Rivpra CZ

Valamar Riviera d.d.
Leisure & Hotels

Date: 10th of November 2016
A reinvention of Croatian tourism
Recommendation
BUY
Re-initiating coverage with Buy
Target price (HRK)
42
Current price (HRK)*
31,3
Upside potential
33%
*as of 9.11.2016
Relative price and volume (000)

200
1.200
180
1.000
160
800
140
We re-initiate coverage of Valamar Riviera d.d. (Valamar) with a Buy rating.

Valamar owns and operates a portfolio of 30 hotels & resorts, 13 camps and more
than 21.000 units (including the Imperial acquisition). Despite being headquarted in
Croatia, 95% of sales comes from foreign markets. In a nutshell, Valamar is a play on
Western European (Germany, Austria, Italy) consumer/ tourist. We see Valamar
generating EBITDA of HRK 500 mn in 106 FY with an EBITDA margin of 35%. The
business is well run with growth underpinned by synergies form recent acquisitions. We
see t RevPAR expansion and the re-definition of the Croatian touristic product as the
main near term catalyst to drive the shares and as such we rate the Valamar stock a
BUY.
600
120
400
100
200
80
60
Jan-15
0
Jul-15
Vol
Jan-16
Jul-16
RIVP
CROBEX
Share data
Market cap (HRK bn)
3,94
52 week range (HKR
22,4 / 35,9
Shares o/s (mn)
126
Avg. daily turnover
HRK 1.05 mn
Free float
49%
Bloomberg ticker
RIVPRA CZ
Reuters ticker
RIVP.ZA
Exchange ticker
RIVP-R-A
Exchange
ISIN
Website
Zagreb
HRRIVPRA0000
valamarriviera.com
Research dep.
Aleksandra Krianec
Email: research@fima.com
Tel: +385 42 660 975
Leadership position in an attractive market

Valamar has the leading market share in Croatia, which is one of the in one of the
fastest growing European markets. The key assumption behind our model is that
Valamar will increase its prices and lift its shoulders i.e. increase occupancy in AprilJune and September-November periods. The company plans to do that by continuing
to invest in upscaling of capacities. Croatian climate is not as favorable as in
competitor destinations (Cyprus, Mallorca, Canary). However, Valamar is
compensating for that with (i) cultural destination characteristics (Dubrovnik); (ii)
proximity of main markets (Istria, Rabac, Krk); (iii) gastro & cycling events (Istria).
Valuation and risks

We re-initiate coverage with a HRK 42 target, based on our DCF model. We consider
Valamar to be a growth stock, with healthy prospects to improve earnings over the
medium term (EBITDA CAGR 2017-21e of 9,2%). In our DCF an un-orthodox approach
on the Equity Risk premium was taken, but we believe that our model is still quite
conservative. Upside risks include: (i) continually low interest rates alongside increasing
consumer confidence in the main markets(ii) stronger RevPAR and better EBITDA
margins (with our 35% EBITDA margin estimate we are at the lower end of the
managements guidance range) (iii) synergies from the Alpe Adria expansion. Key
concern comes from the fact that we might be wrong about the future of Croatian
tourism. We believe that Croatia is in the early stage of a process we would call a reinvention of Croatian tourism. Croatian touristic development was interrupted by the
war in nineties and it took more than 25 years to reach pre-war numbers. The current
momentum makes as moderately optimistic as we see Croatia becoming a European
Riviera.
Figure 1: Forecasts and ratios
Client contacts
HRK (mn)
2014A
2015A
2016E
2017E
2018E
Darko Horvat
Revenues
1.078
1.269
1.475
1.770
1.919
Email: dhorvat@fima.com
EBITDA
298
416
500
611
672
Tel: +385 42 660 962
EBIT
95
183
240
274
307
Vlatko Kesegi
Net income
51
105
201
235
268
Email: vkesegic@fima.com
EPS
0,4
0,8
1,6
1,9
2,1
Tel: +385 31 636 510
P/E
41,9
28,3
19,6
16,8
14,7
EV/EBITDA
9,5
10,0
10,1
8,9
7,7
Source: FIMA Research

Please see important disclosures at the end
Equity Story
After the acquisition of

