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It was no surprise when OEH missed estimates on last week.  We still think Street estimates are too high for the balance of the year, as well as for 2010 but what is the real value?



“The Company plans to make further disposals of non-core assets in the coming quarters as we continue to deleverage the Company in line with our target and reach a four to five times ratio of debt to average EBITDA by the end of 2011.” – OEH Management 


Despite another quarter of terrible numbers and a seemingly outrageous valuation of 18x 2009 EV/EBITDA, we believe that if the company is serious about monetizing some of its assets, the real value of the company may be higher.  As we wrote about in “NAV: WHO CARES?” on 06/10/2009, given the dearth of transactions at the upper upscale and luxury end, change in the “traditional” set of real estate buyers, lack of financing, and the uncertain timing of any recovery, per key (Net Asset) values are difficult to determine.  However, our best crack is that OEH’s NAV lies somewhere north of $11/share.


We think that potential buyers of trophy assets (like the Cipriani) would be willing to pay a price that provides a break-even scenario in the first few years as fundamentals recover.  On the 2Q09 call, OEH discussed selling up to 8 properties to help de-lever the company over the next 2 years.  Below is our attempt to try to quantify the proceeds of some potential assets sales. 


Windsor Court, which is under contract, and the Bora Bora asset are currently in the process of accepting bids.  OEH did not specify the sales price for Windsor Court other than stating that proceeds will materially exceed the $37MM mortgage on the property.  Our best guess is that Windsor Court will fetch $45MM -$50MM, or between $140-150k per key.  Bora Bora was purchased by Orient Express in March 2001 for $19.6MM.  We also believe that there is some land that comes with the asset.   We think that OEH should be able to get more than the initial purchase price - perhaps $30MM.


Other assets that we expect to come on the block include:

  • The Grand Hotel Europe
    • 2007 EBITDA of $21MM, 2008 EBITDA of $23.6MM, 2009E EBITDA of $13MM
    • Rates are in roubles, so the hotel took a huge hit this year after an unusually good year in 2008 when the rouble depreciated about 27.5% against the dollar in the 1H09
    • This is the largest EBITDA producing asset in OEH’s portfolio with 300 keys
    • Since the Russian economy is levered to oil, a recovery in prices could help them sell this asset at north of $200MM and perhaps closer to $230MM
    • Selling a majority stake in the asset is also a possibility
    • Given the volatility of the Russian market, we don’t think this asset is high on the list of for sale properties
  • Hotel de la Cité
    • With 61 keys located in Carcassonne, France, this asset is located in a “day trip” market which OEH mentioned was suffering the most in the current environment
    • 2007 EBITDA was $0.9MM, 2008 EBITDA was $0.1MM… our guess is that they are loss making this year
    • Our best guess is that this asset would fetch about $20-25MM
  • Keswick Hall & Inn at Perry Cabin
    • We believe that OEH would love to sell these assets, but the market just isn’t there now.   However, they fit the bill of “weekend getaway” markets
  •  Westcliff Hotel
    • Located in Johannesburg, South Africa, this asset is not key to the portfolio
    • Most of the customers that go on the OEH safaris stay at the airport hotel in Johannesburg so there’s not a lot of synergy with the Westcliff
    • We think OEH would sell this asset for a bid of $20-25MM
  • Lilianfels Hotel
    • Located just outside of Sydney, Australia in the Blue Mountains National Park
    • Another day tripper hotel
    • Best guess at value: $20MM
  • Pansea Porfolio               
    • We think that at least one of these assets will be up for sale in the next two years

What's Next? Monkey Time...

I love my banana.


Now the Fibonacci Monkeys are going to be chasing the 200-day Moving Monkeys and we’ll eventually get overbought.


What’s next?


The SP500’s immediate term resistance is 1,018 (a higher-high, and YTD high). After I we watch the monkeys fling’em at that line, we’ll make a new call from there. Provided that the US Dollar continues to be compromised, my intermediate term level of 1,041 resistance has every reason to be realized. The nightmare scenario for those who tried to call a crash again (AFTER the 4-day correction), is a SP500 futures picture of up 10-15 handles in the morning.



Keith R. McCullough
Chief Executive Officer


What's Next? Monkey Time...  - bananas

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Game Time YouTube: Bernanke Burns The Buck

Our Game Time call was that he would pander – he just pandered.


There was no signal of raising rates – explicitly or rhetorically. Bernanke said the Fed is going to “gradually slow the pace” of buying UST Bonds, but that’s just a political plug.


Per Wikipedia: to pander means, “in politics, portrayal of one's views to fit in line with a certain crowd of voters the candidate is attempting to impress.”


Ben Bernanke is pandering to the political pressures associated with getting a core constituency paid: Bankers, Debtors, and Politicians. He is hostage to his own personal history (studying depressions) and those savvy politicians who understand how to use that personal history as a backboard for their compromised agenda.


While, in the long run, this doesn’t end well for those paying the bills (US consumers via inflation and the Chinese holders of US Debt), in the immediate term you should continue to focus on how you can get paid. Just understand the dynamics of US Dollar Devaluation, and capitalize on it.


The US Dollar is down on the day, and everything priced in those dollars is up.



Game Time YouTube: Bernanke Burns The Buck - bern


Retail: Destocking Over?

Inventory destocking and clean-up across the supply chain appears to be at an inflection point now that the majority of the branded apparel and footwear vendors have reported 2Q results.  The chart below shows branded apparel and footwear sales to inventory spreads over the past several quarters vs. the trend at Macy’s (one of the largest sellers of all these goods).  Yes we know that most vendors have become less and less reliant on the department store channel, but with the dominance of Macy’s market-share in branded retailing, it’s still worth a look. We’ll have a better picture of this over the next week or two when every other retailer reports 2Q inventories, but for now it is clear that the delta on sales/inventory is getting better on the margin. 


The bottom line here appears to be that this is good for most links in the supply chain.  But we can’t improve this delta (hence boosting Gross Margin) by simply shrinking inventories forever. At some point, companies are going to have to actually buy inventory if they care to grow their respective businesses. This actually smells a little like Wall Street to me, where many people are not ALLOWED to be bullish because they (or their PMs) are too afraid of being run over making a positive bet on a consumer discretionary company. At some point, retailers are going to have to start to open the gates. My sense is that this will be around Holiday. That’s also the time when we eye a period (Spring) where the delta on compares won’t be as easy, and companies will need to either benefit from, or suffer with, the capital deployment decisions made today.


Bottom line is that I still think that the Quality Trade returns in early 2010, and companies that are proactively preparing to grow their businesses for the New Reality will prove that today’s numbers are far too low (RL, BBBY, UA, and even Nike later in the year). PSS is in there – though I accept that it does not deserve the ‘quality’ label. Junk is as junk does. That’s WRC, GIL, and JNY. And yes, include ROST and TJX in there. I know everyone loves them and they’re not ‘junky,' but we’ll start to see quality of earnings and incremental ROIC head in that direction next year.


Retail: Destocking Over? - Sales Inventory Growth


Long Germany: EWG

As a follow up to Matt Hedrick’s thorough post on Germany vs. UK yesterday, we have been getting a lot of questions as to what this ETF holds.

Here’s the data:



Long Germany: EWG - ewg

Long Germany: EWG - chart

Long Germany: EWG - ewg3

Long Germany: EWG - ewg4

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