Leisure Canada Inc -
Adrian Day's GLOBAL ANALYST -- Buy Leisure Canada (LCAN.CDN)
Leisure Canada Inc LCAN
Shares issued 22,931,725 1999-11-04 close $1.43
Friday Nov 5 1999
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Adrian Day's GLOBAL ANALYST
(410) 224-8885 P.O. Box 6644, Annapolis, MD 21401
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November, 1999
BUY LEISURE CANADA (LCAN.CDN)
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Viva la revolucion! There's a revolution taking place in Cuba today, but it's not the one Fidel Castro and Che Guevara had in mind when they rode into Havana 40 years ago. Cuba is changing. Indeed, a visit last week showed how dramatically it has changed since my last visit five years ago.
Then, Cuba was in a devastating depression, following the collapse of the Soviet Union and the withdrawal of Soviet subsidies. At that time, out of necessity, Cuba slowly began to open up its markets to foreign tourists and investors, as well as to permit very limited forms of private ownership, which have transformed the island. This revolution will not be turned back; the cat is out of the bag.
The liberalization accelerated following the visit of the Pope. By visiting the island and meeting with Castro, he made it respectable to visit. Beyond that, his visit ensured freedom of religion, not just for Catholics but for other religions as well. Today, one sees many yarmulkas, for example, something not seen five years ago. The Pope's visit legitimized Christmas again and made it acceptable for Cubans to return to church. These changes had a more profound if subtle impact. To some extent, given the suppression of religion under the communist regime, being religious was seen as opposition to the government. Now, being religious is acceptable, and has chipped away at the omniscience of the state.
Cuba has come a long way in a short time
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Five years ago, there were few cars on the road, few restaurants, and certainly no construction. Today, Havana is on the edge of a boom. The main roads are busy with traffic at all hours of the day and night; there are dozens of good restaurants (some much better than good); construction scaffolding is everywhere; and tourist traffic is booming with frequent flights from British Airways and Air France. Over 60 major airlines now arrive at Havana's new $100 million airport. Tourists are flocking from Spain, Germany, Mexico, Canada--everywhere, indeed, except from the United States. Whereas five years ago you couldn't get a decent hotel room because there weren't any, today you can't get a decent hotel without a reservation. Ironically, in light of the U.S. embargo, the U.S. dollar is now the de facto currency of Cuba.
Profit opportunities in tourism
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The place has changed. Within five years Cuba will be booming and some investors will participate. At present, the changes are cautious and controlled, but they are noticeable and they are irrevocable. In part owing to the lack of private property rights, there are few ways in which an investor can participate, either in an active or passive way. The main industries--cigars, rum, sugar--offer no possibilities (at present). But the number one foreign currency earner is tourism. And there is one company, a pure play on the growth in Cuba's tourism, that offers outstanding potential at present levels.
Tourism is booming from an admittedly low start. Visitor arrivals are growing at a staggering 20-25% per year, far exceeding anything in the rest of the Caribbean. Cuba is the largest country in the Caribbean, with a land mass three times the rest of the Caribbean combined, and a population of 11 million. And it offers so much that the rest of the Caribbean doesn't - it has culture, very low crime, and genuinely friendly--and literate--people, all in addition to the sun and the sand. The old city of Havana, recently designated a World Heritage Site, is being restored to its former splendor. With its 17th century cathedrals, buildings and plazas, Old Havana is one of the most delightful cities in the world. It is not for nothing that Havana used to be called "the Paris of the Caribbean".
There is also, of course, the mystery of its being off-limits for the past 40 years, which adds to the attraction. The U.S. embargo will be lifted one day and Americans will return to Cuba. A recent study by Pricewaterhouse suggests that 6 million Americans will visit the island nation within the first year of travel restrictions being lifted. Many of these, of course, are Cuban-Americans who will stay with friends, but there simply are not enough hotel rooms at the moment or on the drawing board to accommodate such a surge in visitors. Tourism is perhaps the ideal sector in which to look for investments.
A leader in the nascent tourism industry
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Leisure Canada (LCAN, CDN), a company developing major hotel and resort properties on the island, is an outstanding investment opportunity for people with patience who can tolerate some risk and volatility, but who can recognize the incredible potential of this sleeping giant.
