EHG.L Regulatory News (EHG)

9 January 2018

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Elegant Hotels Group plc

Preliminary Unaudited Results for the Year Ended 30 September 2017

A year of decent progress in the context of a changed market

Elegant Hotels Group plc ("Elegant Hotels" or the "Company" or the "Group"), the owner and operator of seven upscale freehold hotels and a beachfront restaurant on the island of Barbados, today announces its preliminary unaudited results for the year ended 30 September 2017. The Group's audited results for the year ended 30 September 2017 will be posted to shareholders in due course, at which point a further announcement will be made.

This was the first full year of a rebased Sterling/USD exchange rate. As a result, given Elegant Hotels' rates are priced in USD while the majority of its customers are from the UK, it has been necessary for the Group to discount rates at certain of its properties on a targeted and tactical basis. This has inevitably affected the profit margins of the business, but the Group believes that the pricing environment is now much more stable. As such, these market conditions should be seen as the new normal.

Unaudited Financial Highlights

· Revenue up 5.1% to $59.9 million (2016: $57.0 million), reflecting an improvement in occupancy and the addition of Waves Hotel & Spa to the portfolio

· RevPAR (revenue per available room) down 4.6% to $227 (2016: $238)

· ADR (average daily rates) down 6.3% to $354 (2016: $378)

· Adjusted EBITDA* down 7.6% to $18.1 million (2016: $19.6 million)

· Profit after tax down 6.1% to $9.2 million (2016: $9.8 million)

· Adjusted EPS of 10.1 cents per share (2016: 13.1 cents per share)

· Implied Net Asset Value (NAV) of 163 pence per share (218 cents per share†)

· Year-end net debt of $73.1 million (2016: $61.8 million)

· Proposed final dividend of 1.75 pence per share, resulting in a full year dividend of 5.25 pence per share

Operational Highlights

· Successful acquisition, refurbishment and reopening of Treasure Beach Hotel in Barbados, bringing room count up 6.3% to 588 (2016: 553)

· Signed management contract for Hodges Bay Resort & Spa in Antigua, the Group's first property outside Barbados

· Agreement signed in March to provide sales and marketing services to The Landings Resort & Spa in St. Lucia

· Closure and renovation of The House as part of the ongoing strategy of refurbishing, repositioning and repricing the portfolio

· Occupancy increased to 63.9% (2016: 62.9%)

* The Group uses adjusted EBITDA as a measure of performance as it better represents underlying performance. Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation and one-off costs that are outside the ordinary course of business. Adjusted profit and adjusted EPS reflect the adjusted EBITDA figure.

†based on an exchange rate of £1 : $1.34

Please note that due to rounding, numbers presented throughout this document may not add up precisely to the totals provided. Percentage changes are calculated on unrounded figures.

Commenting on the results, Sunil Chatrani, CEO of Elegant Hotels, said:

"The Group delivered a solid performance in 2017 against a background of changed market conditions. The team remains firmly focused on delivering our strategy, and we are pleased with the operational progress that has been made during the year. We have continued to strive for day-to-day excellence, and have invested in our people and systems to ensure that our hotels continue to provide exceptional guest experiences. We have also successfully expanded our sales and marketing presence in the US in order to drive further growth in visitor numbers from that market.

During the year we acquired another hotel in Barbados, in the form of Treasure Beach. We also expanded outside of the island for the first time through a management contract and a sales and marketing agreement on hotels in Antigua and St Lucia, respectively. Trading since the start of the new financial year has remained in line with market expectations, and our bookings are currently tracking ahead of the same period last year. As a result, the Group remains confident in its prospects for FY18 and beyond."

Analyst conference call

A presentation and conference call for analysts and institutional investors with the Company's management team will take place at 9am (GMT) today, the details of which are as follows:

For further information

NOTES TO EDITORS:

Elegant Hotels owns and operates seven luxury freehold hotels and a beachfront restaurant, Daphne's, on the island of Barbados. The Group's portfolio currently comprises 588 rooms, making it twice as large (by room number) as the closest competitor in the Barbados luxury hotel room market. Six of the seven properties are situated along the prestigious west coast of Barbados commonly known as the "Platinum Coast". The properties are all freehold, with a total aggregate plot size of approximately 23 acres and an aggregate beachfront of 2,600 feet.

In the year ended 30 September 2017, the Group achieved revenue of $59.9 million and EBITDA before non-recurring items of $18.1 million.

Together, the Group's seven existing hotels - Colony Club, Tamarind, The House, Crystal Cove, Turtle Beach, Waves Hotel & Spa and Treasure Beach - offer styles encompassing classic and contemporary, family-friendly and adults-only. The Group also has a management contract for Hodges Bay Resort in Antigua and a sales and marketing contract for The Landings Resort & Spa in St. Lucia.

The Group's strategy is to leverage its position as a leading hotel operator in Barbados and to expand both on Barbados as well as further into the Caribbean.

