Minoan Group PLC
Value in Crete 5 April 2016
The Presidential Decree (‘PD’) authorising Minoan’s major development in Company Data Crete outshines the group results for 2014/15 just published. EPIC MIN Price (last close) p 9.4 The results themselves are satisfactory, if not exciting – but the Greek decision turns 52 week Hi / Lo p 13.1 / 6.0 attention back to the company as an asset play of significant potential value. Issued Ord. m 188.83 Market cap £m 17.7 The PD is subject only to an appeal to the Council of State, which has already Diluted Ord. m 258.21 unanimously approved the project. It now looks unstoppable, although we must still Diluted mkt cap £m 24.3 consider the possibility of hitches on the way, given the history of the process in which Minoan has been involved over the years. Share Price, p
The PD is the first approval for a major foreign leisure development in Greece for 14 the past 30 years. It opens the way to a 2,000 bed luxury hotel and residential 12 project in the spectacular North-East corner of Crete, and will be a ‘trophy asset’ in 10 the making.
8 On activation of the contract with the Toplou Monastery Foundation (‘the Foundation’) Minoan will have a number of options open to it to realise value, the 6
most likely of which we believe would be a partnership deal with a leading 4 Apr/15 Aug/15 Dec/15 Apr/16 international operator, combined with investment from other sources: Middle Eastern and, more recently, Asian financial institutions have been persistent Source: ADVFN investors in high end hotel and leisure assets, and some very high prices have been
realised.
Valuation is difficult at this stage, but we have calculated a range of possible short, Description medium and long term values, which translate into the following target prices for Minoan Minoan Group PLC is engaged in the shares – holiday/leisure business. It has a long standing project for a luxury Short term: 21p leisure/holiday complex in Cavo Sidero in Eastern Crete, and also Medium term: 41p operates in the UK travel agency Long term: 61p sector.
Conor Fahy (Analyst) 0207 065 2690 [email protected] Hannah Crowe 0207 065 2692 [email protected]
Please refer to the important disclosures shown on the back page and note that post MiFID this information is categorised as Marketing Material Minoan Group PLC 5 April 2016
The Crete project
State of play
On 11 March 2016 Minoan announced:
“...the Presidential Decree (“PD”) granting land use approval for its project in Crete (the “Project”) has been issued. The President of the Hellenic Republic of Greece, Mr Prokopios Pavlopoulos has signed the decree and it has been published in the Government Gazette today. The planning rules for the Project are now enshrined in law.”
This has been long in the making. The contract (following an international bidding mechanism) with the Toplou Monastery Foundation (‘the Foundation’)1 for use of the land was signed in 1995. Since then the project has been bogged down by bureaucratic delay and litigious opposition. Greece has many hoops through which the innocents are invited to jump. It says much for the perseverance and determination of the Minoan management that it has got to this final stage. Landmarks in the last ten years are summarised below –
April 2007: approval of the environmental plan in February 2007, followed by an appeal.
December 2010: The Greek Council of state annuls the decision.
December 2010: the Greek government approves a new ‘fast track’ process designed ‘to expedite the planning process for projects which the government considers to be environmentally appropriate and, in the strategic long term, (in the) national interest.’
July 2011: Minoan submits a new masterplan. The design reflects a number of iterations following various changes to relevant planning and tourism laws.
September 2011: CBRE site valuation of €100m, reaffirmed in 2012.
June 2012: an agreement with The Candia Investment Corporation (‘Candia’) for an economic interest in the project of up to 10%.
September 2012: fast track status awarded.
February 2013: appeal against fast track status.
April 2013: appeals withdrawn.
December 2013: Strategic Environmental Assessment (‘SEA’) submitted.
May 2014: SEA approved by the Greek Ministry of Culture.
November 2014: project approved by the committee of the general secretaries of the relevant government ministries.
March 2015: unanimous approval by a Plenum of the Greek Council of State (the highest court in the country).
March 2016: PD issued, all relevant ministerial signatures having been obtained.