The company is well established in Cuba. Although other companies have beaten it to the punch with completed hotel buildings, Leisure Canada is taking a longer-term view. It has tied-up three superb tracts of ideally located land. And, whereas most tourism to Cuba at the moment is either packaged tours or cruise ships--both notoriously low-spenders--Leisure Canada is planning five-star destination resorts. Master plans and architectural drawings are already complete on all properties, with ground breaking on the first site set for next month. Let's look briefly at these three main properties, all ocean front.
Three properties offering different possibilities
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* Jibacoa lies halfway between Havana and the popular vacation destination of Varadero. The location is ideal, with a major highway and main power lines running through the property. So too is the setting. With spectacular views, palm-tree studded hills as a backdrop, old growth trees throughout the property and several beautiful sandy coves, the 5 1/2-square kilometre property will eventually host five hotels with 1,400 room, as well as villas and timeshares, two golf courses, a marina, an equestrian center, a spa, and numerous other attractions. This development has been designed to be a 5-star rated destination resort, anchored by internationally recognized brands.
Groundbreaking on Phase 1, to include a 600-plus room hotel complex, is scheduled for within the next 60 days. This first hotel will be managed under a recently announced agreement by Le Meridien Hotel group. The entire Meridien Village Phase 1is estimated conservatively to be completed by November 2001.
* Cayo Largo, 30 minutes from Havana, was reputedly described by Columbus as "the loveliest land ever beheld by human eyes." It is the archetypal Caribbean island, with soft white sand and the clearest turquoise waters imaginable. The island hosts seven fine but modest hotels--and, indescribably (but so typical of communist nations) a fully operational airstrip that can accommodate 727s and DC-10s. I saw a fully laden Lufthansa 767 land on this seven-mile long speck of sand and lush vegetation non-stop from Frankfurt. Because of concerns about the environment and infrastructure, Leisure Canada's 900 room in three hotels will likely be the last built on the island.
* Monte Barreto is a two-square-block site in the middle of the fast developing modern section in the western part of Havana. Around it are brand new hotels and office buildings. Adjacent to it, a new aquarium is under construction. Leisure Canada's 850-room hotel on the site will cater to both business and tourist traffic. It will sit on the last waterfront site available in Havana.
The goal is first-class facilities with a Cuban flair
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Although each site is quite different in location and ambience, Leisure Canada is determined that all three will be built to first-class world standards and each will retain a strong Cuban character. When the Meridien Hotel is complete, it will be Cuba's only first-class hotel.
The deal with Meridian is illustrative of how Leisure Canada intends to proceed, planning joint ventures of various types with leading hotel groups and vacation operators around the world. This provides the necessary expertise as well as potentially capital, and also provides marketing and other essential services once a hotel is operational.
Leisure Canada plans joint ventures with major groups
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It is currently in discussions with other groups for its other planned hotels. A recently announced joint venture, for example, gives the company rights to the PGA-Cuba name, as well as merchandising and media rights. Two recent additions to the board of directors--the senior vice president of Marriott International, and the past president of Four Seasons international division--provide a clue to the attractiveness of what Leisure Canada has to offer. It has tied up three of the finest sites in Cuba, has excellent relations with the government, and is in a position to lead the renewal of Cuba's high-end tourism market.
Solid revenue projections
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It should be pointed out that the local company (50% owned by Leisure Canada, 50% by the Cuban government's Grand Caribe hotel group) provides for a 50-year lease. There are no land taxes during that period, and no operating taxes until income has repaid the original investment. Thereafter, tax is at a maximum 30% rate.
Projections are that Leisure Canada could be earning $70 million a year by 2004. A rough calculation would put that at $1 a share after allowing for equity dilution to raise the capital costs.
The company is led by Wally Berukoff, former CEO of Miramar Mining. In 1992, he was the first person to start a joint venture with the Cuban government. He developed the first copper mine after the revolution. And he was also responsible for bringing the first loan to Cuba through Barclays Bank of London. Before Miramar, Berukoff's background is in hotels and real estate. Through a stable commitment to investment in Cuba, Berukoff has expanded his operations to the development of 11 world-class resorts and two 18-hole championship golf courses. Because of this long commitment to investing in Cuba, Berukoff and Leisure Canada were featured on a 15-minute CNN segment on investment in Cuba.