Investor website: http://www.eleganthotelsgroup.com 

Consumer website: http://www.eleganthotels.com 

BUSINESS REVIEW

Market overview

Barbados arrivals and competition

As expected, market conditions in Barbados remained challenging throughout the 2017 financial year. While arrivals to Barbados were up 6.4% year-on-year for the January to October 2017 period (2016: 5.5%), this was the first full year of a rebased Sterling/USD exchange rate, which has had a negative impact on our business: the Group's rates are priced in USD while the majority of customers are from the UK (around 75% on a room nights basis). This affects both the rates the Group is currently able to achieve at some of its properties, as well as demand for Barbados as a luxury tourist destination.

Recent data from the Barbados Tourism Marketing Inc shows that stay-over tourist arrivals from the UK have grown 0.7% year-on-year for January to October 2017, compared to growth of 2.2% for 2016. In addition, demand for luxury accommodation from UK travellers has declined despite the overall increase in numbers, and the villa and value market have tended to benefit from increased visitor arrivals.

However, we remain confident in the underlying attractiveness of Barbados for UK travellers, given its reputation as a safe destination and the fact that it is fortunate to be located south of the hurricane belt. Barbados is very rarely affected by hurricanes and, during the recent hurricane season, we experienced no disruption at the hotels and saw no material impact on bookings.

In addition to daily flights from London Gatwick and Manchester by a number of different carriers, Virgin is running a new twice-weekly service direct from London Heathrow from December 2017 to April 2018. There are also significant opportunities outside the UK market which the Group is working to capture, as set out further below. In particular, US arrivals to Barbados were up 14.2% year-on-year (January to October) compared to an 11.5% increase in the prior year.

Review of FY 2017 performance against strategy

Revenue - pricing and occupancy

Revenue for 2017 was $59.9 million, up 5.1% on the prior year (2016: $57.0 million). This reflected an improvement in occupancy in H2 2017, partially due to the timing of Easter (which fell in H2 in 2017, as opposed to H1 in 2016). Occupancy was 63.9% for the Group, up from 62.9% in the prior year. However, ADR fell 6.3% in the period from $378 to $354. This partially reflects the success of Waves Hotel & Spa, which contributed strongly to occupancy but had a lower average rate, especially in H1. Excluding Waves, ADR would have been $365, a reduction of 3%.

During the year, the Group reviewed the pricing strategy for some of its properties in response to the weakening of Sterling. Rates were discounted on a targeted and tactical basis in certain cases in order to drive occupancy in the context of the rebased market. ADR was maintained at The House and Colony Club, our properties with the highest rates. For these properties, maintaining rates has been a strategic objective in order to maintain differentiation among the hotels in the portfolio. In 2018, we intend to continue to review pricing strategies for each property to ensure that we effectively balance occupancy and rate.

During the year, we used targeted promotions to boost occupancy during slower periods. Over the high demand periods, our specialised US-based revenue team continues to be disciplined and cautious with discounting, leveraging both the Group's excellent relationships with tour operators as well as its scale and its substantial share of available luxury rooms in Barbados.

Target market and go-to-market strategy

Throughout 2017, the Group expanded its target market focus in response to the weaker UK market conditions. The sales teams in both the UK and the US were bolstered, and during the year the Group launched a new website to target direct bookings from the US. In addition, new contracts were signed with tour operators in the US and Canada, and the Group hosted a number of familiarisation trips for US operators. As a result of this, and the addition of Waves in 2016, the proportion of bookings from North America rose from 14% in 2016 to 17% in 2017.

There are also both opportunities and challenges in relation to changes in the demographic of visitors. The number of older, repeat guests is declining so attracting new guests is an area of growing focus. An increasingly important market for us is the millennial segment, including families and "double income no kids", who tend to value experiences and sustainability and for whom repeat visits are less common. As a result, when we are refurbishing our properties we continually focus on appealing to this segment as well as our more established guest-type.

In this regard, the marketing of Waves as a contemporary all-inclusive spa resort has been highly successful, and resulted in an increase in the number of guests from the millennial category. Given the success of this offering, we have incorporated a new spa into the refurbished House, and continue to assess additional spa opportunities throughout the Group.

Cost control

Implementing cost control measures has been a key area of focus for the Group during 2017 given the pressure on rates. This has involved targeted streamlining and centralisation of back office functions, and the set-up of a central warehousing function which was operational from the end of calendar 2017. The impact of these measures is expected to be seen in the financial year ending 30 September 2018.

Existing portfolio enhancement

We are continuously looking to improve the profitability of our hotels with our focussed three-step program of refurbishing, repositioning and repricing. These steps interplay to find the best combination of physical structure (refurbish), guest experience (reposition) and yield management (reprice).

In addition to our regular capex spend of 4% of each hotel's revenue, we spent approximately $1.5m on special projects, as planned. The most significant project undertaken during the year was the refurbishment of the public areas at The House, as well as the addition of a new spa. The House was closed from mid-August to the beginning of October, and since its re-opening has seen a 9% increase in business-on-the-books, driven by a stronger rate, compared to the same time in 2016.

In addition, we added a coffee shop and ice cream parlour to Turtle Beach and a coffee and wine bar to Crystal Cove. These additions, along with targeted discounting, resulted in both of these hotels increasing their occupancy compared to the prior year, and enhanced our offerings compared to new all-inclusive competitors on the island.

The results of Waves Hotel & Spa, following the post-acquisition refurbishment, also illustrate the success of this strategy. Waves' occupancy was the highest in the Group at 73%, and it maintained ADR significantly in excess of pre-acquisition levels.