1 the Public Welfare Ecclesiastical Foundation Panagia Akrotiriani which has its seat at the Holy Monastery of Toplou, Crete, a charitable foundation established by the Holy Monastery of Toplou and the Holy Metropolis of Sitia and Ierapetra.
2 www.equitydevelopment.co.uk 5 April 2016 Minoan Group PLC
‘Fast track’ has still not been very quick, but it has proved to be a vast improvement on what went on before.
There can be another appeal against the PD. Objectors, if allowed under the law, have 60 days after signature in which to make an appeal – which makes the relevant date 11 May 2016.
The problem facing possible objectors, however, is that the project has been unanimously approved by the Council of State, with no dissenting opinions expressed – and any appeal must go to that very same Council of State. It appears very unlikely that an appeal would succeed.
The project also has the overwhelming backing of the relevant local authorities/communities in Minoan’s part of Crete. It should perhaps be emphasised that every elected government from the beginning of the project has given its approval of it, but frustrated by legal delays.
A last ditch appeal, however, is still possible, involving delay, which means there is still a political/legal risk involved.
This affects timescale. If there is no appeal, on 12 May Minoan will be in possession of a major asset on which it can do business. If there is an appeal, the Council of State may be able to hear it before the summer recess; if not, probably in September. We can only wait and see, and assume that the process will be finally over by September at the latest. Given the history of the project the cynic might regard this view as a triumph of hope against experience, but it seems a reasonable assumption - we have not applied a political/legal risk discount.
What Minoan has secured in Crete
The project site is the Cavo Sidero peninsula in north-eastern Crete, and comprises more than 22,000 stremmata (about 5,500 acres). It has 28 kilometres of Mediterranean 2coastline, numerous secluded bays and inlets as well as an interior with rolling hills where herbs such as thyme and marjoram are part of the natural vegetation. It surrounds the famous Vai palm forest and beach, the only one in Europe and a major tourist lure.
Position in Crete Development locations
The original plan envisaged a high quality development in three phases of 7,000 beds, but was eventually rejected on planning grounds in 2010.
The new plan which replaced it, and which has now been signed into law by the PD, is significantly smaller in scale at about 2,000 beds. However, it has, if anything, upped the ante in terms of quality. The entire project will be built and operated to five star or six star standard, and will consist of small and medium sized hotels (including two flagship hotels) and residential units, the residential units all being served by the hotels. www.equitydevelopment.co.uk 3 Minoan Group PLC 5 April 2016
It should be noted that the proposed development will only utilise about 0.4% of the contract land, an illustration of the care given to preservation of the environment and the cultural and historical significance of the site. This tiny footprint could seem to allow for further development in the future, not allowed for in our estimates.
The development will fall definitely into the luxury bracket, and is probably a ‘trophy asset’ in the making. There will be a golf course designed around the natural contours of the land, as well as a multitude of other land based and water sports, wellness centres, and cultural and environmental activities. Minoan believes that these facilities will prove to be a magnet for year-round use, not just concentrating on the seasonal summer trade.
The project will be self-sufficient in water and energy resources.
Other participants in the project
Candia: Candia acquired a 5% interest in the project in 2012 for an immediate cash consideration of £1m - Minoan was in need of cash at the time. A further £1m was supposed to be subscribed for an additional 5%, but this is now ‘due at such time as the parties determine.’
The agreement also specified that Candia and its partners would have the right to purchase a further 25% share in the Project for an additional £12.5 million, during an agreed period after receipt of Environmental Approval. There has as yet been no announcement in respect of this, but exercise of this right would have a significant impact on the value of the project to Minoan. Exercise or non-exercise would also have implications for the value of the project as a whole – see later.
Also part of the agreement was an option for Candia to buy up to 4m shares in Minoan at 8p per share, exercisable up to and including 30 September 2015. We assume it has lapsed.
The Foundation: the contract with the Foundation contains a number of provisions relating to environmental and other matters, but also contains important commercial terms. The main commercial terms are summarised by us as follows –
An initial consideration of £5m, already partially paid. The balance of £3.9m will become payable on activation of the contract.