Imperial, Valamar will own
and operate a portfolio of
close to 21.000 units, which
will make it the largest
Croatian tourism company.
Valamar is the largest hospitality company in Croatia, with its portfolio currently
comprising 30 hotels & resorts, 13 camps and more than 18,000 units in operation.
Valamar was created in 2014 as a result of a merger involving Valamar Group,
Riviera Adria and Valamar Adria holding. However, the roots of Valamar go back to
early 1950s when in Porec, Croatia, Riviera Porec was founded. During the next 40
years, the Company intensively invested and built hotels, mostly in Porec. Therefore,
Porec still accounts for more than half of Valamars unit capacity. Exposure to other
Croatian destinations outside Porec, was mainly created inorganically. The Group's
expansion strategy, which over the years has involved a number of mergers and/or
acquisitions of hotel chains, has not only driven increases in hotel capacity (number of
rooms), but also enabled Valamar to become Croatia's leading hotel chain. In 2011,
Valamar acquired Zlatni Otok d.d and Rabac d.d., with capacities situated on the
Island of Krk and Istria, respectively. In 2013 Dubrovnik Babin Kuk d.d. was acquired,
which provided Valamar with Dubrovnik exposure. In 2015, the Company acquired a
100% stake in Hoteli Baska.
Portfolio overview
Valamar currently owns and manages more than 50 assets, which they cluster in 30
hotels & resorts and 13 campsites. The overall number of units stood at 18.072,
thereof 7.927 in hotels&resorts and 10.145 in camps.
Figure 2: Valamar portfolio map as per May 2016 without Imperial
Source: Valamar Integrated Company Annual Report and Corporate Social Responsibility
How happy the guests are?

Guest satisfaction is the core of Valamars philosophy and it seems that The Company
is quite good in making and keeping guests happy. A good measure for that are the
booking.com and Tripadvisor ratings. The average overall rating is 8,28 (10 is the
max) on Booking.com and 4,00 (5 is the max) on Tripadvisor. The average rating per
category is above 8 for all asset categories, with 2* category being the only
exception.
Figure 4: OTA ratings per destination
Figure 3: OTA ratings per category

8,5
8,2
9,2
8,8
8,5
8,4
8,4
7,9
7,8
7,3
4,5
3,9
3,2
1*
2*
3*
Bookng.com
4,5
4,4
4,0
4,2
4,1
3,0
4*
5*
Dubrovnik
Krk
Tripadvisor
Pore
Bookng.com
Source: Booking.com, Tripadvisor.com, Valamar, FIMA Research
Pula
3,8
Rabac
Tripadvisor
Source: Booking.com, Tripadvisor.com, Valamar, FIMA Research
Location wise, lower ratings are seen on Pula and Rabac site, which is mainly a result
of lower categorization on those destinations (2,0* and 2.8* on average,
respectively). Valamars business model resides on a destination cluster approach. This
model enables the Company to achieve operating efficiencies by grouping
operational services (maintenance, laundry, horticulture etc). Following that approach,
Valamars assets are managed through 4 centers: West Istria, Rabac, Krk and
Dubrovnik.
Distribution
The share of direct bookings
is below peer group average,
making the distribution
share increase one of the
strategic goals for the
Company.
Around 38% of income is directly booked, with a goal to reach 50% by 2020. The
larger the proportion of room bookings that can be delivered through Valamars
direct channels, the lower the sales and marketing costs will be. When compared to its
peers, Valamar has somewhat lower proportion of direct bookings under its direct
distribution control. In order to increase the return rate and direct bookings, in May
2015, Valamar launched a loyalty program and ended the year with 33k members.
We expect this number to be significantly higher in 2016.
Figure 5: Valamar distribution split
Groups & M.I.C.E.
Direct booking
26%
38%
62%
Uncontrolled Distribution
Chanells
Allotments
21%
15%
OTAs
Source: Valamar, FIMA Research
Valamar was relatively late with introduction of its loyalty program (European peers
have been doing that for years) and benefits are yet to be seen. If well run, loyalty
program can really create brand loyalty and boost RevPAR. Loyalty program can
be beneficial both for the customer and Valamar. Namely, it (i) reduces dependencies
on OTAs; (ii) increases percentage of sales via homepage; (iii) generates a network
effect in terms of future travel; (iv) increases sustainability of revenue via returning
guests.
On the other hand, we see OTAs model as a potential threat to everything that wants
to be achieved by the loyalty program. Actually OTAs are competition to brand
loyalty and pose a risk of hotel commodisation, with brand values being ousted by
OTA ratings replacing them. We also fell into OTA trap by looking into Valamars
booking.com and Tripadvisor ratings. However, as already argued in this research,
Valamar brand is in an early stage of construction, which we see as an upside.
Group markets
Despite being nominally located in Croatia, Valamar is not a Croatian play. It is a
play on German and Austrian tourists. As visible from the below chart, measured by
overnights, German guests contribute with 29%, while Austria domiciled guests add
additional 14%.
Croatias 2013 EU accession was defiantly an event that helped Croatian tourism.
Simplified border crossing procedure, EU wide health insurance and many other
factors added to the level of perceived safety and comfort. Additional simplification
of traveling to Croatia will come when Croatia joins Schengen Area (probably 2018).
Figure 6: Valamar source markets
Valamar is a bet on the West

