Ilirija d d : Ažurirano izvješće 11/08/2022

Consumer Discretionary, Croatia11 August 2022

Ilirija d.d.	Buy
	Upgraded from Hold
	Price: HRK 178
	Price target: HRK 209
	(from HRK 192)

Stronger prices drive upgrade

Following the 2Q22 numbers, we make small upwards adjustments to our model again and raise our 12M price target (PT) by c.9%, to HRK 209. Accordingly, we also upgrade our recommendation from Hold to BUY, with potential upside of 17%. Ilirija's 2Q numbers provide an even clearer picture of how management is positioning the business, ahead of the peak summer season; as we observed in 1Q22, the message, we believe, is stronger pricing. Going forward, we maintain that Ilirija's strong balance sheet positions it for a new growth capex cycle, as well as a return to regular dividends. In July, the company was also more active with its share buyback, its 6M ADTV improved to EUR 7.0k; of this, however, nearly two-thirds was generated in just two trading days. This low liquidity remains an issue, in our view, for investors seeking exposure to the story.

Our updated forecasts reflect the stronger pricing in the camping and hotel segments during the peak season. In total, we have raised our 2022- 24E revenues forecasts by another c.5%, on average, specifically for: 1) higher average rates or mobile homes and individual pitches (camping segment); and

1. hotel ADRs. Camping revenues grew nearly 50% yoy on c.10% more pitch days sold and c.32% more higher revenues per sold pitch. The 1H22 hotel revenues rose c.360% yoy - the driver here, naturally, was occupancy, but with 28% yoy higher average revenues per sold. We observe a similar, albeit less dramatic, trend in the nautical rates (with revenues +9% yoy). Only in real estate do we see revenues remaining flat, around the 2020-21 levels.

We have lifted our 2022E net profit estimate by c.8%, to HRK 32.7m, on revenues of HRK 186m and EBITDA of HRK 59.5m (increases of 4% and 5%, respectively). Again, we note that our numbers imply a c.400bps yoy compression in the EBITDA margin, to 32.0% (+30bps vs. previous estimates), but still above the 2019 level. Assuming that the 2022 season price adjustment will stick, even with the current cost pressure, we see the 2023-24EEBITDA margin stabilising around 31%. Following our revisions, we see 2022-24Erevenues and net profit CAGRs of 4.7% (+50bps) and 4.4% (-140bps),respectively; Ilirija's 2017-19CAGRs were 5.6% and 7.3%, respectively.

On our 2022E earnings, Ilirija trades at an EV/EBITDA of 7.9x and a PER of 13.1x, the former a 50% discount versus its global hospitality peers. In our view, the significant discount reflects its peers' 2022E earnings being below potential, while the stocks are pricing in, in full, a recovery from 2023E- onwards. The stock's EV/EBITDA discounts for 2023-24Enarrow to c.32%, or in line with its 2016-19discount vs. its peers.

Croatian tourist nights returned to pre-pandemic levels in June, according to the latest statistical office release. At 13.1m, tourist nights in June doubled yoy, fully in line with the 2019 figure; this, in our view, suggests a promising start to the 3Q high season. June tourist arrivals of 2.66m were 91% of 2019, i.e., average nights stayed grew c.12%, to 5.14. Specifically, in Zadar County, where Ilirija is situated, tourist arrivals were 102% of the 2019 level and tourist nights were at 92%, or 1.27m nights.

Expected events

3Q22 results	End-October
4Q22 results	End-February
1Q23 results	End-April

Key data

Market Cap	EUR 57m
Free float	47.1%
6M ADTV	EUR 7.0k
Shares outstanding	2.4m
Major Shareholder	Arsenal (59.2%)
Reuters Code	ILRA.ZA
Bloomberg Code	ILRA CZ
CROBEX Index	1,219

Price performance

52-w range		HRK 193-150
52-w performance	7.9%
Relative performance	7.9%
Ilirija 12M share price performance
		ILRA CZ		CROBEX (rebased)