Expansion

During 2017, we acquired Treasure Beach, a 35 suite hotel located next to the Tamarind Hotel on the 'Platinum Coast' of Barbados. At the time of the IPO in 2015 we set out our acquisition plan - to add hotels that complement our portfolio and that benefit from the Group's scale. Treasure Beach is a great geographic fit, as well as meeting our criteria of acquiring under-performing hotels that can be refurbished, repositioned and repriced in line with our enhancement strategy. It reopened in December 2017 following $2.8m of refurbishments as a European-plan adults only resort.

As a result of our acquisition strategy, our total room count is now 588 compared to 483 at the time of the IPO. This is more than twice the nearest competitor on Barbados and gives the Group significant influence and leverage with tour operator partners.

During the year, the Group added two properties to its portfolio via a management contract and a sales and marketing contract. In October 2016, the Group entered into an agreement to manage Hodges Bay Resort, a new 122-room luxury hotel in Antigua. The construction of Hodges Bay is currently taking longer than expected but we are pleased that the current owners are ensuring that this product is built to the highest standards. In March 2017, the Group added The Landings Resort and Spa, an 85 villa property in St. Lucia, with an agreement to provide a variety of services across the areas of sales, marketing, reservations, revenue management and public relations across all key markets. The Landings contract is progressing well and enables us to expand our sales and marketing footprint.

The Group is continually assessing potential acquisition targets both in Barbados and throughout the wider Caribbean. We see a number of compelling opportunities ahead of us, and are constantly managing our cash flow and debt availability in order to ensure that we can take advantage of them as they present themselves. The Board is at an advanced stage of discussions with one particular opportunity and hopes to make an announcement shortly.

Dividend

Elegant Hotels set out its dividend policy at the time of IPO in May 2015. Since then, we have paid cumulative dividends of 14 pence per share, while seeing a significant shift in the market largely due to the devaluation of Sterling compared to the US dollar. We have also taken advantage of multiple expansion and strategic opportunities including Waves Hotel & Spa and Treasure Beach.

Our objective is to become one of the leading hotel groups in the Caribbean in order to deliver sustainable investor returns. To achieve this, the Group must reinvest in its business model and ensure that it is well placed to capitalise on the numerous opportunities that we see for expansion.

Given the current market opportunities and the need to reinvest in our properties in an increasingly competitive market, the Board is recommending a reduction in our final dividend to 1.75p for the year ended 30 September 2017 from 3.5p in the prior year. This equates to a full year dividend of 5.25p for the year ended 30 September 2017 versus 7.0p in the prior year. The final dividend is subject to the approval of the Company's shareholders and will be paid on 7 March 2018 to shareholders on the register on 26 January 2018. The Company's ordinary shares will become ex-dividend on 25 January 2018.

Going forward, the Group intends to pay a full year dividend of 4.0p for the financial year ending 30 September 2018, split into a one third interim payment and two thirds final dividend payment. As always, the payment of dividends will be subject to the discretion of the Board and to the Company having sufficient distributable reserves.

People and Board

We were pleased to welcome two new additions to our Board this year. Jeff Singleton joined the Group as Chief Financial Officer in December 2016 and was appointed to the Board in March 2017. Jeff brings significant industry and listed-company experience and since his arrival has focused on restructuring the finance function and improving risk management, internal controls and management information. Luke Johnson joined the Board as a Non-Executive Director in May 2017, adding his significant hospitality experience and business skills to the Board.

The success of our hotels is highly dependent on our fantastic team of engaged service staff, who aim to deliver friendly, personal, best-of-the-Caribbean service to our guests. We have continued to invest in our staff this year, with various training and development opportunities and the continuation of our health and happiness programs.

Outlook

Trading since the start of the new financial year has remained in line with market expectations, and our bookings are currently tracking ahead of the same period last year. As a result, the Group remains confident in its prospects for 2018 and beyond.

FINANCIAL REVIEW

The financial information for the year ended 30 September 2017 is unaudited. The comparative figures for the year ended 30 September 2016 are restated to adjust the fair value acquisition accounting relating to the Waves acquisition and are unaudited.

Overview

There has been a good recovery in revenue in H2 2017 which has continued into 2018. However, lower rates at some of our properties have continued to put pressure on EBITDA and, as a result, cost control in the Group has been a key focus. Specific activities in this area have included the streamlining and centralising of the Finance functions in order to achieve economies of scale, as well as enhancing the Group's risk management framework.

Gross profit

Gross profit for the year was $35.5m (2016: $35.1m), while gross margin reduced from 61.6% to 59.3%, due to a combination of lower rates and a greater relative contribution from lower-margin H2 revenue compared to 2016.

Recurring selling, general and administrative expenses

Selling, general and administrative expenses before exceptional items and bargain purchase gain increased to $22.9m (2016: $20.1m), principally reflecting the addition of Waves Hotel & Spa. Additionally, the Group increased its corporate costs compared to the prior period with the appointment of a Chief Financial Officer and Group Operations Director. Both of these appointments were necessary in order to fulfil the Group's strategic expansion strategies.

Depreciation and amortisation increased from $3.2m to $4.1m primarily due to the acquisition of Waves in the prior year.

