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DDDooolllppphhhiiinnn CCCooovvveee LLLiiimmmiiittteeeddd CCCooommmpppaaannnyyy AAAnnnaaalllyyysssiiisss Ticker: DCOVE

Financial Year End: December 31

Majority Shareholder: Stafford Burrowes

Date: August 31, 2011

SELL

Price at 31 August 2011 $7.70

Price Target $6.72

52 Week Range $3.10 - $7.70

DCOVE SHARE PRICE/VOLUME CHART

STOCK DATA

Market Cap ($’000) 3,021,683.10

Shares Outstanding 392,426,376

Free Float 20.39%

Volume 2,000

DOLPHIN COVE COMPANY ANALYSIS

DOLPHIN COVE LIMITED P a g e | 2

COMPANY OVERVIEW

Dolphin Cove Limited was incorporated in September 1998 as Gabarone Limited and

changed its name to Dolphin Cove in March 1999. The Group owns and operates the

Dolphin Cove marine parks in Jamaica located in Ocho Rios and Lucea. The Group also

operates tours of the Prospect Plantation near Ocho Rios and a small dolphin lagoon at

the Half Moon resort exclusively for guests at that resort. The group has over 300

employees and keeps on staff a dedicated veterinarian, trainers and handlers to oversee

care of the dolphins and other marine animals the company owns. In December 2010, the

company offered its shares up to the public through an IPO that was oversubscribed and

raised $240 million.

Clientele

Ninety five percent (95%) of the company’s customers are tourists, with 35% of them

being cruise ship passengers and 60% being stopovers staying at hotels. The other 5% of

customers are local residents.

Competition

Industry statistics indicate that the company’s Ocho Rios marine park is amongst the

three most popular tourist attractions in the country, with competition coming mainly

from Dunn’s River Falls, Mystic Mountain and Chukka Caribbean Adventure tours. The

Hanover attraction faces little if any competition.

Management & Corporate Governance

Dolphin Cove has a 7 member board which is chaired by its founder, CEO and majority

shareholder, Stafford Burrowes. The board also consists of business leaders and stalwarts

such as Raby Danvers Williams and William McConnell; an encouraging indication of

the strength of the company’s management.

The board does however diverge from international best practice standards relating to

corporate governance, as only three of the seven members are independent, as well as

having the chairman serving as CEO.



MACROECONOMIC OVERVIEW

Dolphin Cove’s business is directly related to the performance of the tourism sector, as it

is spending by tourists that constitutes the largest portion of company’s revenues.

Specifically, stopover arrivals, cruise passenger arrivals, and stopover visitor spending

are the economic variables that have the

greatest effect on Dolphin Cove’s

performance.

Stopover Arrivals

A stopover tourist is defined as one staying

in the country at least 24 hours and

excluding those arriving by cruise ship. For

the 2010 calendar year, stopover arrivals totaled 1,921,678 which represented a nearly

5% increase over the 1,831,097 stopovers recorded in 2009. Since 2005, stopover arrivals

have grown at an annually compounded rate of 5.4%. The main factors impacting

stopover arrivals over the period were an aggressive thrust to maintain airlift capacity and

initiate new gateways to the island, and advertising campaigns undertaken by the Jamaica

Tourist Board that have enhanced the island’s visibility and marketability to various

visitor segments. For the first quarter of 2011, stopover arrivals to the country increased

by 4.4% to 553,304 compared to 529,934 in 2010.

Cruise Passenger Arrivals

STOPOVER ARRIVALS

CRUISE PASSENGER ARRIVALS



For only the second time since 2004,

Jamaica recorded less than one million

cruise passenger arrivals in 2010. The

909,619 cruise passengers that arrived

last year represented a 1.4% decline

when compared to 2009. Cruise arrivals

have been falling at a rate of 9.2% per

year since 2006, and reflect global

economic conditions combined with the lack of price flexibility that cruise ship operators

posses, which prevents them from decreasing prices to sufficiently counter the effects on

consumers of the harsh economic circumstances. For the January to March 2011 period,

total cruise passengers to the country was 291,553, an increase of 5.1% over the 277,972

recorded in 2010.