200

190

180

170

160

150

140

EQUITY

RESEARCH

Year	Sales	EBITDA	Net profit	EPS	EPS	DPS	P/E	EV/EBITDA	P/CE	Div yield
	HRK m	HRK m	HRK m	HRK	% yoy	HRK	(x)	(x)	(x)	%
2019	163.5	50.2	31.3	13.03	-15%	0.00	14.0	10.8	10.0	0.0%
2020	97.6	21.2	1.0	0.42	-97%	0.00	n.m.	21.5	16.2	0.0%
2021	134.5	48.4	22.2	9.21	n.m.	3.50	17.3	9.2	8.7	2.2%
2022E	186.0	59.5	32.7	13.58	47%	3.50	13.1	7.9	9.1	2.0%
2023E	197.4	59.5	32.7	13.59	0%	3.50	13.1	7.5	8.5	2.0%
2024E	204.0	64.1	35.6	14.81	9%	3.71	12.0	6.6	8.0	2.1%
Analysts: Bram Buring, CFA; Alex Boulougouris, CFA				Prague: [phone]
E-mail: [e-mail]; [e-mail]			Website: www.wood.com

Contents
Company snapshot - BUY, HRK 209..............................................................................................................	3
Valuation............................................................................................................................................................	4
Financials ..........................................................................................................................................................	6
Important disclosures ......................................................................................................................................	8

Closing Prices as of 10 August 2022

© 2022 by WOOD & Company Financial Services, a.s.

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Ilirija d.d.

