MKM: Time To Buy Diamond Resorts, There's More Upside After February Strategic Review

In February 2016, Diamond Resorts International Inc DRII launched a strategic review to unlock shareholder value. MKM Parners’ Christopher Agnew initiated coverage of the company with a Buy rating and a price target of $27.

Analyst Christopher Agnew expects leisure focused businesses to outperform in 2016, backed by strong consumer demand.

High Customer Satisfaction

Diamond Resorts benefits from repeat purchases, with 60 percent of its VOI sales to existing members. Another 20 percent sales are to non-members at home owners’ associations that are managed by the company. Only 20 percent sales are to new members.

Higher ROIC

Diamond Resorts reacquires recycled inventory from owners who are fully paid off, can no longer pay maintenance fees. “Inventory reclamation is more capital efficient, has minimal project level risk, and has a higher ROIC,” Agnew wrote.

Gross VOI Sales Growth Potential

Diamond Resorts is targeting same-store VOI sales growth of 10-15 percent over the next 2-3 years. The analyst expects the company to look to “consolidate the fragmented industry with similar sized deals of Intrawest Resort Group (~$85mn).” He added, “DRII has more flexibility, opportunity and higher potential synergies with no brand affiliation (royalty deals, brand standards) than its peers.”

Recurring Fees

More than 30 percent of the company’s revenue is contributed by recurring fees, Agnew noted.