An upfront fee of 10% of the net profit earned by Minoan on the grant of original villa or apartment leases.
Annual consideration of 10% of the gross revenues of the entire site, irrespective of where that revenue is generated. Minimum payments increase from £330,000 in the third year following activation of the contract to £3.3m over a period of ten years.
Other considerations linked to specific events include such as listing of Minoan’s shares on a stock exchange (Minoan is quoted on AIM, therefore not listed) or a sale of more than 50% of its share capital or that of a subsidiary to a new strategic investor.
Minoan must invest at least £250m in the first ten years after activation of the contract.
4 www.equitydevelopment.co.uk 5 April 2016 Minoan Group PLC
Greece and tourism
Tourism is very important to Greece, and has proved to be very resilient to the economic forces buffeting the country.
The following chart shows tourist arrivals in Greece for the last eleven years:
Greece: arrivals at holiday destinations
3,500
3,000
Arrivals (000s) 2,500
2,000
1,500
1,000
500
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Eurostat
This chart shows expected high seasonality, but also shows growth year on year – the only exception being 2012, when there was a slight dip.
A range of possible deals
Minoan has a number of possible routes to the realisation of value in Crete –
Development of the whole project by the company itself.
Sale of one or more parts of the project.
Sale of the whole project.
Sale of the company to a larger entity.
A partnership deal with an established tourist developer, with Minoan as a ‘silent’ partner.
A partnership deal with Minoan playing its full part.
There may be other choices open to the company, but we think the last of these options is the most likely course of action for the company to take.
Middle Eastern interest in the luxury hotel business is well established, and goes back to 1977 when the Dorchester was sold by Development Securities to a consortium from the Middle East headed by the Sultan of Brunei (wholly owned by the Sultanate of Brunei since 1982). What has changed in the last few years has been a surge in interest from China and other Far Eastern countries, fuelled by emerging middle classes who have directed their savings into the financial services industry.
Outbound real estate investment was restricted, which meant that investment by financial institutions pushed domestic commercial yields down to less than 2.5%. When capital markets were liberalised there was a rush to buy real estate assets in North America and Europe, with domestic Asian real estate values tumbling by up to 40%.
The original emphasis was on office property, but this has since morphed into a thirst for hotels, with Anbang acquiring the prestigious Waldorf Astoria in New York City. With ‘trophy assets’ in scarce supply, acquisitions have extended into mid-market hotels.
www.equitydevelopment.co.uk 5 Minoan Group PLC 5 April 2016
Value
Pointers to value –
The deal with Candia, which places a value of £50m on the project if the option to buy another 25% for £25m is exercised. Candia may have a number of reasons to exercise or not to exercise, but it remains a minimum pointer given that the deal was struck when the project was very much in doubt.
The CBRE value of the site alone of €100m in 2011, reaffirmed in 2012.
The plan allows for 108,000m2 of buildable space. This does not, however, include half floors and basements, which means that the effective space under the plan could be in excess of 130,000m2. We have not allowed for this, which would inflate our numbers.
In our own estimates we have looked at construction costs and at the value per room on development. Unfortunately, information on Greece appears to be in short supply so we have had to make some crude assumptions based largely on other markets.