Visitor Spending

Expenditure by visitors to the country has

increased on an annually compounded

basis by 5.3% per year since 2005.

Visitor spending increased from US$1.5

billion in 2005 to US$2 billion in 2010.

Of this amount, an estimated US$241

million was spent by these tourists on

entertainment and attractions. Last year,

total expenditure by cruise ship

passengers totaled US$79 million with an average spend per passenger of US$87.35. Of

note, is the fact that the percentage spend by cruise ship passengers on attractions has

increased from 7.6% in 2005 to 20.5% in 2010. This particular statistic has positive

implications for Dolphin Cove.

VISITOR SPENDING (US$’000)

TOURIST ARRIVALS BY MONTH



Seasonality of Tourist Arrivals

The tourism industry is characterized

by a peak winter tourist period which

sees the highest number of tourist

arrivals between the months of

December and March inclusive. As a

result of this, Dolphin Cove’s revenue

performance exhibits results of this

seasonality with the first quarter of the financial year usually showing strong performance

numbers that are not replicated in the subsequent quarters.

Outlook

Looking ahead, total visitor arrivals to the island may be somewhat volatile given the

current uncertainty surrounding economic conditions in the US and in Europe, visitors

from which account for approximately 80% of total visitors to the country. There is a

possibility that these countries may slip into a recession and the any such occurrence will

have a very real and visible negative effect on the local tourism industry. Also, it is

estimated that there will be an 8% reduction in airlift seats for 2011 from North America

and this may prove an impediment to tourist arrival growth. Positively however, cruise

passenger arrivals are expected to see a boost with the recent completion of the new

Falmouth port, which is projected by the Port Authority of Jamaica to result in roughly

1,000,000 additional cruise passengers per year. Given this, Dolphin Cove must remain

cautious as it seeks to navigate the near term given the precarious state of the local and

global economies.



INDUSTRY ANALYSIS

Porter’s Five Forces

Competitive Force Rating Reasoning

Threat of Entry Low The capital expenditure

necessary to set up

competing operations are

significant.

Threat of Substitutes Low There are little if any

substitutes for tourist

attractions.

Bargaining Power of Buyers Low to Medium Buyers of the company’s

products have little

bargaining power due to the

lack of direct competitors

offering the same

products/services.

Bargaining Power of Suppliers Low The tourist attraction

industry does not have any

significant suppliers.

Rivalry among Existing Competitors Medium Rivalry in the industry

comes in the form of

companies offering

attractions that vary in

nature such as waterfalls,

nature tours and adventure

excursions.



COMPANY ANALYSIS

SWOT Analysis

STRENGTHS WEAKNESSES

The company has well established

relationships with cruise ship and hotel

operators which it uses to drive

business through its doors.

It operates in a niche market, being the

only company to offer dolphin

attractions and faces little risk of its

business model being replicated due to

the high startup costs and the difficulty

in sourcing and acquiring dolphins.

The majority of Dolphin Cove’s

revenues are derived in US dollars

which should provide a hedge against

local currency devaluation in the long

run.

The company is hugely dependent on

the performance of international

economies, factors over which they

have no control.

Tourist arrivals to the country are

seasonal and as such the company may

find it difficult to sustain sales in the

off season.

OPPORTUNITIES THREATS

The recently completed Falmouth port

is projected to bring in up to one

million cruise ship visitors per year

which could be substantially beneficial

to Dolphin Cove. The new port was a

joint venture between Royal Caribbean

and the Government, and was built to

accommodate the simultaneous docking

of Royal Caribbean’s two newest and

largest ships which carry 11,000 per

voyage between them.

Any deterioration in the global

economic environment could have a

direct impact on the local tourism

sector and thusly affect the company

adversely.



Segment Overview

The company earns revenues from two main business activities, namely Dolphin

Attractions and what they classify as Ancillary Services.

Dolphin Attractions

Dolphin attraction revenues are derived

from the sale of dolphin, stingray and shark

experiences. This segment has historically

accounted for roughly 70% of revenues and

generated $519 million in gross profits for

2010.