European consumer.
26%
29%
4%
5%
6%
14%
8%
Germany
Austria
Italy
Slovenia
Netherlands
Croatia
UK
Others
9%
We are moderately cautious on Italy (9% of overnights) due to the sovereign debt
and financial sector vulnerabilities connected with Italy. UK domiciled guests account
for 4% of overnights, which is limiting the possible Brexit impact. The consensus GDP
growth estimates and projections for Valamars key markets are presented in the
table below.
Figure 7: Valamar source markets predicted GDP growth rates
2016e
2017e
2018e
Germany
1,8%
1,3%
1,4%
Austria
1,3%
1,1%
1,5%
Italy
0,8%
0,8%
1,0%
Slovenia
2,0%
2,1%
2,4%
Netherlands
1,5%
1,5%
1,7%
Source: Bloomberg
Strategy
In June this year, during the Investor day, Valamar presented its first Integrated
Annual Report and Corporate Social Responsibility Report, together with Valamars
new 2020 Corporate Development strategy. Compared to what the company has
been doing in the past, the new strategy does not bring tectonic movements to
Valamars business. The company plans to keep its important role in Croatian Tourism,
which is no news. However, as outlined in the Strategy, the Company plans to achieve
a two digit EBITDA CAGR in the 5 years period through acquisitions or strategic
partnership in selected destinations in the leisure hospitality sector in Europe.
Figure 8: Valamar medium term strategy & guidance
Revenue Growth
Growth through acquisitions and strategic partnerships in selected destinations in the

leisure hospitality sector in Europe
Profitability
Valamar's goal is to achieve EBITDA of 35-38%
CAPEX
Portfolio investments of HRK 1.5 - 2.0 bn over the 5 years period
Distribution
Target 50% of revenue from direct bookings and 30% of returning guests
Work force
To achieve 70% seasonal worker return rate and to develop 80% of management
internally
Enviroment
Return 2.5% of revenues to the community through education, tourism and destination
projects
Owners
Increase market cap and offer sustainable dividends
Looking to expand into Alpe-Adria region
Expanding to the Alpe

Adria region could bring a
lot of synergies and provide
an opportunity for the work
force cost arbitrage.
Valamar operates exclusively in Croatia, but it seems that the Company would be
particularly open for an acquisition in the Alpe-Adria region, probably due to
complementary seasonality in the Alps versus the Adriatic. The idea is to move the
summer work force from the Adriatic coast to the Alps resorts during the winter. This
would probably increase the work force loyalty, due to the permanent employment,
and create some room for work-force cost arbitrage. The 2015 average gross salary
at Valamar amounted to HRK7.887 (1.050), which is 13% higher than the industry
average in Croatia, but well below average industry salary in Austria or North Italy.
The Alpe-Adria expansion goes hand-in hand with another strategic goal that aims
for 70% seasonal worker return rate.
5
Happy employees = happy guests

Operationally, Valamar seems to be committed to employees and guests,
understanding that satisfaction of those is highly correlated. Therefore, one of the
strategic goals is to strengthen direct relationships with guests by achieving 50% of
revenues from direct bookings (currently at 38%) and 30% of returning guests
(currently at 25%).
Analyzing Valamars Integrated Annual Report and Corporate Social Responsibility
Report one can notice that the word guest is mentioned 137 times, word employee
106 times and word service 102 times, which also gives some flavor to the direction
Valamar plans to follow.
Figure 9: Words frequency in Valamars annual report
service
Guest - employee interaction

and dependency seems to be
the center of Valamars
business philosophy.
102
employee
106
market
106
increase
guest
develop
manage
111
137
140
182
HRK 1.5bn 2.0bn CAPEX
Upscaling of capacities is the