For construction costs we have looked at numbers produced by RLB:
Construction costs per square metre for 5 star hotels
US$ Euros *
Low High Low High
Amsterdam 1,500 1,900 1,339 1,696
Berlin 2,720 2,720 2,429 2,429
Birmnigham 2,750 2,750 2,455 2,455
Bristol 3,045 3,045 2,719 2,719
Budapest 1,950 1,950 1,741 1,741
Dublin 2,200 2,200 1,964 1,964
London 3,240 3,240 2,893 2,893
Madrid 2,600 2,600 2,321 2,321
Manchester 2,700 2,700 2,411 2,411
Moscow 3,500 3,500 3,125 3,125
Oslo 5,090 5,090 4,545 4,545
Paris 4,436 4,436 3,961 3,961
Podgorica (Montenegro) 2,100 2,100 1,875 1,875
Sheffield 2,690 2,690 2,402 2,402
Vienna 3,382 3,382 3,020 3,020
Average of all 2,927 2,954 2,613 2,637
Average excl top six 2,414 2,456 2,155 2,193
Average of bottom four 1,938 2,038 1,730 1,819
* €1 = $1.12
Source: Rider Levett Bucknall, International Report Q1 2015
6 www.equitydevelopment.co.uk 5 April 2016 Minoan Group PLC
With the exception of Sheffield and Bristol (which we regard as ‘wild cards’), all these numbers relate to construction costs in capital cities. It is surprising to note how wildly they diverge. We suspect, however, that costs in Greece would gravitate towards the lowest four, which would suggest a figure of €1,800/m2.
Without anything more to guide us, we have assumed €2,000/m2. We have assumed 1,000 rooms, and that room cost represents 45% of the total, which suggests a cost of €2,200 per room.
Value per room is even more difficult, but the one transaction in Greece recorded is highly significant.
In 2015 Jermyn Street Real Estate Fund made an offer for a majority stake in the Astir Palace Vouliagmeni from HRADF2, valuing it at €400m. The Astir Palace has 343 rooms in three hotels, but Jermyn Street clearly has further site development in mind. We assume that only 50% of the price represents the value of existing rooms, and that the implied room value is €580,000 per room. The site is close to Athens on mainland Greece, but has some striking similarities with Minoan’s plans for Crete – it is on a peninsula, has 75 acres (against Minoan’s 6,000+), and is unashamedly luxurious, with many of the kind of features planned for Cavo Sidero. It is an example of a ‘trophy asset’.
Jermyn Street represents Middle Eastern clients - Abu Dhabi, Dubai, Kuwait, Saudi Arabia and Turkey’s Dogus Group.
Closer to home, the Qatari sovereign wealth fund acquired 64% of the Maybourne Hotel Group, owner of Claridges, the Connaught and the Berkeley, in a deal which valued the group at £2.75bn, a stunning £5.1m per room. Qatar already owned the Intercontinental Park Lane in London, and Le Grand Hotel in Paris.
We have also looked at the numbers produced by HVS3 on 2015 transactions in Europe, and anecdotal evidence, which seem to suggest figures in excess of €700,000 per room for high end properties. These numbers are several times the averages for all transactions, and suggest a sharp division between high end and the rest.
However, these sale prices relate to fully developed and operating businesses, while the Crete project has yet to see a spade hit the ground. So we show a range of possible outcomes –
Hypothetical calculation of value €000s €000s €000s
Value per room 300 400 500 Construction costs 222 222 222 Net value per room 78 178 278 Total value on 1,000 rooms 77,778 177,778 277,778
Source: ED estimates
These show a very wide range of values, with the assumptions on room valuation having a marked gearing effect. They translate into net numbers to Minoan as follows –
2 HRADF = Hellenic Republic Asset Development Fund, the Greek government’s privatisation vehicle 3 HVS (Hodges Ward Elliott) ‘2105 European Hotel Transactions’, March 2016 www.equitydevelopment.co.uk 7 Minoan Group PLC 5 April 2016
Net values to Minoan £m £m £m A: with 5% Candia minority Total value in £m * 62 142 222 Due to Foundation on activation (4) (4) (4) Candia minority (3) (7) (11) Net value to Minoan 55 131 207
B: with 35% Candia minority Total value in £m * 62 142 222 Due to Foundation on activation (4) (4) (4) Candia minority (20) (48) (76) Candia contribution 14 14 14 Net value to Minoan 51 103 155
A: Value pence per share diluted 21.5 50.9 80.3 B: Value pence per share diluted 19.9 40.0 60.2
* £1 = €1.25
Source: ED estimates
These figures could prove to be conservative, especially given our assumptions on room valuation. The lowest value for the whole project (€80m or £62m) is higher than the implied value of the Candia deal, but substantially less than the site-only valuation of €100m (£80m) estimated by CBRE.