Strong management in place
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Vice-president is Graeme Lempriere, who has worked with Berukoff in all of his real estate developments for over 12 years. Heading the local operations is an Ecuadorian, Marcello Montenegro, who has lived in Cuba for eight years, and built 10 hotels on the island for the Delta chain. Peter MacLeod, Senior Vice President for Design and Development, has over 20 years experience in design and construction in the hotel industry, including positions with Delta Hotels, Imperial Group and CP Hotels. Throughout his career, he has been responsible for the development of over 50 hotels, including nine in Cuba for Delta. These, along with the rest of the team, are men of vision and practical entrepreneurship, with a combined 30-years plus of experience in the design, development and management of hotels in Cuba, men who can get the job done.
Raising big money for Cuba will not be easy
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There are two main risks. The first is the obvious Cuba factor. One could spend a long time discussing this, but three key points may suffice here. One, I do not believe Cuba can go backwards. It has no major godfather any longer, following the collapse of the Soviet Union, and the people like their new-found wealth and freedoms (such as they are).
Two, although the government retains ownership of most land and businesses and there are many onerous rules and regulations (in particular, regarding employment of Cubans), it was emphasized to me over and over that the government--having made an agreement with a foreign investor--has always abided by that agreement. And three, Leisure Canada has ensured that there are no U.S. claims on any of its properties.
Lots of money will be required
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The second risk is financing. The company will require tremendous sums of money to bring its plans to fruition. The planned development of the three projects will require a total of $400 million over 10 years, half of which is Leisure Canada's responsibility. Although it is well funded now, with C$7.5 million in the bank following a summer financing, the money will go quickly once construction is underway. Its share of Phase 1 of Jibacoa alone, for example, is $32 million. The company plans to raise the necessary financing in various ways. Some of the groups with which it is discussing, for example, want an equity interest. But the company will have to raise some equity itself, and the risk is that it may have to do so at times that are not propitious in the marketplace. That is something we will monitor.
A third problem will soon be out of the way. Leisure Canada stock currently trades on the notoriously opaque Canadian Dealer Network. However, the company will be moving to Vancouver within a couple of months, and this will improve the liquidity tremendously. (You know how bad the CDN is when Vancouver is considered a major step forward.)
This is a great time to buy, just as the story is unfolding
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This is an excellent time to buy. The island's "liberalization" seems secure, and tourism is booming. The company has completed the long preliminary footwork and is ready to start building. Over coming months, we can expect many announcements, including groundbreaking, the move to Vancouver, and probably more joint ventures on the different hotels. And the stock is cheap. The financing was weighing on the stock while there has been heavy selling from a determined seller. This selling now appears out of the way, and the financing is done. Although the stock has bounced a little off the absolute lows, the current level is more or less the long-term low. The stock has been here twice before and each time given investors a double. I believe it will do that and more for us this time. The float is small. Berukoff and other insiders own approximately 10 million shares, with strong supporters such as the Robertson Stephens funds in the U.S. who own another 4 million. Together, that's over half of the shares outstanding. This strong support is encouraging, while making the stock more responsive to positive news.
Get more information!
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The company has an excellent package that will help you see--more than my mere words can do--why I am so excited about the company and its prospects. For a package, call John Gray or Ryan Mulhern at 604-990-9599. In addition, you should get hold of the June 1999 issue of Cigar Aficionado, which was devoted in its entirety to Cuba, with a discussion of the embargo issue and a thorough travel guide (Shanken Communications, 212-684-4224). I thought the writers were a little harsh on many of the hotels and restaurants--what do you expect after 40 years of Marxism?--but the articles are full of valuable insights.
Cuba is changing, and you can participate through Leisure Canada. Buy now, while the stock is low, before groundbreaking and the positive developments I anticipate in coming months.
LEISURE CANADA
LCAN.Canadian Dealer Network
Market Cap.: C$45 million
52-week high-low: C$3.15/1.25
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LEISURE CANADA INC. (CDN: LCAN)
213 West 1st St., North Vancouver
British Columbia, Canada V7M 1B3
Tel: 604-990-9599
leisurecanada.com
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