main CAPEX theme.
CAPEX is another big strategic topic for Valamar as the Company plans to invest HRK
1.5-2.0bn by 2020 and generate EBITDA margin of 35%-38%. In the course of
2017, Valamar plans to invest HRK 753 mostly in reconstruction and upgrade of
existing capacities in Rabac. Through a HRK205mn investment, former Girandella
Tourist Village 2*, together with Sunrise Girandella Villas, will be upgraded to
Valamar Girandella Resort 4*. Currently, Girandella Tourist Village is one of the
lowest rated assets (booking.com 7,2), which we expect will change after the upscale
is done. For the newly reconstructed asset, Valamar has signed a 3-year occupancy
guaranteed allotment contract (starting in 2017) with Der Touristik Kln. This
partnership is expected to bring 25.000 guests to this destination. The reconstruction
will be done in two phases some 250 units are to be ready for 2017, while
additional 150 units will be ready for season 2018.
The other big 2017 investment is a HRK197 investment in reconstruction and upgrade
of two hotels (Bellevue and Albona) that will create a Bellevue Family Life Resort 4*
and branded as TUI Family Life, based on a 3 year contract with TUI Northern Europe
Limited, TUI UK I TUI Nordic Holding AB. This cooperation is expected to bring 76.000
guests through flight connections with the UK and Scandinavian countries.
Valamar Group is using fixed contracts for newly upgraded assets as this provides a
lot of predictability and stable revenues. In banking terms, the Company is
exchanging market risk with credit risk (in these case the risk of TUI and der Toristik
Kln).
A large part of the remaining HRK321mn (out of HRK 753mn 2017 CAPEX) will be
used to upgrade services and products and to add a total of 277 new mobile homes
to camp Krk (5*), camp Jezevac (4*), camp Maria (4*), camp Zablace (3*) and camp
Skrila (3*).
Imperial acquisition
In September this year Valamar signed a contract to acquire 318.446 shares or
50,08% stake in Imperial Rab d.d for a total price of HRK 260.8mn. Based on the
price and Imperial TTM data, acquisition multiples stand at 14,6 x EV/EBITDA, 32,9x
P/E and 5,8x EV/S. Valamar entered into this transaction together with AZ
mandatory pension fund, that was already holding 9,45% of Imperial shares. After
the close of the transaction Valamar transferred 10% of the outstanding Imperial
shares to AZ (HRK 52,1mn), while Valamar kept the remaining 40,08% stake
(transaction value of 208,7mn). The transaction multiples look expensive and
therefore a lot of growth is built in the purchase price.
Buying a Government owned

and managed company
usually implies significant
operational upside potential.
Imperials portfolio
Imperial owns and operates a portfolio of 2.855 units, split into 9 assets. All of the
assets are in the same location (Island of Rab). Some 57% of all Imperials units are
categorized with 4*, which was helped by a HRK63mn investment in Hotel Padova
(175 units). Booking.com ratings are decent, with all of the 4* assets having ratings
above 8,0.
Figure 10: Overview of Imperials portfolio
Units
Category
Hotel Imperial
136
4*
8,1
3,5
Hotel Carolina
150
4*
8,5
Hotel Padova
175
4*
8,5
Ville Carolina
10
4*
Hotel Eva
200
2*
7,2
2,5
TN San Marino 5 hotels
466
3*
7,9
3,5
TN Suha Punta App 3*
48
3*
7,9
3,5
TN Suha Punta Pav 2*

Camp San Marino
Camp Padova
Total
Booking.com Tripadvisor
40
2*
1.145
4*
8,4
485
3*
8,2
2.855
Just like with other Croatian tourism companies, Imperials revenues are highly seasonal.
Therefore, just like with Valamar, extending the season i.e. reduction of seasonality is
one of the two key value drivers.
Figure 11: Imperial Sales Seasonality
Figure 12: Imperial EBIT Seasonality
122%
223%
76%
13%
2%
21%
2%
0%
Q1
Q2
Figure 13: Imperial EBITDA Seasonality
Q3
Q4
Source: Imperial, Bloomberg, FIMA Research

-48%
Q1
Q2
Q3
-77%
Q4
-11%
Q1
Q2
Q3
-24%
Q4

7
Croatian tourism
Emerging tourism sector

boosted by brownfield and
greenfield investments.
The structure of the Croatian economy is dominated by the service sector, which
accounts for 70% of Gross Domestic Product (GDP). This is mostly due to a very well
developed tourism industry. In 2015, Croatian tourism has experienced another
record year in terms of tourist arrivals (+9% yoy to 14,3mn) and overnight stays
(+7% yoy to 71,6mn). According to the CNB data, last years tourism revenues grew
by 7,6% to 7,96bn. We see tourism revenues growing by CAGR of 4,57% in the
four year period.
Figure 14: Tourism revenues (bn)
2012 - 2019 CAGR
of 4.57%
2011 - 2015 CAGR
of 3.76%
Source: Croatian central bank, FIMA Research
The main source of foreign tourism revenues is Germany, which accounted for 26% of
external tourism revenues. With 10,8% share in tourism revenues, Italy is the second
largest Croatian market. This makes us moderately cautious due to the sovereign debt
and financial sector vulnerabilities connected with Italy.
Figure 15: Main tourism export markets (bn)
2,5
2
1,5
1
0,5
0
2011.
2012.
2013.
DE
IT
AT
2014.
SI
2015.
CH
Just like with individual companies, high seasonality of Croatian tourism is visible on
the Figure 16. When compared to European peers, Croatia has the highest occupancy
in June and August and lower occupancy in months preceding and following June and
August. Valamar will benefit further from a country wide approach and efforts aiming
to lift the shoulders i.e. increase occupancy rates in the shoulder season.
Figure 16: Main tourism export markets (bn)

