Ilirija d.d.: Adriatic tourism, by land and by sea (BUY - initiation of coverage)

We initiate coverage of Ilirija with a BUY recommendation and a price target (PT) of HRK 178/share, offering upside of 37%. Ilirija is a hospitality company, based in Biograd na moru, comprising five segments: 1) hotels; 2) nautical tourism – it operates the three largest marinas on the northern Adriatic coast; 3) camping; 4) real estate (a shopping centre in Zadar, with gross lettable area of 28,500m2 sqm, acquired in 2016); and 5) a destination management company (DMC Ilirija Travel). The stable revenues from the marina business and the shopping centre in particular have insulated Ilirija’s earnings from the worst of the COVID-19 pandemic, and its reasonable balance sheet management means that Ilirija should be able to resume growth investments once the pandemic has resolved itself, as well as dividends, in our view. The business has, historically, generated a ROCE of c.8% (vs. our WACC assumption of 7.5%) and we expect this to the remain the case from 2022E-onwards. On our numbers, the stock trades currently at 2021-22E EV/EBITDAs of 8.9x and 6.4x, respectively, or a 40% discount vs. its peers. However, its liquidity, we have to note, is extremely poor: over the past three years, it has traded, on average, just three days out of each month and its 6M ADTV is just EUR 809. For investors that can accept this limitation, however, the current entry point seems attractive, in our view.