MKM Upgrades Interval Leisure Group, Sees 'Large Opportunity To Unlock Significant Value'

Analyst Christopher Agnew said the company's merger with Vistana should lead to higher earnings and free cash flow (FCF).

"IILG's strong balance sheet provides good visibility into unlocking value over a multi-year period; inventory on the balance sheet includes $6.7 billion of embedded sales value and leverage declined to 1.5x," Agnew wrote in a note.

"We believe the company is poised for earnings and FCF growth to accelerate. 3, 6 and 9 year EBITDA CAGR, including six acquisitions was 4.0–5.5 percent, post- merger, we believe organic EBITDA CAGR can increase to the upper-end of 5.0–10.0 percent," Agnew continued.

In addition, Agnew forecast FCF of $250 million–$300 million in 2017/18, which accelerates in 2019/20 as multiple development phases are in full swing.

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Further, the company has positive catalysts through the end of 2016 and into 2017 in the form of improving industry and company metrics and corporate actions by peers. The analyst also noted the company's 2.8 percent dividend yield as part of his bullish thesis.

The analyst also raised his price target to $25 based on his 8.5x 2017 EBITDA estimate of $369.5 million and DCF calculation with a weighting of 70/30.

"We believe the company could deserve a premium to peers based on the growth opportunity presented by its strong inventory base, its diversified mix of business with fee-for-service and recurring revenue streams and its leading upscale brands," Agnew added.

At the time of writing, shares of Interval Leisure had climbed 4.51 percent on the day to $17.91.