Revisiting my most viewed Stock Write-Up

A look, one year later, has it worked out?

One year ago, in December 2022, from the green mountains of Colombia, I wrote my most viewed article to date. Now, one year later, it is time to revisit it. Did it work? Is the thesis still intact?

Let's take a look. In case you don't know what I'm talking about, here's the old article:

LS Invest: Heads I win big, tail I win a little

Summary of the situation in December 2022:

“LS Invest owns 9 hotels in Germany, Spain, Austria and the Dominican Republic and 2 Rehabilitation clinics in Germany. The company has a book value of €417m (8,42€ a share) and trades at €287m (5,6€ a share). Lopesan Touristik, S.A. owns 89,6% of outstanding shares. When he owns 90%+ a squeeze out is possible. In case of a squeeze out the minimum valuation would be book value of 8,4€ a share, representing a 50% upside from the current share-price.”

In my write-up, I described two potential ways, to make money:

1. A squeeze-out that would unlock the value of their properties.

2. Stronger earnings in 2022 (first year after Covid and with earnings from the Dominican Republic “D.R.”)

For the first scenario, it is important to note that the hotels in Germany in particular have been depreciated quite a bit - and in total, all real estate should have been worth significantly more than the book value of 8.4€.

“It is certainly impossible to calculate the exact value of every hotel, but given the fact that the hotel in Spain is 2,3x times worth the value on the books, it seems reasonable to assume 1,2 - 1,5x book value is probably in a conservative range of valuation.
This would lead us to: 10-12€ / share. I have no idea of the exact value, but I am sure that I am directionally right.”

Regarding 2022 earnings, I estimated between €20-25m in EBITDA. They did €23,7m in EBITDA. At a market cap of only €243m and net debt of €33m, this would imply a cap rate of 8.5% cap rate.

Note: Cap rate is a common valuation metric for real-estate. It is calculated by dividing EBITDA/EV. Normal Cap Rates are 6-8% for luxury hotels and 8-10% for budget hotels.

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Valuing the stock now

Earnings Basis:

In 2023, they completed the sale of their German hotels. For €140 million excluding bonus, and an additional €50 million if the new owner reaches a certain EBITDA threshold with these hotels. The hotels generated €17.1 million in EBITDA on a standalone basis (excluding corporate costs). Therefore, excluding the bonus, the hotels were sold at a cap rate of 12.21%. Sure, these are old hotels, but I would say the seller did not overpay. After taxing those numbers at 30%, it leaves the stock at en EV of €178m. But the remaining hotels did only €13m in EBITDA (ex. company costs) in 2022.

The new hotel in the D.R. is the focus of the management, the reason why they sold the old hotels in Germany is to put their capital more into luxury hotels in the D.R.

The occupancy rate for the hotel in 2022 was 66%. There is probably some upside to get to about 75%. Applying the same prices, it would increase EBITDA to €10.2 million, adding €3 million EBITDA for the hotel in Spain and €1 million for the ones in Austria, and we arrive at €14-15 million EBITDA before group expansions. Even €15m of EBITDA after cooperation expanses (which would be very optimistic) would imply a cap rate of 8.4% on an EV of €178m. Certainly, a luxury resort in the DR deserves a lower cap rate (or higher multiple) than old hotels in Germany. On the other hand, the stock should also trade at a discount for being delisted and controlled by (horrible) management.

Verdict: I think the stock currently fairly valued on an earnings basis. I am not sure, I liked the sale of the hotels in Germany. I think they were sold rather cheaply, and I fear the cash generated will be invested in low ROE projects in the Dominican Republic.

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Asset Basis:

“The first, most likely and best scenario would be a squeeze-out. Everything looks like this will happen soon, but this has been said now since more than one year. The truth is, nobody knows when and if it will happen. The actions of the major shareholder point toward a Squeeze-Out. His ownership increased from 51% at the end of 2018 to now 89,6%. He delisted the stock in 2021 and now stopped reporting quarterly results, decreasing the communication with shareholder to a bare minimum. So, I would say 80% chance of a squeeze out in the next 12-16 months.”

The book value after the sale of the German hotels is €465 million, or €9.39 per share (I subtracted 30% taxes from the sale and assumed no bonus). So the book value increased by 11.5% while the share price fell from €5.6 to €5. If there is no squeeze-out, shares will probably never trade at book value. However, if there is a squeeze-out, it will very, very likely be taken private for more than just book value, because even after selling off the most depreciated assets, the real estate is probably worth more than book value. To be conservative, I took the book value without the bonus to calculate the potential IRR depending on the years you have to wait for the squeeze-out to happen.

Conclusion:

I think the stock is less attractive on an earnings basis than it was a year ago. However, the gap between book value and market cap has widened, making it cheaper on an asset basis. Unfortunately, management has shown no interest or signs of doing a squeeze-out yet. Therefore, it remains, more than ever, a "one day stock" - one day I will wake up and something has happened. I just don't know when that will be. That is why I have trimmed my position, because I think there are more attractive opportunities, or at least more "fun" opportunities, since holding a stock for many years with no movement, just to maybe get paid one day, is psychologically challenging, even though it may work from an IRR perspective.

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Disclaimer: This is not investment advice and meant for entertainment purposes only, I hold a position in the discussed company and therefore may be biased in my opinion. Please be aware that this is an illiquid microcap, please only buy and sell with a limit-order.