100
80
60
40
20
0
2012M01
2013M01
Spain
2014M01
France
Croatia
2015M01
Italy
2016M01
Cyprus
Malta
Top line development

We expect Valamars revenues to increase under the influence of two main forces:
Available data pointing to

exceptionally strong
September
1. Adjusting the shoulders - Croatia has been a summer destination with rather
short high season during June, July and August and relatively weak occupancy in
the shoulder season. The official 2016 data is not out yet, but overall indicators
are pointing to very strong September. The efforts on that front have been the
joint ones the government, together with different tourism associations and
corporates invested serious efforts to extend the season. Certain markets were
targeted and events were created (Wine & Food initiatives, Cycling tourism,
Congressional tourism), which is already yielding results. The schedule of events
was not randomly chosen as one of the main reasons for a short season is the
weather. When compared to some other European destinations, namely Mallorca,
Greece or Canary Islands (not exactly Europe but probably competes with
Croatia), Valamar destinations have more rainy days and lower temperatures in
May, June, September and October.
Figure 17: Average daily temperatures in Valamars and competitor destinations
35
30
25
20
15
10
5
0
Jan
Feb
Mar
Mallorca
Apr
May
Crete
Jun
Jul
Cyprus
Aug
Sep
Dubrovnik
Oct
Nov
Dec
Porec
Source: Holiday Weather
However, even though Croatian climate is not as hot as the ones Cyprus or Crete
enjoy, Valamars destinations beat mainland competitors when it comes to sunshine
hours per day. Also, when compared to island destinations, Croatia fares quite well.
Figure 18: Average sunshine hours
15
12
9
6
3
0
Jan
Feb
Mar
Apr
Cyprus
May
Jun
Crete
Malta
Jul
Aug
Dubrovnik
Sep
Oct
Nov
Dec
Porec
Source: Holiday Weather
In Dubrovnik, visitors should expect 12 hours of sunshine a day in May and June, on
average, and 13 in July and August. Thats more than Provence (8 in May, 10 in June
and August, 11 in July) or Corfu (10 in May, 12 in June, 13 in July and 11 in August).
Valamars revenues, in line with the Croatian hotel industry as a whole, are highly
seasonal with revenues and profitability varying throughout the year. There is a risk
of adverse conditions or events that occur during peak demand periods. High
seasonality of Valamars business is reflected across the P&L. Q3 is by far strongest
for Valamar in terms of sales, with a multiplicative impact on EBITDA Q3 strength and
EBITA strength due to the operational leverage. The same multiplicative impact
applies to the weakness of Q1 sales.
Figure 19: Valamar Sales Seasonality
Figure 20: Valamar EBIT Seasonality

249%
68%
5%
1%
Q2
126%
19%
26%
Q1
Figure 21: Valamar EBITDA Seasonality
Q3
Q4
Source: Valamar, Bloomberg, FIMA Research
22%
-64%
Q1
Q2
Q3
-104%
-15%
Q4
Q1
Q2
Q3
-33%
Q4
Valamar is not the only Croatian tourism company having a seasonally strong Q3 and
seasonally weak Q1. Its pretty much a country wide story.
The revenues and seasonality can also be affected by the timing of Easter, which
occasionally shifts from Q1 to Q2. In our view, seasonality is not a guide to the
quality of a company. It points to certain risks (concentration on one Q) and reveals
room for improvement.
In developed Europe, there are no listed hotel groups that are copycats of Valamar,
so we have chosen a combination of smaller Croatian hotel companies and a selection
of publicly quoted hotel groups as potential benchmarks for Valamar. In the following
10
charts, we highlight how Valamar compares to the peer group based on seasonality
of sales.
Figure 22: Seasonality of sales peer group
0%
10%
Valamar 1%
20%
3%
Orbis
50%
60%
70%
80%
90%
68%
100%
5%
26%
66%
5%
25%
68%
4%
18%
Arenaturist 3%
Rezidor
40%
26%
Maistra 3%
Plava Laguna
30%
29%
29%
24%
71%
23%
22%
26%
NH
20%
27%
Melia
21%
28%
Q1
3%
26%
26%
27%
25%
40%
Q2
Q3
12%
Q4
Source: Bloomberg, FIMA Research
Analysis of forecasts
Revenue analysis
As already outlined, our model resides on a key assumption that Croatia will become
a top European holiday destination and that Valamar, as the largest hospitality
company in Croatia, will be a key component of that. Therefore, we see sales
increase coming both from stronger occupancy and increased pricing. We expect to
see a higher ADR increase in the 2017 and 2018 driven by market trends and geopolitical reasons, and firmer occupancy expansion in 2019 onwards driven by
destination management.
Figure 23: Forecasted sales breakdown
2015
2016e
2017e
2018e
2019e
2020e
2021e
Number of units
17.783
18.072
21.380
21.780
22.080
22.380
22.680
Occupancy days
119
128
131
133
136
140
144
7,7%
2,0%
2,0%
2,0%
3,0%
3,0%
493
519
545
567
578
584
596
6,9%
5,3%
5,0%
4,0%
2,0%
1,0%
RevPar
58.668
66.555
71.281
75.614
78.669
81.840
85.981
Board revenues
1043,3
1202,8
1524,0
1646,9
1737,0
1831,6
1950,0
Sales revenues
1267,7
1475,0
1796,2
1919,1
2009,2
2103,8
2222,3
-occupancy change
ADR
-ADR change
Source: Bloomberg, FIMA Research
11
On the capacity side, 2017 will be market by Imperial consolidation., which is giving
a boost to the overall Board Revenues and Sales figures. Between 2017-2021E, we
forecast +8.5% compound annual growth (CAGR) for net sales, with an annual
breakdown of board revenues shown in the figure 24.
Figure 24: Valamar Board revenues growth
2.100
Figure 25: Valamar revenue components

