We think some investors may be waiting for the spin-off to own MAR.
Marriott Vacation Worldwide (Ticker: “VAC”) will start trading on an as issued basis tomorrow. As we wrote about in “It’s Not the Economy, Stupid” (08/25)”, the spin-off of Marriott’s timeshare business will be a long-term value creating transaction positive.
Most lodging investors do not love the timeshare business - capital intensive and cash flow negative during periods of revenue and GAAP earnings growth - but as long as the business is small enough, they generally ignore it when thinking about value and multiples. As a separate entity, VAC should grow the business with their shareholders aligned with growing the company, while MAR benefits by getting a high multiple fee revenue stream that grows with the growth of VAC’s business – which should be at a faster rate than if VAC was still under the MAR umbrella.
We think that VAC is worth about $2.10 to MAR or approximately $1BN. Stripping out the timeshare business, MAR is trading at just 10x 2012, close to trough valuation on a business where 90% of the gross margin is fee driven. MAR should trade well above prior trough valuation levels since the business is of much higher quality. Incentive fees are now a smaller part of the pie and the only timeshare exposure is fee driven, and we’re at a different point in the cycle.
We think that VAC will do about $135-140MM of EBITDA in 2012 and that 7.0-7.5x EBITDA (or 17-18x P/E) is an appropriate multiple given the quality of their business.
While management wants us to do a sum of the parts where we assign a high multiple to the fee part of their busines, we just don’t see the point since the fees that VAC collects basically equate to the royalty they pay out to MAR – so in our view it’s a wash. What you are left with is a real estate developer, finance company and rental business - which typically trade at mid to high single digit EBITDA multiples. There aren't many comps for this business but we would note that the Sunterra multiple included a takeout premium which occurred at the height of the market in 2007 and Bluegreen is a micro-cap stock which recently received an offer to be taken private from Diamond Resorts.
For a vacation ownership business, there are a lot of things we like about VAC’s business:
- Ability to grow without becoming too asset intensive
- Seemingly competent management team and Board
- Reasonable expectations from the outset
- Opportunity for improvement by selling off excess land in their Luxury segment and de-emphasizing less profitable parts of their business
We are uncertain as to the near term trading, however. On the negative side, there is a likelihood of technical selling pressure from uninterested funds inheriting this stub and the historical low multiples assigned to timeshare. However, as we said from the outset, there appears to be a number of sideline sitters awaiting the spin-off to own the hotel company.