December 06, 2010 Dolphin Cove Limited INITIAL PUBLIC OFFERING Najja Daley Senior Financial Analyst ndaley@scotiadbg.com COMPANY OVERVIEW Dolphin Cove Limited was incorporated in September 1998 as Gabarone Limited and changed its name to Dolphin Cove in March 1999. 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 23 dolphins the company owns. Buy Offer Price $3.00 Price Target $4.22 52 Week Range N/A KEY FINANCIAL STATS 8M 2009 8M 2010 $ 000 $ 000 Revenues 618,868 636,843 2.9 Net Profit 110,363 65,512 40.6% Assets 1,111,873 1,096,604 1.37 Clientele The company s customers are mainly 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 new Hanover park faces little if any competition. STOCK DATA * Market Cap ($ 000) 1,177,279.13 Shares Outstanding 392,426,376 Free Float 20.39% *assumes full take up of offer 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.
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 $490 million in gross profits for 2009. DOLPHIN ATTRACTION SALES Total revenues for the dolphin attraction segment have grown at a compounded annual growth rate (CAGR) of 14.6% since 2005, moving from $338 million in 2005 to $583 million as at the end of the 2009 financial year. DOLPHIN ATTRACTION GROSS PROFIT Sales growth throughout the period has been spurred by increased hotel rooms, brought about in part by the Spanish invasion, and a sustained growth in tourist/cruise ship passenger arrivals. 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 15.4% on an annually compounded basis since 2005 and account for approximately $250 million or 30% of Dolphin Cove s total revenues as at 2009. Gross profits for the segment have moved similarly, growing annually by 17.6% to $198 million in 2009.
MACROECONOMIC OVERVIEW Dolphin Cove s business is driven mainly by the performance of the tourism sector, as it is spending by tourists that constitutes the largest portion of company revenues. Total stopover arrivals in 2009 of 1,831,097, was 3.6% or 63,826 more stopovers than the 1,767,271 recorded in 2008. Since 2005, stopover arrivals have grown at an annually compounded rate of 5.4%. The main factors impacting stopover arrivals over the period are an aggressive thrust to maintain the current airlift capacity and initiate new gateways to the island, and advertising campaigns undertaken by the Jamaica STOPOVER ARRIVALS Tourist Board that have enhanced the island s marketability to various visitor segments. For the period January to August 2010, stopover arrivals to the country increased by 4.2% to 1,374,803 compared to 1,319,704 in 2009. CRUISE PASSENGER ARRIVALS For the first time since 2004, Jamaica recorded less than a million cruise passenger arrivals. The 922,349 cruise passengers that arrived in 2009 represented a 15.6% decline when compared to 2008. Cruise arrivals have been falling at a rate of 5.1% per year since 2005, and reflect global economic conditions. For the January to August 2010 period, total cruise passengers to the country was 610,981 a decrease of 7.2%. Spending by stopover visitors to the country has increased by 5.7% per year since 2005. Visitor spending increased from US$1.5 billion in 2005 to US$1.93 billion in 2009. In 2009, total expenditure by cruise ship passengers totaled US$81.8 million with an
average spend per passenger of US$93. Of note is the fact that the percentage spend by cruise ship passengers on attractions has increased from 7.6% in 2005 to 26.2% in 2009. VISITOR SPENDING Looking ahead, the rate of growth of total stopover arrivals to the country is expected to remain at current levels given the turnaround of the US economy currently underway. Cruise passenger arrivals are expected to see a boost with the 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 these indicators, Dolphin Cove is well placed to capitalize and grow revenues in the short to medium term.
SHARE OFFER AND USE OF PROCEEDS The company is seeking to raise $240 million by issuing a total of 80 million shares to potential investors. Of these shares, some have been reserved for special groups as outlined below: # of Shares Class of Shares Price Total Raised 4,000,000 Key Partner Reserved Shares $3.00 $12,000,000 16,000,000 Company Reserved Shares $3.00 $48,000,000 60,000,000 Public Shares $3.00 $180,000,000 80,000,000 $240,000,000 If the company succeeds in raising the $240 million it desires, it intends to use the net proceeds for general expansion purposes including the purchasing of additional lands for the Ocho Rios marine park, completion of the purchase of lands for the Lucea marine park, and for the development of a more diverse range of offerings for guests in order to enhance marketability. They also intend to pay the expenses associated with the IPO out of the proceeds of the fundraising, which it estimates will not exceed $20 million inclusive of brokerage and financial advisory fees as well as other costs incurred in the caring out of the listing proceedings.