Total revenues for the dolphin attraction

segment have grown at a compounded annual growth rate (CAGR) of 12.9% since 2005,

moving from $338 million in 2005 to $620 million as at the end of the 2010 financial

year.

Sales growth throughout the period has

been spurred by greater tourist arrivals

which have occurred due to increased

hotel rooms, brought about in part by the

‘Spanish invasion’, and a sustained

growth in tourist arrivals to the country.

DOLPHIN ATTRACTION SALES ($)

DOLPHIN ATTRACTION GROSS PROFIT ($)



Ancillary Services

Income from the Ancillary services segment is derived from the sale of souvenir

photographs and videos, food and beverages, and the use of the company’s beach

cabanas, nature trail facilities, kayaks, and boat tours offered at its locations.

Revenues from this segment have

grown 13.1% on an annually

compounded basis since 2005 and

accounted for approximately $260

million or 30% of Dolphin Cove’s

total revenues as at 2010. Gross profits

for the segment have moved similarly,

growing annually by 15.4% to $212

million in 2010.

ANCILLARY SERVICES REVENUES ($)



Financial Statement Analysis

For its first quarter ended March 2011, Dolphin Cove Limited reported net profit

attributable to shareholders of $76.6 million, an increase of 153% or $46 million from the

corresponding period of 2010. Influenced by aggressive marketing, an increase in visitor

arrivals and the addition of their new

Falmouth location, the company

recorded a 35% increase in total

revenues to $300 million. The dolphin

attraction segment posted a 33%

increase in revenues to $203 million

while the ancillary services segment

posted a similarly impressive 39%

increase in sales to $97 million for the quarter. The new Falmouth attraction which was

opened last year was responsible for 20% of the overall increase in revenues.

Total operating expenses increased 27%

to $173 million from $137 million, and

were attributable mainly to the operation

of the new marine park in Hanover.

Resulting operating profits experienced

a 73% increase to $83 million from $48

million in 2010.

Net finance costs increased by 34%

when compared to the similar period in 2010 due to interest incurred on loans obtained to

finance the acquisition of lands for the Hanover marine park and startup costs, while

interest income on investments declined 40% to $2.4 million due to the encashment of

some interest earning assets period over period. Dolphin Cove’s resulting net profit

REVENUES ($)

ROE/ROA



attributable to shareholders registered a massive 152.5% increase for the three month

period to $76.6 million as it benefited from income tax expense exemption.

As at March 2011, Dolphin Cove’s asset base stood at $1.3 billion, while shareholders’

equity rose 56% to $933 million. The company’s long term debt increased 63% over the

March 2010 level as leverage was utilized to facilitate the company’s expansion plans.

Projections, Valuation & Recommendation

Dolphin Cove appears well placed within the tourist attraction industry to deliver above

average levels of growth going into the medium term. Though revenues are highly

dependent on the state of the tourism sector, top line growth is expected to continue,

driven by the newly opened Hanover marine park, the newly operational Falmouth port,

and long run strengthening of the US dollar. By way of the strategic locations of its

facilities, the company is well poised to take advantage of the potential growth in tourist

arrivals, and parlay those arrivals into both top and bottom line growth.

With strong consideration given to the possible near term headwinds to be faced from the

fragile US and European economies, and with the completion of the Falmouth port and

the operation of its Hanover attraction, Dolphin Cove is expected to complete the twelve

month period to end March 2012 with revenues of approximately $1.4 billion. Our

estimate is based on a projection that slightly more than half a million new cruise ship

passengers will be arriving through the new port. Though the new marine park in

Hanover is expected to cannibalize some of the Ocho Rios business, it is expected that

any reduction in revenue will be marginal and fully compensated for by the new location

as well as the cruise ship arrivals at the new port. With margins projected to improve

somewhat, net profit for the period to end March 2012 should approximate $215 million

or an EPS of 55 cents.