Selling, general and administrative expenses before exceptional items and bargain purchase gain were 38% of revenue in 2017 (2016: 35%). This reflects the above increased costs as well as the inclusion of Waves, which as an all-inclusive property has a lower operating profit margin, and the flow through effect of rate reductions.

Exceptional costs and bargain purchase gain

Exceptional costs were $1.1m in 2017 compared to $2.2m in the prior year. Included within exceptional costs is a credit of $0.6m from the reversal of share-based payment expense related to the share options issued on IPO which did not vest. Amounts relating to share-based payments made on IPO have been treated as exceptional as they represent a significant and one-off event for the Group.

Acquisition and other exceptional costs were $1.7m in 2017 and $2.0m in 2016, reflecting the acquisitions of Treasure Beach and Waves respectively as well as other exceptional costs relating to restructuring costs and professional fees. The Group also recognised a bargain purchase gain in 2017 of $1.3m related to the acquisition of Treasure Beach.

The Group presents measures of Adjusted EBITDA, Adjusted profit before tax and Adjusted EPS. These measures exclude exceptional costs, non-exceptional share-base payment costs and bargain purchase gain. These items are excluded as they do not reflect the underlying performance of the Group. The tables below set out the calculation of these measures. 

Reconciliation of unaudited Adjusted Profit Before Tax and unaudited adjusted Earnings per share

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

Reconciliation of unaudited Reported and unaudited Adjusted EBITDA

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

Reconciliation of unaudited Operating profit to unaudited Adjusted operating profit

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

Other operating income

Other operating income of $1.0m (2016: $1.1m) principally comprises gains on foreign exchange on converting US dollars into Barbados dollars.

Reported and adjusted EBITDA

Reconciliations of Reported and Adjusted EBITDA are set out in the table above. After adjusting for one-off items, Adjusted EBITDA was $18.1m (2016: $19.6m), 7.6% lower than the prior period, and Adjusted EBITDA margin was 4.2 percentage points lower than the prior period at 30.2%. This reflects the above-mentioned movements. Daphne's contributed approximately $500k to the decrease in Adjusted EBITDA, predominantly relating to its closure for renovation, with the closure of The House accounting for approximately $250k.

Finance expenses

Interest on loans increased in the current year from $1.8m to $2.5m, as a result of additional debt associated with the Waves and Treasure Beach acquisitions and movements in the US LIBOR rate from circa 50 basis points at the start of the year to 125 basis points at the end. The Group continues to explore opportunities to convert variable interest rates to fixed rates in the future. Finance expenses also included $0.3m of foreign exchange losses on forward contracts (2016: $0.4m).

Taxation

Taxation of $1.8m (2016: $2.0m) largely reflected lower profit before tax as well as changes in the relative level of bargain purchase gain and exceptional expenses compared to the prior year.

The adjusted effective tax rate on adjusted profit before tax was 18.7% compared to 17.6% in the prior year.

Profit after tax and Earnings per share

Profit after tax reduced to $9.2m compared to $9.8m in the prior year, with diluted EPS at 10.3 cents per share compared to 11.0 cents per share. Adjusted profit after tax decreased to $9.0 million (2016: $11.7 million). Adjusted diluted EPS reduced from 13.1 cents per share to 10.1 cents per share.

Non-current assets

Property, plant and equipment increased to $183.7m from $172.8m, largely due to the purchase of Treasure Beach in May 2017. In addition, $0.1m of intangible assets were recognised in relation to the cost of the Group's new commercial website.

Net debt and net asset values

Net debt has increased from $61.8m to $73.1m at 30 September 2017, primarily due to the acquisition of Treasure Beach Hotel in May 2017. An additional $8.4m was added to the Bank of Novia Scotia loan facility and was fully drawn down at that point. In addition, the Group drew down its $5.0m revolving facility and made total repayments of $5.2m against bank and vendor loans. At 30 September 2017, the Group has an additional undrawn overdraft facility available of $9.6m and undrawn revolving facilities of $0.2m.

Treasure Beach Hotel was valued by Terra Caribbean at $9.7m at acquisition. Combined with the valuation of Waves in June 2016 and the remaining properties in April 2015, total property valuation is $267.2m, which is greater than its carrying value in these accounts.

Despite the shift in the market which has affected the cash flow valuation of the properties, in the Directors' opinion and based on internal impairment testing, asset values remain significantly in excess of carrying values and no impairments are required.

The Group therefore has an implied net asset value of $194.1m at 30 September 2017, or 163 pence per share (218 cents per share).

Reconciliation of unaudited net debt and unaudited net asset value

Cash flow

The Group's free cash flow (defined as cash flow from operations less capital expenditure) was $6.9m for 2017 (2016: $7.4m). The increase comprises a reduction in cash from operations ($12.5m compared to $17.0m) offset by a reduction in capital expenditure ($5.6m compared to $9.7m) associated with the completion of the Waves renovation in late FY 16. Capital expenditure on Treasure Beach renovations of $0.7m have been recognised in 2017.

As well as reduced EBITDA, cash flow from operations was impacted by the first year of payments on account for Barbados tax expenses (leading to a $2.5m cash tax payment compared to $0.7m in the prior year) and an increase in trade and other receivables of $1.2m largely relating to VAT receivables and non-trade amounts associated with new management and sales agreement contracts.

