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Based in Las Vegas, Nevada, Diamond Resorts International (DRII) scheduled a $264 million IPO with a market capitalization of $1.2 billion at a price range mid-point of $17, for Friday, July 19, 2013.

Six other IPOs were scheduled for the week of July 15. The full IPO calendar can be found at IPOpremium.

  • S-1 filed July 9, 2013
  • Manager, Joint Managers: Credit Suisse; BofA Merrill; J.P. Morgan; Guggenheim
  • Co Managers: Cantor Fitzgerald & Co

Summary
DRII is in the system wide timeshare sales via points VOI's (vacation ownership industry) business. VOI's accounted for 57% of revenue for Q1 '13, including financing the % of VOI revenue was 72% for the 12 months ended March 2013. Hospitality and management services accounted for 28% of revenue.

Although not exactly apples and apples, compared with HomeAway (AWAY) DRII seems priced at a discount. And while there is increasing competition in the network timeshare via points marketplace, DRII has a large network with very active sales offices.

As long as the economy doesn't tank DRII should be able to increase revenue. However, DRII had a very good Q1 '13 that may not be sustainable.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Last 12 months thru March '13

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

Diamond Resorts International (DRII)

$1,246

2.2

50

6.7

-242.9

21%

HomeAway (AWAY)

$2,840

8.9

134

5.2

15.7

 

Glossary

Conclusion

At the price range mid-point of $17, the rating is neutral to negative.
To put the above conclusions and observations in context, the following is reorganized, edited, and summarized from the full S-1 referenced earlier:

Business

DRII offers a vacation ownership program whereby members acquire vacation ownership interests, or VOIs, in the form of points.

Ownership base: DRII has an ownership base of more than 490,000 owner-families, or members, and a worldwide network of 296 vacation destinations located in 32 countries throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, Central America, South America, Europe, Asia, Australia and Africa.

Resort network: DRII's resort network includes 79 Diamond Resorts properties with over 9,000 units that DRII manages and 213 affiliated resorts and hotels and four cruise itineraries, which DRII does not manage and do not carry the DRII brand, but are a part of the network and are available for members to use as vacation destinations.

Two Segments

Hospitality and Management Services: 72% of revenue for the 12 months ended March 31, 2013 (LTM, last 12 months).

Sales and Financing of VOIs (system wide timeshare points): 28% of LTM revenue.

Recent Developments

Comparing Q2 '13 vs Q2 '12

• 28% more sales

• 13.5% closing percentage, compared to 13.8%

• Closed 25% more sales transactions

• Increased average VOI (timeshare) sale price per transaction by 30%

• increased the volume per guest by 27%

Sales

DRII has 50 sales centers across the globe, 44 of which are located at managed resorts, two of which are located at affiliated resorts and four of which are located off-site.

DRII currently employs an in-house sales and marketing team at 38 of these locations and also maintains agency agreements with independent sales organizations at 12 locations.

A substantial amount of DRII's VOI sales activities occur at the managed resort locations in the network, and the volume of sales correlates directly with the number of prospective customers who visit these resorts each year.

Affiliate agreement very important

DRII has an affiliation agreement for an external exchange program with Interval International, which complements DRII's own internal vacation ownership exchange program, THE Club. As a result of this affiliation, members of THE Club generally may use their points to reserve the use of a vacation accommodation at more than 2,700 resorts worldwide that participate in Interval International.

In addition, interval owners at our managed resorts may join either Interval International or RCI, as their HOA constitutions dictate. Such interval owners may then deposit their deeded intervals in exchange for an alternative vacation destination.

When DRII's points and intervals are exchanged through Interval International or RCI, this inventory is made available to owners from other resorts, who are potential customers for DRII's VOI sales.

If DRII does not maintain external exchange program affiliations, the number of individuals exchanging interests through these programs to stay at DRII's managed resorts may decline substantially.

DRII needs at least a stable economy

The ARDA International Foundation, or AIF, has reported that aggregate U.S. VOI sales declined $0.9 billion, or 8.5%, to $9.7 billion in 2008 from $10.6 billion in 2007, and aggregate U.S. VOI sales then declined $3.4 billion, or 35.0%, to $6.3 billion in 2009, down 40% from the high in 2007.

The travel industry has been hurt by various events occurring over the last several years, including the effects of weak domestic and global economies. A sustained downturn in travel patterns, including as a result of increases in travel expenses such as higher airfares or gasoline prices, could cause a reduction in the number of potential customers who visit the managed resorts in DRII's network.

If DRII experiences a substantial decline in visitors to these resorts, DRII's VOI sales would likely decline.

In addition, income and other taxes for some U.S. residents increased in the beginning of 2013, which may reduce the funds that such individuals have available to spend on travel and leisure, including purchasing our VOIs.

Competition

VOI segment: Vacation Ownership Industry - Vacation Interest Sales and Financing segment

Competitors include Bluegreen Corporation, Disney (Disney Vacation Club), Four Seasons Resorts and Hotels, Hilton (Hilton Grand Vacations), Marriott Vacations Worldwide Corporation (which operates the Marriott Vacation Club, the Ritz-Carlton Destination Club, the Ritz-Carlton Residences and the Grand Residence Club by Marriott), Starwood (Starwood Vacation Ownership) and Wyndham Worldwide (which operates Fairfield Resorts and Trendwest Resorts)

DRII also competes with numerous other smaller owners and operators of vacation ownership resorts, as well as alternative lodging companies, such as Home Away and Airbnb, which operate websites that market available furnished, privately-owned residential properties in locations throughout the world, including homes and condominiums, that can be rented on a nightly, weekly or monthly basis.

Consumer financing segment

DRII competes with numerous subsets of financial institutions, including mortgage companies, credit card issuers and other providers of direct-to-consumer financing. These services permit purchasers to utilize a home equity line of credit, mortgage, credit card or other instrument to finance their purchase.

Industry consolidation expected

DRII believes that the vacation ownership industry will continue to consolidate in the future.

Due to the recent economic climate, many competitors have had difficulty maintaining their highly-leveraged, development-focused business models and have begun to increase their focus on sales of VOIs and provision of management services.

Furthermore, a number of competitors, including companies with well-known brand names in the hospitality industry, have adopted strategies and product offerings comparable to DRII's, such as by offering points-based VOI systems, thereby reducing DRII's competitive advantage.

Pre-IPO 5% shareholders

Cloobeck Diamond Parent, LLC, 33.6%
DRP Holdco, LLC, 20.7%
Wellington Management Company, 19.9%
Timeshare Acquisitions, LLC, 6.7% (post-IPO)

Use of proceeds

DRII expects to net $217 million from its IPO. Proceeds are allocated to repay debt, including acquisition debt for recently acquired companies.

Disclaimer: This DRII IPO report is based on a reading and analysis of DRII's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Diamond Resorts International