30%
26,7%
1.800
25%
1.500
1.200
15%
14%
14%
13%
12%
82%
82%
85%
86%
86%
87%
88%
2015
2016e
2017e
2018e
2019e
2020e
2021e
15%
8,1%
600
18%
20%
15,3%
900
18%
5,5%
5,4%
6,5%
10%
5%
300
0
0%
2015 2016e 2017e 2018e 2019e 2020e 2021e
Board revenues (LHS)
Board revenues growth (RHS)
Board revenues
Other sales revenues
CAPEX
We highlighted back in the figure 8 (Strategy) that Valamar is targeting 1.5bn
2.0bn combined Capex in the next five years, with a heavy HRK 750mn and HRK
500mn spending in 2017 and 2018, at the very beginning of the explicit forecast
period. We believe this CAPEX will enable Valamar to reach an EBITDA margin of
35%, which is on the lower end of the Companys 35%-38% guidance range.
Figure 26: CAPEX
800
50%
41,9%
700
40%
600
500
26,1%
24,5%
400
17,6%
300
30%
14,9%
14,3%
13,5%
200
20%
10%
100
0
0%
2015
2016e
2017e
CAPEX HRK mn (LHS)
2018e
2019e
2020e
2021e
CAPEX as % of revenue (RHS)
Depreciation
Over the past four years, depreciation has come down from 23% of sales to 19% in
2015. It is expected to come down to 16% of sales in 2021E.
Taxes
Last week, Croatian government presented the details of the new tax reform. The key
takeaway for Valamar was the proposed abolishment of the reduced VAT rate on
restaurant and catering services, which will be increased to 25 percent, while
accommodation services will remain at 13 percent. We see this change having a
limited impact on Valamar.
12
The second direct Valamar impact comes from the corporate income tax. The general
corporate income tax rate is to be reduced from 20% to 18%., which was factored
into our Terminal Period figures. In the explicit forecast period, Valamar will continue
to benefit from tax deductions based on the Law on the Investment Stimulation and
Improving the Investment Climate, which results with lower tax rate.
Net debt
We estimate that by end 2021E, Valamars net debt/EBITDA ratio could reduce to
0.5x, with ~HRK1.1bn of net debt reduction coming from operational cash flows.
However, we assume that the company will keep its leverage above that level. We
also assume that in 2019 the level of debt will decrease to levels that will offer
potential firepower for acquisitions.
Figure 27: Net debt / EBITDA
3,0
2,5
2,2
2,0
2,4
2,2
1,4
1,9
0,8
1,4
0,9
0,5
2016e
2017e
2018e
2019e
2020e
2021e
Valuation
DCF as the only target price driver
Given the relative visibility of cash flow and increasing clarity on operating margins,
we use DCF as the driver of our target price.
Figure 28: Key DCF assumptions
Risk free rate
3,0%
Equity risk premium
8,2%
Beta
0,95
Cost of equity
10,8%
Cost of debt
2,5%
Equity weight
50,0%
Cost of capital
6,7%
Tax rate
Terminal growth rate
18,0%
3,0%
Terminal RFR
4,25%
Terminal ERP
8,2%
Terminal pretax cost of debt
5,0%
Terminal COE
Terminal WACC
12,0%
8,1%
13
In our DCF, in the explicit forecast period, we assume a beta of 0,95, cost of equity
of 10,8%, a tax rate of 18%, and a pre-tax cost of debt of 2,5%. This gives us a
WACC of 6.73%. We assume a constant risk free rate over the explicit forecast
period. We see interest rates moving higher in the next five years. However, we
believe that on the risk free rate side, those will be compensated by an increase in
Croatias credit worthiness (debt/ GDP reduction amid moderate GDP growth cycle).
Figure 29: DCF Valuation
2017E
2018E
2019E
2020E
2021E
TV
Revenue
1.770
1.919
2.009
2.104
2.222
2.300
Revenue growth
20%
8%
5%
5%
6%
2%
EBIT
274
307
321
379
422
460
EBIT growth rate
14%
12%
5%
18%
11%
9%
EBIT margin
Depreciation
CAPEX
16%
336
753
16%
365
500
16%
382
300
18%
358
300
19%
356
300
20%
322
325
CAPEX to Depreciation
2,2
1,4
0,8
0,8
0,8
1,0
Working capital move
-23
-31
-21
-16
-21
-26
Tax
11
12
13
15
17
83
-145
171
412
444
475
392
Period for Discount Factor (Mid-Year Convention)
0,5
1,5
2,5
3,5
4,5
Discount factor
0,97
0,91
0,86
0,80
0,76
Present Value of Cashflow
-141
156
352
357
359
Free Cash Flow at Year 5
392
WACC
8,1%
Cashflow
Perpetuity Growth Rate
3,0%
Perpetuity Value at End of Year 5
7.975
Present Value of Perpetuity
5.413
(+) Present Value of Free Cash Flows
1.083
(=) Current Enterprise Value
6.496
(-) Current Net Debt
1.510
(-) Current Preferred and Minority Interest
240
4.746
(=) Equity Value