Valuation

To arrive at a valuation for Dolphin Cove a multi-staged DDM was utilized. The

company has stated that its intended dividend policy is to pay out no less than 25% of



earnings, with consideration given for possible capital requirements. The company will

continue to pay no income taxes for the first five years of its listing and half the statutory

amount over the subsequent five year period. Dividends are projected to grow at 24%

during this initial five year period before transitioning over a five year period to a long

run rate of growth of 12%. The output of the valuation model suggests an intrinsic value

of $6.72 per share for Dolphin Cove.

Monte Carlo Simulation

To add a dimension of robustness to the valuation, a Monte Carlo simulation was run on

the valuation model. A Monte Carlo simulation produces a distribution of possible

outcomes of a forecast based on simulating differing changes to inputs to the model. In

the simulation run, the inputs that were tested were the cost of equity, and the two growth

rates that were used in the DDM. The simulation suggests a mean price per share estimate

of $6.14. (Full results of the results of the simulation are provided in the appendix.)

Recommendation

Dolphin Cove has exhibited strong growth since its inception and it is expected to

continue putting forward impressive growth numbers into the medium term as it benefits

from its expanding operations as well as the tax break and further visibility it will receive

as a result of being listed on the Junior Stock Exchange. Despite this however, since

being listed, market exuberance has run the price up to its current level of $7.70,

representing an all time trading high and a P/E ratio of approximately 26X trailing

earnings. This leads us to recommend a SELL for Dolphin Cove.



Technical Analysis

A technical analysis was carried out on the Dolphin Cove stock by using the RSI

measure. This is a momentum indicator that suggests relative valuation of stocks that are

trading within certain bands. As indicated below, Dolphin Cove has an RSI of 87.58

which puts the stock in the SELL zone and further supports the above recommendation.

Figure 1: Source - Bloomberg

Risks to Valuation

Any slowdown in US and Europe economies may adversely affect revenues through

the effect it may have on tourist arrivals from those regions.

The valuation is dependent on cruises ship arrivals from the new Falmouth port

amounting to at least 500,000 per year. A departure from this figure could affect the

revenue growth prospects of the company.



APPENDIX

DOLPHIN COVE FINANCIAL SUMMARY

Year Ended 31-Dec 2006 2007 2008 2009 2010 Q1 2010 Q1 2011

Income Statement

Dolphin Revenue 483,573,950 504,504,576 522,852,445 583,419,947 619,843,889 153,367,727 203,160,764

Ancillary Revenue 156,106,832 175,139,094 219,564,665 249,218,304 259,795,037 70,059,526 97,253,069

Total Revenue 639,680,782 679,643,670 742,417,110 832,638,251 879,638,926 223,427,253 300,413,833

Operating Expenses 418,150,927 516,923,834 523,066,455 566,338,635 594,538,565 136,682,109 173,169,942

Operating Profit 108,053,223 40,417,345 80,604,261 122,489,073 138,094,534 48,103,897 83,276,604

Net Profit 106,567,350 22,212,124 74,755,117 104,725,630 69,169,513 30,329,674 76,590,083

Balance Sheet

Total Assets 455,656,381 481,186,028 519,606,906 1,111,873,066 1,287,901,551 1,136,106,814 1,311,121,438

Total Liabilities 172,038,581 175,356,104 139,021,865 280,820,324 431,704,119 537,913,048 378,590,722

Shareholders’ Equity 283,617,800 305,829,924 380,585,041 831,052,742 856,197,432 598,193,766 932,530,716

Long Term Debt 48,147,121 61,061,394 31,901,622 129,779,915 248,338,046 121,793,777 198,135,320

