HVS 4Q22: McIntyre Partnerships on OneSpaWorld

Hidden Value Stocks issue for the fourth quarter ended December 31, 2022, featuring an update from Chris McIntyre, pitching his thesis on OneSpaWorld Holdings Ltd (NASDAQ:OSW).

Updates from Previous Issues: McIntyre Partnerships

McIntyre Partnerships, and its founder, Chris McIntyre, were featured in the December 2018 issue of Hidden Value Stocks.

Over the past four years, the fund has outperformed its benchmark substantially by investing in under-the-radar, high-quality small-cap stocks.

McIntyre has returned 14% per annum gross since its inception at the beginning of 2017 compared to 3.4% for its benchmark, the Russell 2000 Value index.

According to its latest figures, the fund was down -15.7% for the year to the end of the third quarter of 2022 compared to -21.1% for its benchmark.

In Chris McIntyre’s latest letter to partners, the fund manager highlighted a new idea to investors. This company was hit by the pandemic but is now bouncing back.

Thesis On OneSpaWorld

Here’s the condensed version of the thesis:

“OneSpaWorld Holdings Limited (OSW) provides spa services on cruise ships and has been an investment since 2020, originally as part of our Covid Recovery basket. In addition to benefitting from the continuing recovery of global cruise travel, OSW is an exceptionally dominant niche business with a strong growth outlook that should compound in value over time.

OSW is a quasi-monopoly with over 90% share of the cruise spa market…Niche businesses models like OSW that are too small for customers to pushback while too large for competitors to gain share are some of my favorite longterm investments.

The growth algorithm for OSW is relatively simple. Pre-Covid, cruise line passengers grew at a consistent 6-7% rate for several decades. Cruising has historically gained share versus on-land vacations, as cruises are typically 20-30% less expensive. Further, OSW typically outperforms overall passenger growth as OSW has added higher ASP services, such as Botox, and newer cruise ships have larger spa facilities.

The Covid downturn resulted in some newbuild cruise delays, and there may be an overhang of some former cruisers still hesitant to vacation, but I believe OSW is likely to achieve its historical 7-10% topline growth rate within a few years.

Importantly, outside of Covid, OSW has shown minimal cyclicality during recessions. Cruise lines are highly incentivized to fill their ships given the low incremental marginal cost per passenger. As a result, cruise ships are almost always operated at max capacity, even if the cruise lines must resort to discounting.

While this brings on board a slightly different type of customer, OSW has historically operated well and kept ASP and attachment rates steady in downturns. During the 2009 recession, OSW saw only a 10% decline in sales and EBITDA declined less than that.

Assuming cruising returns to full capacity by YE2023 and applying OSW’s historical 10- 11% EBITDA margin, I believe OSW should earn $70-$100MM in 2024 EBITDA, which yields $0.75-$1.10 in 2024 FCF/sh.

Of note, OSW pays almost no taxes, as its business is conducted on international waters, and has almost no capex, as the cruise lines pay for the spas. Applying a 15-20x multiple, which I believe may prove conservative, yields $11-$22 per share.”

This article originally appeared on ValueWalk

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