Shares outstanding
Cost of Equity
12m Target Price
124
10,8%
42
Sensitivity analysis
Figure 30 looks at the potential impact on Equity Value for different level of
Perpetuity Growth Rate and WACC for the Terminal Value. As evident from the
table, our model is highly sensitive to both the Growth rate and Cost of Capital in the
period after 2021.
14
Figure 30: Perpetuity growth rate and WACC sensitivity

Perpetuity Growth Rate
TV WACC
2,0%
2,5%
3,0%
3,5%
4,0%
7,1%
4.942
5.588
6.394
7.425
8.794
7,6%
4.319
4.840
5.474
6.264
7.277
8,1%
3.802
4.229
4.739
5.362
6.138
8,6%
3.367
3.722
4.140
4.642
5.253
9,1%
2.995
3.294
3.643
4.054
4.546
Looking for the right CAMP components

How is Valamar connected
with Croatian Sovereigns
Probability of Default?
Given the impact WACC has no our Valuation we deem it worth to examine the key
WACC components. First of all, the cost of equity. It is fair to ask what Valamar has to
do with the risk free rate derived from the YTM on 10Y Croatian Government Bond.
In theory, YTM should reflect the markets perception about issuers Probability of
Default. Lets assume this is correct and ask ourselves how is that relevant to Valamar,
given the fact that 95% of Valamars revenues comes from non-Croatian guests. Yes,
Valamars assets are physically located in Croatia and that connects Valamar to
Croatia. One could also argue that Risk Free Rate is to compensate for a Transfer
Risk from a potential Sovereign default. However, Valamar could easily park
revenues on accounts outside Croatia. Moreover, given the fact that Croatia is an EU
member, Valamar could reallocate its headquarters to another member state.
Combined with that, Valamar could delist itself from ZSE and list in Dublin, Frankfurt
or any other place. Given everything mentioned, we tried to factor in the disconnect
Valamar has with Croatia and calculated the equity risk premium as a weighted
average of equity risk premiums for countries that are Valamars main markets
(category others was added to Croatia). However, the risk free rate was kept at the
10Y Croatian YTM level. Therefore, we believe our approach is quite conservative.
Key Risks
The Risk of being wrong
The key risk to our valuation comes from the fact that we might be wrong about the
future of Croatian tourism. We believe that Croatia is in the early stage of a
process we would call a re-invention of Croatian tourism. We would even go further
and compare developments Opatija (a town in Croatia where tourism started in the
19th century - the Austrian emperor Franz Joseph used to spend several months per
year there) saw in the late 19-th century with things that are happening currently to
the rest of the Croatian coast (excluding well established tourist destinations).
Croatian touristic development was interrupted by the war in nineties and it took more
than 25 years to reach pre-war numbers. We see Croatia becoming a European
Riviera a place where guest from WE, CEE and SEE will spend their holidays and
weekends
Turkey and North Africa recovery Strong Croatian 2016 numbers were also
partially fueled by disturbances in Turkey and North Africa. Stabilization in those
areas might adversely impact Croatia and Valamar. However, as mentioned in the
previous paragraph, if a country is once perceived as unsafe, it takes long to recover.
On the cost side the key risk comes from the availability of skillful work force. Many
Croatian tourism companies source their work force from continental Croatia, which
15
saw some depopulation after Croatia joined EU (no job permits needed in Germany
and Ireland). However, due to the above average salaries (13% higher than the
industry average in Croatia) and a big share of local employees (75% in total), we
see Valamar better positioned compared to its Croatian peers.
Main legal risk comes from unresolved land ownership and potential concession fees
for camping land.
On the technology side, companies like Airbnb do pose a certain amount of risk.
However, in Valamars destinations, we see this risk as being very limited.
16
Fact Sheet
Shareholder Structure
Income Statement
(in 000 HRK)
2013
2014
Board revenues
869.105
895.865
1.043.250
1.086.456
1.117.578
1.333.493
278.658
283.914
423.365
39.876
59.052
171.792
106.016
51.934
105.461
461
461
493
56.649
55.796
58.665
Total revenues
EBITDA
EBIT
Net profit
ADR (in HRK)
RevPAR (in HRK)
2015
Balance Sheet
(in 000 HRK)
2013
2014
2015
Noncurrent assets
Intangible assets
Tangible assets
Non-current financial assets
Trade receivables
Deferred tax assets
Current assets
Inventories
Receivables
Current financial assets
Cash and cash equivalents
TOTAL ASSETS
Capital and reserves
Share capital
Capital reserves
Reserves from profit
Revaluation reserves
Retained earnings or loss carried forward
Profit or loss for the financial year
Minority interest
Provisions
Noncurrent liabilities
Current liabilities
Accrued expenses and deferred income
2.460.268
8.616
2.381.150
3.182
802
66.517
270.049
7.169
37.663
2.112
233.105
2.751.393
1.743.897
1.117.663
478.208
122.288
79
-80.357
106.016
0
358
701.342
239.011
66.785
2.751.488
15.086
2.608.821
43.432
733
83.416
238.600.677
7.278
34.889
1.232
195.202
3.015.504
1.883.737
1.672.021
-18.596
94.258
29.414
55.168
51.381
91
266
828.399
219.471
83.631
3.190.008
17.007
3.065.295
46.547
645
60.514
355.363
9.761
26.681
166
318.755
3.566.619
1.901.691
1.672.021
-374
62.737
31.190
30.577
105.442
98
87
1.331.861
229.557
103.423
TOTAL LIABILITIES
2.751.393
3.015.504
3.566.619
17