Candia will have to make a decision on what to do about its option. It will have a number of things to consider, not least an immediate decision (or near immediate) on the commitment of £13.5m to a project which has not yet started, and the residual political/legal risk involved, as well as straight business risk. We speculate that it might seek to barter its rights into a direct shareholding into Minoan without subscribing more money. In which case we would also speculate that dilution would be a lot less than as illustrated in the above table. For our purposes we must assume that Candia decides to exercise its rights as in the agreement, so we choose the bottom line in the above table. Given the nature of the project, that line fits neatly into short, medium and long term objectives, and we show our value estimates for the group on that basis:
Sum of the parts calculation £m £m £m
Crete: net value to Minoan 51.4 103.4 155.4 Travel & Leisure value 5.0 5.0 5.0 Property, plant etc 0.7 0.7 0.7 Receivables 2.2 2.2 2.2 Cash etc at end October 2015 0.1 0.1 0.1 Net current liabilities (10.3) (10.3) (10.3) Cash in on exercise of options etc 5.4 5.4 5.4 Total 54.6 106.6 158.6
Value pence per share diluted 21.1 41.3 61.4
Source: ED estimates
8 www.equitydevelopment.co.uk 5 April 2016 Minoan Group PLC
We have excluded intangibles and inventories as they principally represent capitalised expenditure relating to Crete.
There may be more dilution – some loans might be converted into equity but, without details of the terms, we cannot count this – and there are some old options at exercise prices of 60p and above which, if exercised, would impact on the long term value.
We set our target prices as follows:
Short term: 21p
Medium term: 41p
Long term: 61p
www.equitydevelopment.co.uk 9 Minoan Group PLC 5 April 2016
Results 2014/15 Year to end October 2014 2015 Change £m £m %
Total transaction value 50.757 60.964 +20.1
Net revenue from travel 5.680 6.493 +14.3 Travel operating expenses (4.647) (5.795) +24.7 Travel EBITDA 1.033 0.698 -32.4 Corporate development costs (0.501) (0.511) +2.0 Luxury resorts overheads (0.427) (0.417) -2.3 Group EBITDA (loss) 0.105 (0.230) -319.0 Depreciation (0.232) (0.311) Loss before finance costs (0.127) (0.541) +326.0 Finance costs (0.270) (0.394) Loss before tax (0.397) (0.935) +135.5 Tax 0.000 0.000 Loss after tax (0.397) (0.935) +135.5 Minorities 0.000 0.000 Net loss attributable to equity (0.397) (0.935) +135.5
Source: Company historic data
We have excluded ‘share-based payments’ from this table.
Given the news about the Crete project, these results may appear largely irrelevant to a consideration of the group as a whole – Minoan is clearly an asset play. But there are some points to be made about Travel –
The H1 statement included a warning about a dispute with the provider of administrative services to the division. In the event, this cost an estimated £410,000, impacting on the full year results just announced.
This dispute has been ‘successfully resolved.’
Total Transaction Value grew by 20%, but net revenue (before expenses) by only 14%, reflecting tighter conditions in the travel market. EBDITA, however, would have been largely unchanged were it not for the dispute.
Revenues in the current year are already up 16%.
The travel division is predicated on expansion by acquisition, reinforced by the chairman in his latest statement.
Beyond this, the chairman has flagged the possibility of separating Travel from the rest of the group to realise the value built up in it, maybe through a quotation of it on the market.
Bearing this in mind, we have assigned a value to the division of £5m, which we regard as nominal.
10 www.equitydevelopment.co.uk
Head of Corporate
Gilbert Ellacombe Direct: 0207 065 2698 Tel: 0207 065 2690 [email protected]
Investor Access
Hannah Crowe Ben Ferguson Direct: 0207 065 2692 Direct: 0207 065 2693 Tel: 0207 065 2690 Tel: 0207 065 2690 [email protected] [email protected]
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