Ratios

Gross Profit Margin 82.26% 81.74% 81.29% 82.70% 83.12% 82.68% 84.47%

Operating Profit Margin 16.89% 5.95% 10.86% 14.71% 15.70% 21.53% 27.72%

Net Profit Margin 16.66% 3.27% 10.07% 12.58% 7.86% 13.57% 25.49%

Return on Equity 45.44% 7.54% 21.78% 17.29% 8.20% 16.98% 40.03%

Return on Assets 27.32% 4.74% 14.94% 12.84% 5.76% 10.79% 25.04%

LT Debt/Equity 16.98% 19.97% 8.38% 15.62% 29.00% 20.36% 21.25%

Interest Coverage 15.30 1.92 4.76 5.28 4.70 7.10 9.21

Current Ratio 1.13 1.07 1.80 2.01 2.17 0.70 2.34

Du Pont Analysis

Profit Margin 16.66% 3.27% 10.07% 12.58% 7.86% 13.57% 25.49%

x Asset Turnover 1.64 1.45 1.48 1.02 0.73 0.20 0.25

x Financial Leverage 1.66 1.59 1.46 1.35 1.42 1.57 1.60

= ROE 45.44% 7.54% 21.78% 17.29% 8.20% 16.98% 40.03%



DOLPHIN COVE INCOME STATEMENT AND PROJECTIONS

12M to 12M to

Year Ended 31-Dec 2006 2007 2008 2009 2010 March 2011 March 2012

Total Revenue 639,680,782 679,643,670 742,417,110 832,638,251 879,638,926 956,625,506 1,368,168,441

Total Direct Expenses 113,476,632 124,112,780 138,881,394 144,077,543 148,482,192 156,430,724 250,774,288

Gross profit 526,204,150 555,530,890 603,535,716 688,560,708 731,156,734 800,194,782 1,117,394,153

Other income

1,810,289 135,000 267,000 1,476,365 4,098,857 4,098,857

Gross Revenue 526,204,150 557,341,179 603,670,716 688,827,708 732,633,099 804,293,639 1,121,493,010

Selling Expenses 164,764,976 214,453,553 218,759,512 248,835,466 257,447,514 272,111,636 369,405,479

Other operations 144,391,904 183,154,489 184,416,067 192,914,012 210,468,108 221,682,478 300,997,057

Administrative 108,994,047 119,315,792 119,890,876 124,589,157 126,622,943 137,232,284 205,225,266

Total Op. Expenses 418,150,927 516,923,834 523,066,455 566,338,635 594,538,565 631,026,398 875,627,802

Operating Profit 108,053,223 40,417,345 80,604,261 122,489,073 138,094,534 173,267,241 245,865,208

Finance income 3,831,289 2,865,454 11,280,013 10,903,294 -1,910,952 -3,491,771 4,712,682

Finance costs -7,061,232 -21,030,515 -16,937,357 -23,200,010 -29,405,694 -31,672,847 -34,840,132

Profit before taxation 104,823,280 22,252,284 74,946,917 110,192,357 106,777,888 138,102,623 215,737,758

Taxation 1,744,070 -40,160 -191,800 -5,466,727 -37,608,375 -22,672,701 0

Profit for the year 106,567,350 22,212,124 74,755,117 104,725,630 69,169,513 115,429,922 215,737,758

EPS ($)

0.22 0.29 0.55



MONTE CARLO SIMULATION

Forecast: PRICE

Summary:

Price range is from $2.58 to $36.84

Base case is 6.72

After 1,000 trials, the std. error of the mean is 0.09

Statistics: Forecast Values

Trials 1,000

Mean 6.14

Median 5.35

Mode ---

Standard Deviation 2.94

Variance 8.66

Skewness 3.23

Kurtosis 22.16

Coeff. of Variability 0.4796

Minimum 2.58

Maximum 36.84

Range Width 34.26

Mean Std. Error 0.09



BIBLIOGRAPHY

Bank of Jamaica - http://www.boj.org.jm

Bloomberg L.P

Dolphin Cove Limited Annual Reports

Dolphin Cove Website - http://www.dolphincovejamaica.com

Deutsche Bank Research - http://gm.db.com

International Monetary Fund - http://www.imf.org

Jamaica Tourist Board - http://www.visitjamaica.com

Planning Institute of Jamaica - http://www.pioj.gov.jm

Private Sector Organisation of Jamaica - http://www.psoj.org

Statistical Institute of Jamaica - http://www.statinja.com

http://www.boj.org.jm/

http://www.dolphincovejamaica.com/

http://gm.db.com/

http://www.imf.org/

http://www.visitjamaica.com/

http://www.pioj.gov.jm/

http://www.psoj.org/

http://www.statinja.com/

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