SWOT ANALYSIS Strengths: 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. The company has well established relationships with cruise ship and hotel operators which it uses to drive patronage. 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. Weaknesses: The company is hugely dependent on the performance of international economies, which are factors that they have no control over. 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 new Falmouth port which is currently under construction 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 is a joint venture between Royal Caribbean and the Government, and is being 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. Due to fact that the company s revenues are majority earned in US dollars, any appreciation of the Jamaican dollar would result in decreased revenues.
FINANCIAL STATEMENT ANALYSIS For the eight months ended August 2010, Dolphin Cove Limited reported net profit attributable to shareholders of $65.5 million down 41% or $45 million from the corresponding period of 2009. NET PROFIT Influenced partly by falling cruise ship arrivals over the period and the appreciation of the Jamaican dollar over its USD counterpart, the company recorded a 2.9% increase in total revenues to $637 million. The dolphin attraction segment posted a 9.1% increase in revenues to $449 million while the ancillary services segment posted a 9.4% decrease in sales to $187.5 million for the period. Total operating expenses increased 11% to $411 million from $370 million, and were attributable to costs incurred in the opening of the new marine park in Hanover. Resulting operating profits experienced a 16% decline to $122 million from $145 million. ROE/ROA Net finance costs increased by $6 million when compared to the similar period in 2009 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 52% to $5.6 million due to the encashment of some interest earning assets over the year. Dolphin Cove s resulting net profit attributable to shareholders registered a decline of 40.6% for the period to $65.5
million. As at August 2010, Dolphin Cove s total assets stood at $1.1 billion, while shareholders equity fell 24% to $633 million. This sharp decrease was due to a dividend declared in 2010 of $263 million. The company s long term debt doubled over the December 2009 level as leverage was utilized to facilitate the company s expansion plans. Projections & Valuation Dolphin Cove appears well placed within the industry to deliver reasonable levels of growth going into the future. Though revenues are highly dependent on the state of the tourism sector, top line growth is expected to continue, driven by the opening of the new Hanover marine park, the new Falmouth port, and long run strengthening of the US dollar. By way of the strategic locations of its facilities, the company is poised to take advantage of the potential growth in tourist arrivals when it occurs, and parlay those arrivals into top and bottom line growth. With the completion of the Falmouth port and the operation of the Hanover attraction, Dolphin Cove is expected to complete the 2011 financial year revenues of $1.5 billion. Our estimate is based on the more conservative projection of slightly more than half a million new cruise ship passengers. 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. Margins are projected to come under some pressure as the company recognizes expenses from the recent expansion. Net profit for the period to end December 2011 should approximate $130 million or an EPS of 33 cents. Valuation To arrive at a valuation for Dolphin Cove a multi-staged DDM was utilized. The company has stated that its dividend policy is to pay out no less than 25% given certain
capital requirements. The company will also pay no income taxes in the first five years of its listing and half the statutory amount over the subsequent five years. Dividends are projected to grow at 24% during this initial five year period before transitioning to a long run rate of 12%. The output of the model suggests an intrinsic value of $4.22 for Dolphin Cove. Alternatively, to test the fairness of the valuation, different assumptions were made for the projected cruise ship passenger arrivals from the Falmouth port. In a model with no new passenger arrivals from the port, growth was based on the opening of the Lucea facility along with expected future tourist arrivals and a price of $3.13 was derived. With the Falmouth port factored in with expected arrivals of 300,000 passengers per year, a price $3.87 was obtained. This highlights that the IPO price of $3.00 represents an undervaluation of the company and as such a BUY is recommended for Dolphin Cove. Risks to Valuation Slowdown in US and Europe economies may adversely affect revenues. The valuation is dependent on cruises ship arrivals from the new Falmouth port amounting to at least 600,000 per year. A departure from this figure could affect the revenue growth prospects of the company.
