Valamar Riviera reinitiated at HOLD, TP HRK 40.0 - Intensive investment cycle to be continued

Top line growth above local peers continues to reflect a steady increase of the groups average daily rate (ADR) and occupancy rate, which is the result of strong investments in repositioning and portfolio upgrade. On the other hand, increased pressure from operating costs would limit the growth of profit margins in 2019e. We do not expect that the pressure from increasing operating costs will recede in 2020e and therefore expect EBITDA margin of 35.6% (vs. 35.7% in FY19e). Still, we do reckon with a positive impact on the top line from the opening of a new luxury year-round 5-star resort in Porec and therefore the EBITDA margin should bottom out in 2021e. Additionally, top line and EBITDA margins are likely to be positively influenced by the announced intensive five-year investment cycle of the consolidated company Imperial Riviera (HRK 1.5 bn). We see the latest two transactions with domestic pension funds management companies as an important factor for securing enough funds to develop its business further to other attractive tourism destinations in Croatia, while at the same time maintaining enough financial strength for its own intensive investment cycle. The expected slowdown of sales growth rates to single-digit numbers, a mixed development of profitability margins and high CAPEX expenditures lead to a TP of HRK 40 and a HOLD recommendation.