2

WOOD & Company

Company snapshot - BUY, HRK 209

BUY								COMPANY DESCRIPTION
Bloomberg ticker	ILRA CZ		ILRA CZ		CROBEX (rebased)		Compared to the traditional Croatian resort operators, which rely primarily streams of beachgoers	during the
Closing price (HRK)	178				summer season, Ilirija's	business also adds its Marina Kornati, one of the largest marinas on the Croatian
200
					Adriatic coast, and nautical tourism. The marina's primary earnings driver is providing year-round mooring for
Price target (HRK)	209
190						charter and private vessels; it is a stable business	that last	year, alone,	generated HRK 30.1m for Ilirija, or
Upside to PT	17.4%
180						23% of its total revenues. In addition to moorings and other associated services, Ilirija also operates four mid-
Shares outstanding (m)	2.4						sized hotels, not only for visitors to the marina, a c.1,200 pitch campsite for more traditional holidaymakers,
170
MCAP (EUR m)	57						plus sports and dining facilities. The company also provides event management at its own sites, as well as
160						hosting the annual Biograd Boat Show, one of the	largest floating boat shows in the	region. In	2016, the
Free float	47.1%
150						company acquired the Shopping Center City Galleria in nearby Zadar, a six-floor, c.10k m2 shopping mall near
6M ADTV (EUR '000)	7.0
					the old city centre, which it financed with proceeds from a small capital increase and debt; we view this an
		140
52 Week Range (HRK)	193-150						opportunistic purchase, having little synergy with the tourism core business, but with >99% occupancy and a
								yield to book value of >10%.
RATIOS
PER SHARE RATIOS		2019	2020	2021	2022E	2023E	2024E	VALUATION RATIOS		2019	2020	2021	2022E	2023E	2024E
EPS		13.0	0.4	9.2	13.6	13.6	14.8	P/E		14.0x	356.6x	17.3x	13.1x	13.1x	12.0x
CEPS		18.3	9.3	18.3	19.6	20.9	22.3	EV/EBITDA		10.8x	21.5x	9.2x	7.9x	7.5x	6.6x
BVPS		144.2	144.6	153.8	163.9	174.0	185.3	P/CF		10.0x	16.2x	8.7x	9.1x	8.5x	8.0x
DPS		0.0	0.0	3.5	3.5	3.5	3.7	P/BV		1.3x	1.0x	1.0x	1.1x	1.0x	1.0x
								EV/Capital Employed		1.2x	1.0x	0.9x	1.0x	0.9x	0.9x
FINANCIAL RATIOS		2019	2020	2021	2022E	2023E	2024E	EV/Sales		3.3x	4.7x	3.3x	2.5x	2.3x	2.1x
EBITDA margin		30.7%	21.7%	36.0%	32.0%	30.1%	31.4%	EV/EBIT		15.1x	82.6x	15.1x	10.9x	10.5x	9.1x
EBIT margin		21.9%	5.7%	21.8%	23.1%	21.4%	22.7%	Cash flow from ops, HRK m	44.0	22.5	44.1	47.2	50.3	53.6
Net margin		19.2%	1.0%	16.5%	17.6%	16.6%	17.5%	EV, HRK m		541	456	444	468	446	421
ROE		9.3%	0.3%	6.2%	8.5%	8.0%	8.2%	FCF, HRK m		17.8	8.6	31.8	28.2	30.7	33.4
ROCE		7.9%	1.2%	5.2%	7.3%	7.2%	7.8%	FCF yield		4.0%	2.4%	8.3%	6.6%	7.2%	7.8%
Net debt/EBITDA		2.0x	4.3x	1.2x	0.7x	0.3x	(0.1)x	Dividend yield		0.0%	0.0%	2.2%	2.0%	2.0%	2.1%
Net debt/(cash) to equity		0.3x	0.3x	0.2x	0.1x	0.0x	(0.0)x
COMPANY FINANCIALS
INCOME STATEMENT, HRK m		2019	2020	2021	2022E	2023E	2024E	BALANCE SHEET, HRK m	2019	2020	2021	2022E	2023E	2024E
Total operating revenues		163.5	97.6	134.5	186.0	197.4	204.0	Current Assets		34.0	27.8	52.9	99.2	106.5	117.1
Materials and energy		-24.4	-11.1	-17.1	-29.5	-31.1	-31.5	Cash and equivalents	15.2	23.4	3.7	39.4	45.9	56.0
Services		-21.7	-16.3	-18.5	-24.3	-25.8	-26.6	Trade receivables		15.8	3.4	3.1	12.6	13.4	13.8
Staff cost		-47.4	-31.8	-36.0	-49.7	-56.7	-56.5	Inventories		1.8	1.1	1.0	2.0	2.1	2.2
Other operating expenses		-19.9	-17.3	-14.4	-23.0	-24.4	-25.2	Other		1.2	0.0	45.1	45.1	45.1	45.1
EBITDA		50.2	21.2	48.4	59.5	59.5	64.1	Non-current assets		451.2	448.9	442.0	444.4	446.9	449.4
D&A		-14.4	-15.7	-19.1	-16.6	-17.1	-17.7	PP&E		374.0	370.8	363.6	367.6	371.8	376.0
EBIT		35.8	5.5	29.4	42.9	42.3	46.4	Intangible assets		0.5	0.1	0.2	0.4	0.5	0.7
Net financial expenses		-4.5	-4.5	-3.0	-3.1	-2.4	-2.9	Investment property		76.7	77.9	78.2	76.4	74.5	72.7
Profit before taxation		31.3	1.0	26.4	39.9	39.9	43.5	Other		0.0	0.0	0.0	0.0	0.0	0.0
Income tax		0.0	0.0	-4.2	-7.2	-7.2	-7.8	Total Assets		485.3	476.7	494.9	543.6	553.5	566.5
Net profit		31.3	1.0	22.2	32.7	32.7	35.6
								Total Current Liabilities		40.1	22.7	30.2	37.8	38.1	37.0
CASH FLOW, HRK m		2019	2020	2021	2022E	2023E	2024E	Trade payables		20.1	11.9	14.2	22.7	24.1	24.9
Net profit		31.3	1.0	26.4	32.7	32.7	35.6	ST loans		18.2	9.1	14.1	13.1	12.0	10.1
Depreciation		14.4	15.7	19.0	16.6	17.1	17.7	Other		1.9	1.8	2.0	2.0	2.0	2.0
Change in retained profit		0.0	0.0	0.0	0.0	0.0	0.0	Total Non-current Liabilities	98.4	105.8	94.4	111.4	96.7	83.6
Sale of PP&E		0.0	0.5	0.0	0.0	0.0	0.0	Long-term debt		98.4	105.8	94.4	111.4	96.7	83.6
Share bonuses		0.0	0.0	0.0	0.0	0.0	0.0	Other		0.0	0.0	0.0	0.0	0.0	0.0
Change in working capital		-1.7	5.2	-1.3	-2.0	0.5	0.3	Total shareholders' equity	346.8	348.1	370.2	394.4	418.7	446.0
CF from operating activities		44.0	22.5	44.1	47.2	50.3	53.6	Total liab. & equity		485.3	476.7	494.9	543.6	553.5	566.5
CAPEX		-26.2	-13.9	-12.3	-19.1	-19.6	-20.2
Other		0.6	1.2	-45.1	0.0	0.0	0.0	Net Debt/(Cash)		101.3	91.6	59.7	40.0	17.7	-7.4
CF from Investments		-25.6	-12.7	-57.3	-19.1	-19.6	-20.2	Gearing		2.0	4.3	1.2	0.7	0.3	-0.1
Issuing of new shares		0.0	-	0.0	0.0	0.0	0.0	Capital Employed, HRK m	451.8	443.2	479.0	483.4	485.4	487.6
Purchase of treasury shares		-0.4	0.0	0.0	0.0	0.0	0.0
Dividend paid		-8.4	-	0.0	-8.4	-8.4	-8.4
Increase/(decrease) in long-term borrowings	-5.0	7.5	2.7	17.0	-14.7	-13.1
Increase/(decrease) in short-term borrowings	5.4	-9.1	-9.1	-1.0	-1.1	-1.9
Cash from financing activities		-8.4	-1.7	-6.4	7.5	-24.2	-23.4
Operational highlights		2019	2020	2021	2022E	2023E	2024E	Gross revenues (HRKm) by segment
Nautical		740	717	717	720	730	730		Hotels	Nautical Camps	Real estate	Other
Vessels on berth contract		250
Transit berths - inbound vessels		3,418	1,585	2,667	2,993	3,150	3,350
Transit berth overnight stays		11,227	9,799	10,219	9,878	10,395	11,055
Average contract rate (HRK)		40,686	41,827	43,724	45,002	46,577	48,208	200
Revenues per transit vessel		820.8	1,246.2	940.7	1,012.0	1,027.2	1,042.6
Transit berth ADR		249.9	201.6	245.5	306.7	311.3	315.9
Hotels								150
Number of accomodation units		443	443	443	443	443	443
Open days		229	108	149	230	230	230
Rooms Available ('000)		102	48	66	102	102	102	100
Accommodation units sold ('000)		73.3	14.5	35.5	66.3	70.3	71.1
Occupancy on open day basis		72.1%	30.4%	53.9%	65.1%	69.0%	69.8%
Revenues per sold room		762.1	805.5	790.1	895.7	922.5	954.8	50
Camps
Maximum pitch days ('000)		335.5	332.2	239.2	321.9	321.9	321.9
Total pitch days ('000)		182.7	141.0	118.9	164.1	168.3	168.3	0
Occupancy		54.4%	42.4%	49.7%	51.0%	52.3%	52.3%
	2018	2019	2020	2021	2022E	2023E	2024E
Revenues per sold pitch		174.2	127.7	253.3	288.4	299.6	307.9