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of Valamar Riviera d.d.
Date
Market price
Recommendation
Target price
10.11.2014.
19.92 HRK
BUY
24.29 HRK
Any additional information is available upon request.
19

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Valamar Riviera d.d.

Leisure & Hotels

A reinvention of Croatian tourism

Re-initiating coverage with Buy

Target price (HRK)

Current price (HRK)*

Relative price and volume (000)

We re-initiate coverage of Valamar Riviera d.d. (Valamar) with a Buy rating.

52 week range (HKR

Shares o/s (mn)

Avg. daily turnover

Leadership position in an attractive market

Valuation and risks

Tel: +385 42 660 962

Tel: +385 31 636 510

Source: FIMA Research

Valamar Riviera d.d.

After the acquisition of

Please see important disclosures at the end

Valamar Riviera d.d.

How happy the guests are?

Figure 3: OTA ratings per category

Source: Booking.com, Tripadvisor.com, Valamar, FIMA Research

Source: Booking.com, Tripadvisor.com, Valamar, FIMA Research

Valamar Riviera d.d.

Valamar is a bet on the West

Source: Valamar, FIMA Research

Valamar Riviera d.d.

Growth through acquisitions and strategic partnerships in selected destinations in the

Valamar's goal is to achieve EBITDA of 35-38%

Portfolio investments of HRK 1.5 - 2.0 bn over the 5 years period

Increase market cap and offer sustainable dividends

Source: Valamar, FIMA Research

Looking to expand into Alpe-Adria region

Expanding to the Alpe

Please see important disclosures at the end

Valamar Riviera d.d.

Happy employees = happy guests

Guest - employee interaction

Source: Valamar, FIMA Research

HRK 1.5bn 2.0bn CAPEX

Upscaling of capacities is the

Please see important disclosures at the end

Valamar Riviera d.d.

Buying a Government owned

TN San Marino 5 hotels

TN Suha Punta App 3*

TN Suha Punta Pav 2*

Source: Valamar, FIMA Research

Figure 12: Imperial EBIT Seasonality

Figure 13: Imperial EBITDA Seasonality

Source: Imperial, Bloomberg, FIMA Research

Source: Imperial, Bloomberg, FIMA Research

Source: Imperial, Bloomberg, FIMA Research

Valamar Riviera d.d.

Emerging tourism sector

Source: Croatian central bank, FIMA Research

Source: Croatian central bank, FIMA Research

Valamar Riviera d.d.

Figure 16: Main tourism export markets (bn)

Source: Croatian central bank, FIMA Research

Top line development

Available data pointing to