The Group paid $8.2m in relation to consideration and fees for the Treasure Beach acquisition, net of cash acquired, which was financed through additional loan financing. Dividends paid were $1.6m lower than the prior year at $7.9m, largely due to changes in the Sterling/USD exchange rate, however cash interest paid increased by $0.7m.

Overall, cash and cash equivalents, net of drawn overdraft, decreased from $3.7m to $0.6m at 30 September 2017.

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The notes form part of these financial statements.

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

The notes form part of these financial statements.

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The notes form part of these financial statements.

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

UNAUDITED COMPANY STATEMENT OF CHANGES IN EQUITY

The notes form part of these financial statements.

UNAUDITED CONSOLIDATED AND COMPANY STATEMENTS OF CASH FLOWS

The notes form part of these financial statements.

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

UNAUDITED NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Elegant Hotels Group plc ("Elegant Hotels" or the "Company") is a public limited company incorporated in the UK and listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The address of the registered office is 10 Norwich Street, London, EC4A 1BD.

The principal activity of the Company and its subsidiaries (collectively the "Group") is the ownership and operation of hotels and restaurants in the Caribbean, principally on the island of Barbados. During the year, the Group acquired Treasure Beach, a Barbados-based 35 room hotel.

2. SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these company and consolidated financial statement are set out below. They have been consistently applied in the financial years ending 30 September 2017 (2016/17 financial year) and 30 September 2016 (2015/16 financial year) unless otherwise stated.

2.1.1. BASIS OF PREPARATION

These unaudited financial statements of Elegant Hotels Group plc and the unaudited consolidated financial statements for the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and in accordance with the Companies Act 2006 applicable to companies reporting under IFRS. The Company has taken advantage of the exemption provided under Section 408 of the Companies Act 2006 not to publish its individual Income Statement and related notes.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 September 2017 or 2016. The financial information for 2016 is derived from the statutory accounts for 2016 which have been delivered to the registrar of companies. The auditor has reported on the 2016 accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The statutory accounts for 2017 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the registrar of companies in due course.

The Company and consolidated financial statements are prepared on the historical cost basis, modified by the revaluation of certain assets and liabilities at amortised cost.

The functional currency of the Company is United States dollars ($). The dominant currency of the trading entities is United States dollars ($). The Company and Group presents the financial statements in United States dollars ($), and all information is stated in United States dollars unless otherwise indicated. All amounts have been rounded to the nearest thousand ('000), unless otherwise indicated.

2.1.2. GOING CONCERN

The Group meets its day-to-day working capital requirements with the assistance of its bank facilities which were renewed on 26 May 2015. The Group's forecasts and projections take account of reasonably possible changes in trading performance and show that the Group should be able to operate within the level of its current facilities, meet future debt repayments and continue to comply with its banking covenants for at least the foreseeable future. The Directors consider it appropriate to adopt the going concern basis in preparing the Group financial statements.

2.1.3. PRIOR YEAR ADJUSTMENT - CORRECTION OF DEFERRED TAX ON ACQUISITION

A prior year adjustment has arisen in respect of the year ended 30 September 2016.

In the preparation of these financial statements, the Directors identified that a deferred tax liability that should have been recognised on the 3 March 2016 acquisition through business combination of Waves Hotel and Spa had been omitted from the acquisition accounting and the 2016 statement of financial position. The deferred tax relates to buildings acquired through that business combination for which there is no recognition exemption. As a result the Company has made a prior period adjustment to correct this, restating the prior year consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes as at 30 September 2016, to eliminate the bargain purchase gain in the statement of comprehensive income and record an increased deferred tax liability on the statement of financial position as set out below. The affected balances have been marked as restated.

The impact on profit after tax is a decrease of $3,995k and the impact on net assets is a decrease of $3,995k. The impact on both basic and diluted EPS is a reduction from 15.5 to 11.0 cents per share.

2.2. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

No new standards, interpretations or amendments effective for the first time to the year ended 30 September 2017 have had a material impact on the consolidated results or financial position of the Group or Company.

Management is assessing the following standards, interpretations and amendments, which are not yet effective or adopted, for the impact on the Group:

* IFRS 9 Financial Instruments (effective date for accounting periods from 1 January 2018).

* IFRS 15 Revenue from contracts with Customers (effective date for accounting periods from 1 January 2018).

Management has reviewed IFRS 15 and is considering the treatment of service charge in accordance with the revised standard. Currently, service charge collected as part of revenue and paid to employees is not recorded as revenue. If service charge was recorded as revenue, it would increase revenue by circa 10%. There would be no impact on profit as a result of any change.

* IFRS 16 Leases (effective date for accounting periods from 1 January 2019). This standard has not yet been endorsed by the EU. Management has reviewed IFRS 16 and does not believe it will have a material impact on the Group. The Group owns all of its properties and has very few arrangements that meet the definition of a lease per IFRS 16.

* Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2. This amendment has not yet been endorsed for use in the EU.

* Annual improvements to IFRSs (2014-2016 Cycle) - Minor amendments to various accounting standards, effective for periods beginning on or after 1 January 2017 onwards. This amendment has not yet been endorsed for use in the EU.