Ilirija d.d.

3

WOOD & Company

Valuation

DCF valuation

We value Ilirija using a 10Y DCF model, with a multiples valuation as a sanity check. On this basis, we arrive at a DCF-based 12M PT of HRK 209/share, or upside of c.17% to the current level. The key assumptions in our DCF model include:

• A WACC of 9.4% (previously 9.8%), starting with a risk free rate of 6.0% for Croatia (previously 6.5%) and an equity risk premium of 5.5% (unchanged).
• We apply a levered beta of 0.95x (previously 0.69x), based on an unlevered beta of 0.86x from the Damodaran sector beta database for hotel and gaming companies.
• A terminal value calculated as the average of the perpetuity, with a 0% terminal growth rate, and an exit EV/EBITDA of 8.0x (both unchanged).

DCF valuation

HRK m		2022E	2022E	2023E	2024E	2025E	2026E	2027E	2028E	2029E	2030E
EBIT	42.9	42.3	46.4	47.9	49.3		50.9	52.5	54.1	55.8	57.6
NOPLAT	35.2	34.7	38.0	39.2	40.5		41.7	43.0	44.4	45.8	47.3
Depreciation	16.6	17.1	17.7	18.3	18.9		19.5	20.2	20.8	21.5	22.2
Change in NWC	-2.0	0.5	0.3	0.2	0.2		0.3	0.3	0.3	0.3	0.3
Capex	-19.1	-19.6	-20.2	-20.8	-21.4		-22.0	-22.7	-23.4	-24.1	-24.8
FCF	30.7	32.7	35.8	37.0	38.2		39.5	40.8	42.1	43.5	45.0
PV of FCF	30.7	29.9	29.9	28.2	26.6		25.1	23.7	22.4	21.1	20.0
	I. Perpetuity (g=0%)	II. Exit EV/EBITDA 8.0x				Risk-Free Rate			6.0%
Sum of PV	258		258						Levered Beta			0.95
PV of Terminal value	224		319						Risk premium			5.5%
Total EV	481		576						Cost of Equity			11.2%
Net Debt (2021A)	-60		-60						Cost of Debt			3.1%
Dividend paid	-8		-8						Tax Rate			18.0%
Equity value	413		508						Effective Cost of Debt		2.5%
Equity value (HRK/sh)	171.3		210.6						Weight of Equity			79.8%
Average (HRK/sh)			191							Weight of Debt			20.2%
12M PT (HRK/sh)			209							WACC				9.4%
Source: WOOD Research
		PT sensitivity to WACC and terminal growth rate
		WACC/terminal growth	-2.0%	-1.5%		-1.0%	-0.5%		0.0%	0.5%	1.0%	1.5%	2.0%
		7.4%		233	240		248	257		268	279	293	309	328
	7.9%		220	227		234	241		250	260	272	285	300
	8.4%		209	215		221	227		235	243	253	264	277
	8.9%		199	203		209	215		221	229	237	246	257
		9.4%		189	193		198	203		209	215	222	230	239
	9.9%		181	184		188	193		198	203	210	216	224
	10.4%		173	176		180	184		188	193	198	204	211
	10.9%		165	168		171	175		179	183	188	193	199
	11.4%		158	161		164	167		171	174	178	183	188
		Source: WOOD Research

