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Next week, Diamond Resorts International (DRII) is set to price its initial offering. The pricing is expected to be in a range of $16 to $18. The company is a leader in the vacation rental industry and has a unique spin on the typical timeshare model.

Offering

Diamond Resorts is offering 15.5 million shares in the IPO, with 14 million from the company and 1.5 million from a current investor. The company will have a total of 73.3 million shares outstanding after the IPO and paying off an acquisition. With a pricing of $17, the company will have a market capitalization of $1.25 billion. Public investors will own 21 to 24% of the company based on underwriters' purchases.

Company

Diamond Resorts ended the month of March with 296 destinations in 32 countries. The company has resorts in:

  • United States, Canada, Mexico, Caribbean, Central America, South America, Europe, Asia, Australia, Africa

Prior to several acquisitions taking place after the IPO, here is a look at the managed and affiliate properties of Diamond Resorts International:

  • 79 managed properties (31 North America, 4 Mexico & Caribbean, 44 Europe)
  • 217 affiliate properties (90 North America, 46 Asia & Australia, 30 Mexico/Caribbean/South America, 47 Europe, 4 Cruise)
  • After acquisition, 92 managed, 213 affiliate

Diamond Resorts differs from other vacation rental and timeshare companies with its unique VOI (vacation ownership interests) system. The company allows members an allotted number of points based on yearly purchases. The points are then used to reserve vacation stays at any Diamond Resorts. Unlike timeshare programs, Diamond customers can pick from any resort and any available week.

Diamond Resorts operates in two business segments.

  • Hospitality and management services - In the last twelve months, hospitality made up only 28% of total revenue with $160 million in revenue. Net income of $92 million represented 48% of the total, with the segments' stronger margins.
  • Sales and financing of VOIs - The company's sales segment, powered with 50 sales centers, represented 72% of the last twelve months sales for Diamond Resorts with $407 million. Net income of the segment was $101 million, representing 52% of the company's total.

Financials

In the last twelve months, Diamond Resorts saw revenue of $568.2 million. Net income over that time was $25.5 million. Revenue is increasing thanks to more sales presentations and stronger average transaction sizes. In the quarter, 55,650 sales presentations were held, representing growth of 28%. The amount of presentations closed was 13.5%, a slight decline from the prior year's 13.8%. The company did close on 7518 VOI transactions, versus 6006 a year ago. Average volume per transaction increased 29.7% to $16,012. VOI per guest also increased 26.8% to $2163.

2010

2011

2012

Revenue

$370.8 million

$391.0 million

$523.7 million

# Tours

130,801

146,261

180,981

Destinations

179

219

263

Closing Percentage

17.4%

14.4%

14.8%

Average VOI Per Trans

$9526

$10,490

$12,510

After the IPO, two acquisitions will change the make-up of Diamond Resorts. The company is acquiring Island One Inc. and Crescent One LLC in one transaction. The deal gives Diamond Resorts contracts, consumer loans, existing VOIs, and nine managed resorts in Florida. More importantly, the company will also gain a base of 25,000 customers from the deal. The transaction will complete with the IPO, as Diamond Resorts will pay for the transaction with shares of its new stock.

Another deal announced in June is Diamond Resorts acquisition of PMR Service Companies. The deal will transfer several affiliate hotels into the management of Diamond Resorts. The transaction will be paid for with cash, based on the price of the IPO. With a mid range $17 price point, the acquisition would cost $54.3 million.

Strengths

  • Substantial portion of revenue in hospitality segment converts directly to adjusted EBITDA
  • Our capital-efficient business model required limited investment in working capital and capital expenditures
  • Scalable VOI sales and marketing drives increases in adjusted EBITDA
  • High level of customer satisfaction results in significant sales of extra VOIs (was 72% in 2012 vs. 66% in 2011)
  • Accomplished management team positions us for continued growth

Growth Strategy

  • Continue to grow hospitality and management service business
  • Increase membership in THE Club
  • Broaden hospitality service and activity offerings
  • Expand offers of third party products
  • Leverage scalable sales and marketing platform to increase VOI sales revenue
  • Pursue additional opportunities consistent with capital efficient business model

Competitors

In the vacation rental segment, Diamond Resorts faces competition against several companies, including all major hotel providers around the world. The two biggest publicly traded competitors are Marriott Vacations (VAC) and HomeAway Inc. (AWAY).

Marriott Vacations was spun-off from parent company Marriott International. The company has a market capitalization of $1.7 billion. In fiscal 2012, revenue increased 2% to $688 million. Net income was $0.44 per share, giving the company a rich price to earnings. The company is estimating fiscal 2013 earnings per share of $1.77 to $2.00.

HomeAway is the world leader in online vacation rentals. The company, which recently went public, has a market capitalization of $2.6 billion. In fiscal 2012, the company posted revenue of $280.4 million, which was an increase of 21.8%. In fiscal 2013, revenue is guided to hit $339 to $343 million.

Conclusion

The two above examples of Marriott Vacation and HomeAway should show the potential for this IPO to price higher than the initial $16 to $18 range. If shares don't move up, I think investors have a clear opportunity to get in on the ground floor. This is a great company that collects fees from memberships and has a point system. Averages are trending upwards, and the company's acquisitions will help increase customer base and total revenue. This is an IPO investors should watch carefully and consider investing in.

Source: Diamond Resorts International Is An IPO Investors Should Get Behind