The other standards not yet in effect are not expected to have a material impact on the Group or Company.

2.3. BASIS OF CONSOLIDATION

SUBSIDIARIES

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

ACQUISITIONS

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group.

The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. Acquisition related costs are expensed as incurred.

INTRA-GROUP

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

In the Company financial statements, all investments in subsidiaries are carried at cost less impairment.

2.4. FOREIGN CURRENCY TRANSACTIONS AND BALANCES

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income.

Exchange differences are recognised in profit or loss in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.

The Group enters into forward US dollar/Sterling forward exchange contracts to secure the amount of approved dividends. No other forward contracts or similar contracts are conducted.

2.5. REVENUE RECOGNITION

Revenue for the Group is measured at the fair value of the consideration received or receivable, net of discounts, value added taxes and service charges. The Group recognises revenue for services provided when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity.

Revenue arising from the provision of hotel accommodation, restaurant and bar services and activities is recognised when the service is provided or the products are delivered to the customer.

All deposits for accommodation and similar income which are received in advance of the related performance are classified as deferred revenue and shown as a liability until delivery of the service.

2.6. FINANCE INCOME AND EXPENSE

Finance income is recognised in profit and loss on an accruals basis. Finance expense is recognised in profit or loss using the effective interest method.

2.7. EXCEPTIONAL ITEMS

Exceptional items are items that are, in the judgment of management, material due to their size or nature, or non- recurring items that are considered exceptional. They are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group.

2.8. EMPLOYEE BENEFITS

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Elegant Hotels Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Contributions to defined contribution pension schemes are charged to the Consolidated Statement of Comprehensive Income in the year to which the employee's services relate.

2.9. SEGMENT REPORTING

An operating segment is a component of the Elegant Hotels Group that engages in business activities from which it may earn revenues and incur expenses; whose operating results are regularly reviewed by the entity's Chief

Operating Decision Maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance; and for which discrete financial information is available.

All revenue and operating profit is derived from the main activity of the Group. Each hotel is considered to be a separate operating segment of the Group based on the information provided to the CODM (considered to be the Board of Directors). These segments are aggregated for the purposes of disclosure as the aggregation criteria of IFRS 8 Operating Segments are considered to be met. The Directors believe the aggregation criteria is met due to the similar economic characteristics of the hotels which all operate on the island of Barbados.

2.10. SHARE-BASED PAYMENTS

Employees (and Executive Directors) receive remuneration in the form of equity-settled share-based payments, whereby employees render services in exchange for rights over shares (share options). The fair value of the employee services received in exchange for the grant of share options is recognised as an expense. The total amount to be expensed on a straight-line basis over the vesting period is determined by reference to the fair value of the share options determined at the grant date, excluding the impact of any non-market based vesting conditions (for example, continuation of employment and performance targets).

Non-market based vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each reporting date to allow for forecasted employee attrition and the difference is charged or credited to the Statement of Comprehensive Income, with a corresponding adjustment to reserves.

2.11. TAXATION

Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised directly in equity or other comprehensive income, where it is recognised in other comprehensive income or directly in equity, respectively.

Current tax for the year is the expected tax payable on the taxable income for the year, using the best estimate of the weighted average annual income tax rate expected for the full financial year.

Deferred tax is recognised using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets or liabilities, using the tax rates enacted or substantially enacted at the reporting date.

Deferred income tax is not provided on the initial recognition of an asset or liability in a transaction, other than a business combination, if at the time of the transaction there is no effect on either accounting or taxable profit or loss.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefits will be realised.

Deferred tax assets and liabilities are offset only when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income tax levied by the same taxation authority and the Group intends to settle current tax assets and liabilities on a net basis.

2.12. INVENTORIES

Inventories are valued at the lower of cost and net realisable value on a first in, first out basis. The cost is determined using a weighted average basis. Net realisable value for inventories held for sale is the estimated selling price in the normal course of business less the estimated costs necessary to make the sale. Net realisable value for inventories held for consumption in the provision of services is equivalent to cost.

2.13. PROPERTY, PLANT AND EQUIPMENT

Items of property, plant and equipment are initially recognised at cost, including directly attributable costs, and subsequently stated at historical cost less depreciation and impairment.

Land is not depreciated.

Depreciation is calculated on other items of property, plant and equipment on a straight line basis over the expected useful economic life of the asset as follows:

Depreciation on assets under construction does not commence until they are complete and available for use. These assets represent "fit-outs".

2.14. INTANGIBLE ASSETS

The Group records intangible assets relating to its commercial website. These assets are initially recorded at cost. The website has been assessed as an asset with a finite life of three years. The cost of the website is amortised on a straight line basis over this period. The carrying value and the amortisation period is reviewed annually.

Costs associated with maintaining the website are recognised as an expense when incurred.

2.15. IMPAIRMENT OF NON-FINANCIAL ASSETS

Assets that have indefinite useful lives are not subject to amortisation and are tested annually for impairment. All other non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

The Group determines any impairment by comparing the carrying values of each of the Group's assets (or the cash- generating unit to which it belongs) to their recoverable amounts, which is the higher of the asset's fair value less costs to sell and its value in use. Fair value represents market value in an active market. Value in use is determined by discounting future cash flows arising from the asset. Future cash flows are determined with reference to the Group's own projections using pre-tax discount rates.