Ilirija d.d.

4

WOOD & Company

Peer multiples

Peer multiples

Name	Country	Price	Mkt Cap		P/E		EV/EBITDA		EBITDA margin
		(LCU)	(EUR)	22E	23E	24E	22E	23E	24E	22E	23E	24E
ILIRIJA DD	HR	178	57	13.1	13.1	12.0	7.9	7.5	6.6	36%	32%	30%
ARENA HOSPITALITY GROUP DD	HR	240	164	13.4	13.2	12.5	7.7	7.3	7.6	26%	28%	29%
PPHE HOTEL GROUP LTD	NE	1,445	727	n.a.	28.4	18.0	17.5	12.5	10.9	29%	32%	33%
MELIA HOTELS INTERNATIONAL	SP	6.37	1,404	48.0	15.9	10.8	11.3	9.0	7.1	24%	26%	27%
NH HOTEL GROUP SA	IR	3.59	1,564	232.2	16.1	11.8	9.1	6.7	5.5	27%	30%	32%
ACCOR SA	SP	26.5	6,969	54.2	23.8	18.1	15.7	11.1	9.5	16%	20%	21%
LEMON TREE HOTELS LTD	FR	75.5	736	n.a.	80.4	43.7	61.9	21.5	17.0	30%	48%	49%
INDIAN HOTELS CO LTD	IN	267.95	4,680	n.a.	57.9	42.4	85.1	28.4	23.3	13%	28%	30%
HUAZHU GROUP LTD-ADR	IN	38.72	12,182	n.a.	36.3	25.5	60.0	20.0	14.9	10%	26%	29%
SH JINJIANG INTL HOTELS - B	CH	2.018	7,958	54.2	23.8	18.1	15.7	11.1	9.5	16%	20%	21%
MINOR INTERNATIONAL PCL	CH	33.75	4,879	89.5	29.6	20.5	12.4	10.1	8.2	26%	26%	27%
Peer median				n.m.	23.8	18.1	15.7	11.1	9.5	26%	28%	29%
Ilirija vs peer median				n.m.	-45%	-34%	-50%	-33%	-31%
Source: Bloomberg, WOOD Research

Compared to the 2017-19 levels, the 2022E median consensus peer multiples remain elevated, in our view, but are reverting to the mean for 2023-24E. A "normal" median peer group EV/EBITDA multiple would be closer to 13x (currently, our peers trade at a 2023-24E average of 10.3x) and around 22x for PERs (vs. our average of 20.9x for 2023-24E). For our multiples valuation, we apply: 1) the "normalised" figures for 2022E; and 2) the 2023-24E peer multiples to the average 2022-24E earnings (which are, themselves, more or less, normalised). We also apply the same historic (2016-19) discounts vs. its domestic peers (34% on PER, 2% on EV/EBITDA) as we used in our initiation report in. On these numbers, we reach a fair value for the stock, on PER, of HRK 196/share, and HRK 250 on EV/EBITDAs. The average of the two valuation methods is HRK 223/share, 7% above our DCF price target and an upside of 25% from the current levels.

Peer multiple valuation

	P/E	EV/EBITDA
Peer group avg. multiples	21.3	11.2
Trailing 3yr premium/(discount)	-34%	-2%
Average 2022-24E earnings (HRK m)	33.7	61.0
EV		672
Net debt (2021)		-60
Dividend paid		-8
Equity value	473	603
Equity value per share	196	250
Weight	50%	50%
Fair value (HRK/sh)		223
Source: WOOD Research

Ilirija d.d.

5

WOOD & Company