Interval Leisure: Lots Of Space For Further Appreciation

| About: ILG, Inc (ILG)
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Business Overview:

The recovery in the U.S. economy brings many industries back to their growth path; VOI (timeshare) is one such industry. Interval Leisure (IILG) is a divided paying small-cap company that operates in VOI (timeshare) industry and serves the both sides of the industry: Property developers/resorts and vacationers. It operates the world's second largest VOI exchange network. Its exchange network consists of approximately 2,800 resorts located in over 75 countries and serves about 1.8 million members. The company also provides management services to about 200 properties. It has two reportable segments: Membership and exchange (offers travel and leisure related products and services); Management and rental (This segment provides management and rental-services to both vacation property owners and vacationers).

Investment Thesis/Theme:

Despite some very strong financial performance by the company in the last one year, its share price has just shown a growth of about 12%. I believe that these valuations are cheap and don't reflect its true business strengths, its future growth potential and leaves a lot of space for further appreciation of its share price. There are several reasons behind my belief like:

  1. Recovery in the U.S. market.
  2. Robust outlook for the vacation ownership industry.
  3. Improving margins and attractive dividend yield.
  4. Its reach and its large member base.
  5. Its business model and limited competition.
  6. Excellent acquisition strategic.
  7. Couple of recent events: an acquisition and price increase.

1. Recovery in the U.S. market.

The U.S. is the most important market for VOI industry as it's the world's largest market for VOI industry. With the economic recovery in the U.S. (see the chart below), the fortunes of VOI industry have changed immensely and the industry is getting back on its growth path.

The chart below shows the region-wise market size of VOI industry.

Since the U.S. is the largest market for VOI industry, its recovery plays a critical role in the growth of VOI industry. The company too generates most of its revenues from the U.S. market. So, the recovery in the U.S. economy will not only improve its future outlook immensely, but also allow it to use the cash generated, from the U.S. operations, to make business acquisitions in regions like Europe and Asia. Economy in the some parts of Europe and Asia is facing significant uncertainties and these types of situations normally favors cash rich acquirers as they invariably gets better bargains under weak economic conditions.

The table below shows the revenue ($ in thousands) generated by the company from the United States versus all other countries:

(Source: form 10-Q, Q2 FY 2013)

Moreover, despite the consistent growth during last three years, the industry is still recovering from the economic downturn that happened in 2008. The sale of the vacation ownership weeks was at about $6.9 billion in 2012, significantly lower than about $11 billion that the industry touched in 2007 (see the chart below). This leaves lots and lots of space for the industry to grow in the future. Since the company is one of the leading players of the industry, there is no reason why the company shouldn't be able to capture its share.

2. Robust outlook for the vacation ownership industry:

With the economic recovery in the U.S. and some other big markets, the outlook for the vacation ownership industry is strong. Moreover, the interest in VOI industry is also growing in the other countries like Brazil, Russia, China, Mexico, etc. As the company already has a global presence in over 16 countries, this growing interest is very positive for the company's future. The effect of growing popularity of VOI industry in the new/underdeveloped markets have already been showing up for the company. In the last two months three out of four resorts that joined its exchange network are located in these markets: Brazil, Uruguay, Mexico. The VOI products/packages are also expected to see an increasing demand due to its several benefits over the traditional options, these benefits include:

  • Vast choice of locations/resorts: Members enjoys a huge choice of resorts that are available on the selected exchange network.
  • Saving on the future vacation costs: Since the member pays the fees upfront, it saves, to some extent, on the future increase of vacation cost.
  • Certainty of quality accommodations: Exchange networks rate the resorts according to various parameters like cost, quality, service, etc. This rating allows the members to choose quality accommodation for vacations.

3. Improving margins and attractive dividend yield.

The company's margins have shown a substantial and sustainable improvement since the last few quarters (See the table below), due to the reduced interest cost, and also due to the reduced amortization expenses related to some acquired assets.

With the rise in profits, the company intends to pay healthy dividend to its investors. The company currently intends to declare and pay quarterly dividend of $0.11 per share. At this pay-out rate and the current share price of $21, the company offers an attractive dividend yield of about 2%.

4. Its reach and its large member base:

The company's exchange network consists of approximately 2,800 resorts located in over 75 countries, which includes the leading independent resort developers and branded hospitality companies. With this network, the company's network covers almost half the resorts that participate in the vacation ownership industry, in about 108 countries. This scale and reach not only makes it sure that the company captures the business opportunities from all around the world but also, to some extent, saves it from any region-specific slowdown.