DOLPHIN COVE FINANCIAL SUMMARY Year Ended 31-Dec 2005 2006 2007 2008 2009 Income Statement Dolphin Revenue 338,188,823 483,573,950 504,504,576 522,852,445 583,419,947 Ancillary Revenue 140,604,809 156,106,832 175,139,094 219,564,665 249,218,304 Total Revenue 478,793,632 639,680,782 679,643,670 742,417,110 832,638,251 Operating Expenses 314,112,300 418,150,927 516,923,834 523,066,455 566,338,635 Operating Profit 52,087,937 108,053,223 40,417,345 80,604,261 122,489,073 Net Profit 43,841,805 106,567,350 22,212,124 74,755,117 104,725,630 Balance Sheet Total Assets 324,586,854 455,656,381 481,186,028 519,606,906 1,111,873,066 Total Liabilities 139,157,562 172,038,581 175,356,104 139,021,865 280,820,324 Shareholders Equity 185,429,292 283,617,800 305,829,924 380,585,041 831,052,742 Long Term Debt 68,518,228 48,147,121 61,061,394 31,901,622 129,779,915 Ratios Gross Profit Margin 76.41% 82.26% 81.74% 81.29% 82.70% Operating Profit Margin 10.88% 16.89% 5.95% 10.86% 14.71% Net Profit Margin 9.16% 16.66% 3.27% 10.07% 12.58% Return on Equity 23.64% 45.44% 7.54% 21.78% 17.29% Return on Assets 13.51% 27.32% 4.74% 14.94% 12.84% LT Debt/Equity 36.95% 16.98% 19.97% 8.38% 15.62% Interest Coverage 8.21 15.30 1.92 4.76 5.28 Current Ratio 1.38 1.13 1.07 1.80 2.01 Du Pont Analysis Profit Margin 9.16% 16.66% 3.27% 10.07% 12.58% x Asset Turnover 1.48 1.64 1.45 1.48 1.02 x Financial Leverage 1.75 1.66 1.59 1.46 1.35 = ROE 23.64% 45.44% 7.54% 21.78% 17.29%
DOLPHIN COVE INCOME STATEMENT AND PROJECTIONS Year Ended 31-Dec 2005 2006 2007 2008 2009 FY2011 Total Revenue 478,793,632 639,680,782 679,643,670 742,417,110 832,638,251 1,547,244,074 Total Direct Expenses -112,949,540-113,476,632-124,112,780-138,881,394-144,077,543-276,965,507 Gross profit 365,844,092 526,204,150 555,530,890 603,535,716 688,560,708 1,270,278,567 Other income 356,145 1,810,289 135,000 267,000 Gross Revenue 366,200,237 526,204,150 557,341,179 603,670,716 688,827,708 1,270,278,567 Selling Expenses 119,579,281 164,764,976 214,453,553 218,759,512 248,835,466 491,361,041 Other operations 106,661,276 144,391,904 183,154,489 184,416,067 192,914,012 413,517,788 Administrative 87,871,743 108,994,047 119,315,792 119,890,876 124,589,157 209,129,066 Total Operating Expenses 314,112,300 418,150,927 516,923,834 523,066,455 566,338,635 1,114,007,894 Operating Profit 52,087,937 108,053,223 40,417,345 80,604,261 122,489,073 156,270,673 Finance income 1,699,047 3,831,289 2,865,454 11,280,013 10,903,294 5,435,288 Finance costs -6,345,147-7,061,232-21,030,515-16,937,357-23,200,010-32,089,481 Profit before taxation 47,441,837 104,823,280 22,252,284 74,946,917 110,192,357 129,616,481 Taxation -3,600,032 1,744,070-40,160-191,800-5,466,727 0 Profit for the year 43,841,805 106,567,350 22,212,124 74,755,117 104,725,630 129,616,481
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