to interest incurred on loans obtained to finance the acquisition of lands for the Hanover marine park and startup costs, while interest income on investments declined 40% to $2.4 million due to the encashment of some interest earning assets period over period. Dolphin Cove s resulting net profit

11 DOLPHIN COVE LIMITED P a g e 11 attributable to shareholders registered a massive 152.5% increase for the three month period to $76.6 million as it benefited from income tax expense exemption. As at March 2011, Dolphin Cove s asset base stood at $1.3 billion, while shareholders equity rose 56% to $933 million. The company s long term debt increased 63% over the March 2010 level as leverage was utilized to facilitate the company s expansion plans. Projections, Valuation & Recommendation Dolphin Cove appears well placed within the tourist attraction industry to deliver above average levels of growth going into the medium term. Though revenues are highly dependent on the state of the tourism sector, top line growth is expected to continue, driven by the newly opened Hanover marine park, the newly operational Falmouth port, and long run strengthening of the US dollar. By way of the strategic locations of its facilities, the company is well poised to take advantage of the potential growth in tourist arrivals, and parlay those arrivals into both top and bottom line growth. With strong consideration given to the possible near term headwinds to be faced from the fragile US and European economies, and with the completion of the Falmouth port and the operation of its Hanover attraction, Dolphin Cove is expected to complete the twelve month period to end March 2012 with revenues of approximately $1.4 billion. Our estimate is based on a projection that slightly more than half a million new cruise ship passengers will be arriving through the new port. Though the new marine park in Hanover is expected to cannibalize some of the Ocho Rios business, it is expected that any reduction in revenue will be marginal and fully compensated for by the new location as well as the cruise ship arrivals at the new port. With margins projected to improve somewhat, net profit for the period to end March 2012 should approximate $215 million or an EPS of 55 cents. Valuation To arrive at a valuation for Dolphin Cove a multi-staged DDM was utilized. The company has stated that its intended dividend policy is to pay out no less than 25% of

12 DOLPHIN COVE LIMITED P a g e 12 earnings, with consideration given for possible capital requirements. The company will continue to pay no income taxes for the first five years of its listing and half the statutory amount over the subsequent five year period. Dividends are projected to grow at 24% during this initial five year period before transitioning over a five year period to a long run rate of growth of 12%. The output of the valuation model suggests an intrinsic value of $6.72 per share for Dolphin Cove. Monte Carlo Simulation To add a dimension of robustness to the valuation, a Monte Carlo simulation was run on the valuation model. A Monte Carlo simulation produces a distribution of possible outcomes of a forecast based on simulating differing changes to inputs to the model. In the simulation run, the inputs that were tested were the cost of equity, and the two growth rates that were used in the DDM. The simulation suggests a mean price per share estimate of $6.14. (Full results of the results of the simulation are provided in the appendix.) Recommendation Dolphin Cove has exhibited strong growth since its inception and it is expected to continue putting forward impressive growth numbers into the medium term as it benefits from its expanding operations as well as the tax break and further visibility it will receive as a result of being listed on the Junior Stock Exchange. Despite this however, since being listed, market exuberance has run the price up to its current level of $7.70, representing an all time trading high and a P/E ratio of approximately 26X trailing earnings. This leads us to recommend a SELL for Dolphin Cove.

13 DOLPHIN COVE LIMITED P a g e 13 Technical Analysis A technical analysis was carried out on the Dolphin Cove stock by using the RSI measure. This is a momentum indicator that suggests relative valuation of stocks that are trading within certain bands. As indicated below, Dolphin Cove has an RSI of which puts the stock in the SELL zone and further supports the above recommendation. Figure 1: Source - Bloomberg Risks to Valuation Any slowdown in US and Europe economies may adversely affect revenues through the effect it may have on tourist arrivals from those regions. The valuation is dependent on cruises ship arrivals from the new Falmouth port amounting to at least 500,000 per year. A departure from this figure could affect the revenue growth prospects of the company.