2.16. LEASED ASSETS

Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an "operating lease"), the total rentals payable under the lease are charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the lease term. The aggregate benefit of lease incentives is recognised as a reduction of the rental expense over the lease term.

2.17. FINANCIAL ASSETS

The Group classifies its existing financial assets, including cash and cash equivalents, as loans and receivables. The classification depends on the purpose for which the assets are held.

Management determines the classification of financial assets at initial recognition and re-evaluates this designation at every reporting date.

2.18. LOANS AND RECEIVABLES

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset.

The Group's loans and receivables comprise cash and cash equivalents, short-term deposits, and accounts and other receivables.

They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Accounts receivable are presented in current assets in the Statement of Financial Position, except for those with maturities greater than one year after the reporting date, which are presented as non-current assets.

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.

The Company advances loans to its subsidiary undertakings which are accounted for as part of its net investment in those operations. These loans are repayable on demand and are stated at amortised cost less provision

for impairment.

Cash and cash equivalents comprise of cash balances and fixed deposits with original maturity dates of 90 days or less. The carrying value of cash and cash equivalents in the Statement of Financial Position is considered to be fair value.

2.19. FINANCIAL LIABILITIES

All financial liabilities are recognised initially at fair value, net of transaction costs incurred, and subsequently carried at amortised cost. The Group's financial liabilities include bank and third-party loans, the bank overdraft and trade and other payables.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan and amortised to the profit and loss over the life of the loan.

All borrowing costs are recognised in profit or loss in the period in which they are incurred.

2.20. PROVISIONS

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The Group's provisions are made up of legal amounts relating to specific legal claims, employee benefits, specifically annual leave, and sales incentive schemes. The timing of the utilisation of the provision is uncertain and is largely outside of the Group's control.

2.21. SHARE CAPITAL

Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group's ordinary shares are classified as equity.

2.22. DIVIDEND DISTRIBUTION

Final dividend distributions to the Company's shareholders are recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders. Interim dividends are recognised when paid. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements.

3. ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. Judgements made by the Directors, in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are:

Property, plant and equipment - The assessment of the useful economic lives requires judgement in order that depreciation can be charged over the life selected. This also includes the assessment of residual values that will be attributed to the hotel properties. Judgement is also required in determining whether the carrying values of the assets have any indication of impairment.

Acquisition accounting - The Group assessed the identifiable assets and liabilities of Treasure Beach Limited on acquisition. The difference in the fair value and the carrying amount on the property acquired resulted in a bargain purchase gain (see note 4). Other Items specifically considered but not deemed relevant related to customer lists, brand name, workforce and intellectual property. The Group did not identify any intangible items that would meet the criteria for recognition on acquisition.

4. BUSINESS COMBINATIONS

ACQUISITION OF TREASURE BEACH HOTEL

On 5 May 2017, the Group purchased 100% of the share capital of Treasure Beach Limited for $7.9 million. Treasure Beach Limited is a Barbados externally registered company which owns the business and property of Treasure Beach Hotel, located in Paynes Bay, St. James, Barbados. The Group purchased Treasure Beach to further expand within Barbados. It has refurbished the property as an adults-only European plan offering.

Treasure Beach Limited's property has been independently valued at $9.7 million by Terra Caribbean. In addition, a deferred tax liability of $0.6m was recognised on the value of the buildings. The difference of approximately $1.3 million between the total consideration and the fair value of the assets and liabilities is shown as a bargain purchase gain on acquisition in the Consolidated Statement of Comprehensive Income. The bargain purchase gain resulted from the property being for sale for a number of years, the property was loss making prior to acquisitions and the Directors believed the property was not operating to its full potential. The Directors reviewed the purchased assets for unrecognised intangible assets but could not identify any.

The acquisition accounting policies are consistent with those of the Group.

In the period immediately following the date of acquisition up to July 2017, the operation of the hotel was under the existing brand and the net losses of $0.0m have been recognised as exceptional expenses. The property closed for renovations and reopened in December 2017 under the Elegant Hotels brand.

Acquisition related costs

The Group incurred acquisition related costs of $0.4 million comprising legal, professional and due diligence fees, stamp duty and renovation/refurbishment project management fees. These costs have been included as exceptional administrative expenses in the Consolidated Statement of Comprehensive Income.

Acquired receivables

The fair value of acquired receivables was $0.1 million. The gross contractual amounts receivable is $0.1 million and, at the acquisition date, all of the contractual cash flows were expected to be received.

ACQUISITION OF WAVES HOTEL & SPA

On 3 March 2016, the Group purchased Waves Hotel & Spa via the acquisition of 100% of the shares of Swiss International Ltd for $5.4 million. This was satisfied in cash and a loan from the vendor of $2.0 million. The loan is payable in four equal instalments which commenced on 3 September 2016 and will be settled within the next three years.

The acquisition is in line with the Group's stated strategy to expand both on Barbados and further into the Caribbean. In the period immediately following the date of acquisition up to 18 April 2016, the operation of the hotel and spa was licensed back to the former owner to fulfil existing customer reservations. The property closed for renovation and reopened in August 2016. Waves therefore contributed a small operating loss for the 2016 financial year, the period of acquisition.