To date, the company has almost 1.8 million vacation ownership interest owners enrolled as members of its Interval Network. This large member base attracts more resorts to join its network. This large base is essential for any exchange related services in VOI industry, and normally acts as a huge entry barrier for the new entrants.

5. Its business model and limited competition:

The company's business model is a kind of a self-accelerating business model: More members it made, more property owners (resorts) will prompt to join its network; more resorts join its network, more members it will get. This business model allows the company to expand its resort network with minimal efforts and with very little sales and marketing expenses.

There are just two principal providers of vacation ownership, membership and exchange services in the global vacation membership services industry, Interval International, an ILG business, and RCI, LLC, a subsidiary of Wyndham Worldwide Corp (NYSE:WYN). The limited competition makes sure that the industry as a whole operates with the healthy margins.

6. Excellent acquisition strategy:

The company follows a quick rewarding acquisition strategy.

As per the company's management:

"we focus on highly strategic transactions that are generally immediate or short-term EBITDA accretive." (Source: Seekingalpha)

This acquisition strategy makes it sure that the acquisitions comes cheap and paybacks in a quick time.

7. Couple of recent events: an acquisition and price increase:

An acquisition:

In August 2013, Interval Leisure Group and its subsidiary, VRI Europe Limited, entered into a definitive agreement with CLC World Resorts and Hotels. VRI Europe Limited will purchase the European shared ownership management business of CLC, for approximately £56 million (or approximately $85.6 million) in cash (subject to adjustment for working capital, actual 2013 results and other specified items) and issuance to CLC of shares totaling 24.5% of VRI Europe Limited.

After the said transaction, VRI Europe will manage 21 resorts with more than 1,500 units in the U.K., Spain, France, and Portugal.

As per the company's management:

"This particular transaction it's steeper surface, it's an asset-like business. It's utilizing our tax trapped cash and it's located in a lower tax jurisdictions." (Source: Seekingalpha)

So the said transaction will have the dual benefit for the company.

  1. It will convert its tax trapped cash into revenue generating assets.
  2. This will add significant capacity under the company's "management and rental" segment and is expected to significantly boost the margins of the said segment.

Recent price increase:

The company has recently made some price increase. As per the company's management

"Interval International transaction revenue is up slightly from last year in part due to a price increase of $10 per U.S. exchange that was implemented on July 1. Aston preliminary RevPAR for July was up 9%."(Source: Seekingalpha)

The said price increase is expected to increase the company's revenue by about 5%. The effect of the said price increase will reflect in the coming quarters and will further fuel the company's growth momentum.

Risks:

1. Economic slowdown:

The most significant risk that the company and the industry faces is the economic slowdown risk. Any slowdown in the U.S. economy can hurt its growth momentum.

2. Acquisition related:

Acquisitions are a major medium of growth for the company. Though the company follows a quick rewarding acquisition strategy, but still it's not necessary that all its acquisitions perform well.

3. Slower than expected growth in new markets:

In the long-run, the new/underdeveloped markets are expected to contribute significantly in the company's growth. If due to any reasons, the VOI industry doesn't evolves in these markets as expected, then the growth of the company will get affected (in a negative way).

4. Other risks:

Emergence of new competitors with the better products/services, any adverse change in the Govt. regulations.

Conclusion:

Interval Leisure has been going through very exciting times though its stock price doesn't show the same kind of excitement. The company is currently trading at $21 with market cap of around $1.23 billion. At $21, the company is available at P/E of about 19.5x ("TTM").

I would like to buy the company due to the following reasons:

  • Its valuation, which is undervalued and offers lots of upside.
  • Its business strategy: safe and growth oriented.
  • Its business type: Service oriented that holds huge barriers for the new entrants.

Terms to know:

Timeshare or VOI industry: Timeshare lets families share ownership of completely furnished vacation accommodations, called a "vacation ownership interest" (VOI). Owners can buy a weekly interval or points for a one-time purchase price and yearly maintenance fee.

Exchange Networks: These networks/ programs provide participants with the right to exchange their occupancy rights in their vacation interest (typically, for periods of one week) for comparable, alternative accommodations at another resort or at the same resort during a different occupancy period.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.