14 DOLPHIN COVE LIMITED P a g e 14 APPENDIX DOLPHIN COVE FINANCIAL SUMMARY Year Ended 31-Dec Q Q Income Statement Dolphin Revenue 483,573, ,504, ,852, ,419, ,843, ,367, ,160,764 Ancillary Revenue 156,106, ,139, ,564, ,218, ,795,037 70,059,526 97,253,069 Total Revenue 639,680, ,643, ,417, ,638, ,638, ,427, ,413,833 Operating Expenses 418,150, ,923, ,066, ,338, ,538, ,682, ,169,942 Operating Profit 108,053,223 40,417,345 80,604, ,489, ,094,534 48,103,897 83,276,604 Net Profit 106,567,350 22,212,124 74,755, ,725,630 69,169,513 30,329,674 76,590,083 Balance Sheet Total Assets 455,656, ,186, ,606,906 1,111,873,066 1,287,901,551 1,136,106,814 1,311,121,438 Total Liabilities 172,038, ,356, ,021, ,820, ,704, ,913, ,590,722 Shareholders Equity 283,617, ,829, ,585, ,052, ,197, ,193, ,530,716 Long Term Debt 48,147,121 61,061,394 31,901, ,779, ,338, ,793, ,135,320 Ratios Gross Profit Margin 82.26% 81.74% 81.29% 82.70% 83.12% 82.68% 84.47% Operating Profit Margin 16.89% 5.95% 10.86% 14.71% 15.70% 21.53% 27.72% Net Profit Margin 16.66% 3.27% 10.07% 12.58% 7.86% 13.57% 25.49% Return on Equity 45.44% 7.54% 21.78% 17.29% 8.20% 16.98% 40.03% Return on Assets 27.32% 4.74% 14.94% 12.84% 5.76% 10.79% 25.04% LT Debt/Equity 16.98% 19.97% 8.38% 15.62% 29.00% 20.36% 21.25% Interest Coverage Current Ratio Du Pont Analysis Profit Margin 16.66% 3.27% 10.07% 12.58% 7.86% 13.57% 25.49% x Asset Turnover x Financial Leverage = ROE 45.44% 7.54% 21.78% 17.29% 8.20% 16.98% 40.03%

15 DOLPHIN COVE LIMITED P a g e 15 DOLPHIN COVE INCOME STATEMENT AND PROJECTIONS 12M to 12M to Year Ended 31-Dec March 2011 March 2012 Total Revenue 639,680, ,643, ,417, ,638, ,638, ,625,506 1,368,168,441 Total Direct Expenses 113,476, ,112, ,881, ,077, ,482, ,430, ,774,288 Gross profit 526,204, ,530, ,535, ,560, ,156, ,194,782 1,117,394,153 Other income 1,810, , ,000 1,476,365 4,098,857 4,098,857 Gross Revenue 526,204, ,341, ,670, ,827, ,633, ,293,639 1,121,493,010 Selling Expenses 164,764, ,453, ,759, ,835, ,447, ,111, ,405,479 Other operations 144,391, ,154, ,416, ,914, ,468, ,682, ,997,057 Administrative 108,994, ,315, ,890, ,589, ,622, ,232, ,225,266 Total Op. Expenses 418,150, ,923, ,066, ,338, ,538, ,026, ,627,802 Operating Profit 108,053,223 40,417,345 80,604, ,489, ,094, ,267, ,865,208 Finance income 3,831,289 2,865,454 11,280,013 10,903,294-1,910,952-3,491,771 4,712,682 Finance costs -7,061,232-21,030,515-16,937,357-23,200,010-29,405,694-31,672,847-34,840,132 Profit before taxation 104,823,280 22,252,284 74,946, ,192, ,777, ,102, ,737,758 Taxation 1,744,070-40, ,800-5,466,727-37,608,375-22,672,701 0 Profit for the year 106,567,350 22,212,124 74,755, ,725,630 69,169, ,429, ,737,758 EPS ($)

16 DOLPHIN COVE LIMITED P a g e 16 Forecast: PRICE MONTE CARLO SIMULATION Summary: Price range is from $2.58 to $36.84 Base case is 6.72 After 1,000 trials, the std. error of the mean is 0.09 Statistics: Forecast Values Trials 1,000 Mean 6.14 Median 5.35 Mode --- Standard Deviation 2.94 Variance 8.66 Skewness 3.23 Kurtosis Coeff. of Variability Minimum 2.58 Maximum Range Width Mean Std. Error 0.09

17 DOLPHIN COVE LIMITED P a g e 17 BIBLIOGRAPHY Bank of Jamaica - Bloomberg L.P Dolphin Cove Limited Annual Reports Dolphin Cove Website - Deutsche Bank Research - International Monetary Fund - Jamaica Tourist Board - Planning Institute of Jamaica - Private Sector Organisation of Jamaica - Statistical Institute of Jamaica -