EFFECT OF ACQUISITION

The acquisitions described above had the following effect on the Group's assets and liabilities:

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

5. REVENUE

The Group's revenue is earned in Barbados in USD or currencies pegged to USD.

Virgin Holidays represented 13% of the Group's total revenue (2016: 12%). No other customer represented more than 10% of the Group's total revenue.

6. PROFIT BEFORE TAXATION

Included in profit before taxation are the following amounts:

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

AUDITOR'S REMUNERATION

7. STAFF NUMBERS AND COSTS

The average number of people employed by the Group (including Directors) during the year, analysed by category, was as follows:

The aggregate payroll costs of employees were as follows:

The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current year was $0.1 million (2016: $0.1 million).

8. DIRECTORS' REMUNERATION

The aggregate remuneration (including amounts receivable under long-term incentive schemes) of the highest paid Director during the year was $0.3 million (2016: $0.4 million). None of the Directors received a payment in lieu of pension contribution (2016: none).

9. EXCEPTIONAL ITEMS

10. FINANCE INCOME AND EXPENSE

11. TAXATION

Recognised in the Income Statement

RECONCILIATION OF EFFECTIVE TAX RATE

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

12. EARNINGS PER SHARE

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

Basic earnings per share is calculated by dividing profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year together with the dilutive number of ordinary shares.

The Company has 1,717,223 potentially issuable shares (2016: 4,037,084) all of which relate to share options issued to Directors and key management personnel. The dilutive number of issuable shares is 285,082 (2016: 221,921) for the purposes of calculating the dilutive earnings per share.

Adjusted basic and diluted earnings per share has been shown in order to compare underlying earnings per share year on year. In order to calculate adjusted basic and diluted earnings per share, the numerator has been adjusted to exclude the after tax effect on earnings of share based payments, bargain purchase gains, acquisition and pre- opening costs relating to new hotels and other exceptional items.

13. PROPERTY, PLANT AND EQUIPMENT

No interest has been capitalised into property, plant and equipment. No items of property, plant and equipment are held under finance leases. The Group's properties are used as security for bank loans (see note 20).

The fair value of the Group's property, plant and equipment is considered to be of greater than the book value recorded in these financial statements. All properties, with the exception of Treasure Beach Hotel and Waves Hotels and Spa (those properties disclosed as acquired in these financial statements) were valued by CBRE in April 2015. This valuation indicated a value of $235.5 million which is in excess of their carrying amount. The majority of the Group's non-current assets are located in Barbados.

14. INTANGIBLE ASSETS

The fair value of the Group's intangible asset is considered to be greater than the book value recorded in these financial statements.

15. DEFERRED TAX ASSETS AND LIABILITIES

RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are attributable to the following:

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

The recoverability of the deferred tax asset is dependent on future taxable profits in excess of those arising from the reversal of deferred tax liabilities. The deferred tax asset has been recognised to the extent that it is considered to be recoverable based on forecasts for future periods. At 30 September 2017, the value of the unrecognised deferred tax asset is $0.2 million (2016: $0.9 million). $0.2 million (2016: $0.3 million) of deferred tax assets and deferred tax liabilities are presented net in the statement of financial position as the Group has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same group of entities that intend to realise the asset and settle the liability at the same time.

MOVEMENT IN DEFERRED TAX DURING THE YEAR

* The comparative figures have been restated to adjust the fair value acquisition accounting relating to the prior year acquisition. See note 2.1.3.

16. INVENTORIES

There is no significant difference between the fair value of inventories and the values stated above.

17. TRADE AND OTHER RECEIVABLES

There were no receivables that were past due or considered to be impaired. There is no significant difference between the fair value of other receivables and the values stated above. All amounts shown under trade and other receivables are due to be received within one year.

During the year, electricity bonds were reclassified from short-term investments to trade and other receivables.

CREDIT RISK CONCENTRATION BY GEOGRAPHY

The concentration of credit risk for trade receivables for the Group at the reporting date by geographic region was:

CREDIT RISK CONCENTRATION BY COUNTERPARTY

The concentration of credit risk for trade receivables for the Group at the reporting date by type of counterparty was:

CREDIT QUALITY OF TRADE RECEIVABLE AND VALUATION ALLOWANCES

Industry standard repayment terms for credit sales are applied to all receivables. The Group monitors each receivable balance on a regular basis with regard to credit sales granted and payments received. In order to manage credit risk credit limits are set for customers based on volume of business and payment history. New accounts are usually on a prepaid basis. Credit limits are reviewed by the finance team on a regular basis based on the customer's debt ageing and collection history.

The ageing of trade receivables for the Group at the reporting date was:

Trade receivables are non-interest bearing. There are no indications at the reporting date that recognised debtors will not meet their payment obligations.

The movement in the allowance for impairment in respect of trade receivables for the Group during the year was as follows:

18. SHORT-TERM INVESTMENTS

The Group has an investment in the Barbados Golf Club which was originally undertaken for commercial reasons. During the period, the Group impaired its investment from $0.1 million in 2016 to $0.0 million. The carrying amount reflects the fair value of this investment.

19. CASH AND CASH EQUIVALENTS