ROCE exceeds 14% long-term target

Tourism Holdings 5 September 2016 Update

Tourism Holdings

ROCE exceeds 14% long-term target

FY16 results

Travel & leisure

5 September 2016

Price

NZ$3.20

Market cap

NZ$370m

A$0.96/US$0.73/NZ$

Net cash (NZ$m) as at 30 June 2016

79.0

Shares in issue

115.7m

Free float

84%

Code

THL

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.5

10.3

65.0

Rel (local)

7.2

4.4

29.5

52-week high/low

NZ$3.2

NZ$2.0

Business description

Tourism Holdings listed on the NZX in 1986. It is the largest motorhome rental operator in the world with a fleet of 3,761 motorhomes designed to meet the needs of the free independent traveller (FIT) market.

Next events

AGM

18 October 2016

Analysts

Moira Daw

+61 (0)2 9258 1161

Finola Burke

+61 (0)2 9258 1161

Tourism Holdings is a research client of Edison Investment Research Limited

Tourism Holdings’ (THL’s) FY16 NPAT of NZ$24.4m was in line with company guidance, 21% ahead of FY15 and 1.3% below our forecasts. The company grew EPS by 20.5% and has restored ROCE to 15.1% (FY15: 12.9%), which compares with its targeted long-term average of 14%. The dividend of 19 cents per share (50% imputed) is a 26.7% increase on FY15. THL has not given specific guidance for FY17 and, in line with previous years, further guidance will be provided at the Annual Meeting on 18 October 2016. The company confirmed that it will continue to work towards delivering NPAT of NZ$30m in FY18.

Year
end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15

237.3

31.4

17.9

15.0

17.9

4.7

06/16

278.9

38.1

21.4

19.0

15.0

5.9

06/17e

298.5

41.9

23.6

21.5

13.6

6.7

06/18e

313.6

46.2

26.2

23.5

12.3

7.4

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Key drivers remain positive

Inbound tourism in NZ (up 11% in the year to 30 June 2016) and Australia (up 10% to 30 June 2016) remains strong and NZ expects to benefit from the impact of the Lions tour, which starts in June 2017 and will provide a boost to off-season bookings in FY17 and FY18. THL reported that July 2016 had produced positive trading results and that summer bookings remained strong. The impact of Brexit on UK bookings is unknown at this stage and will continue to be monitored.

Deeper customer relationships to drive yield

The engagement with the customer is moving from an ‘equipment hire’ mentality to engagement with the customer throughout the journey. This will provide THL with opportunities to ‘clip the ticket’ and to increase spend per customer. ROCE is expected to be sustained at the targeted long-term average of 14% through maintenance of the company’s build-buy/rent/sell model and a range of initiatives including flex fleet (vans kept for six to 18 months) and Mighway (a sharing platform akin to Airbnb).

Valuation: DCF valuation is NZ$3.72

THL has established a track record of delivering on guidance and expectations while putting in place a growth strategy designed to maintain a long run return on capital employed of 14%. It is committed to a payout ratio of 75-90% of reported NPAT and our forecasts show an expected yield for FY17 of 6.8%. In addition, THL offers growth at a reasonable price with a PEG ratio of 1x. In light of the FY16 results, we have rolled forward and updated our DCF model to reflect our slightly revised forecasts. We have also reduced our terminal capex assumption to reflect reduced stay in business capex as a result of the flex fleet and other initiatives designed to reduce capital required. Our updated DCF valuation of NZ$3.72 (from NZ$3.44) implies c 16% upside to the current price. We expect this gap to continue to close as management continues to deliver.

FY16 results highlights – all boxes ticked

The key highlights of the FY16 results include:

NPAT of NZ$24.4m in line with guidance of more than NZ$24m provided in May 2016.

Revenue growth of ~18% while increasing EBIT (up 21%) and NPAT (up 21%) and adding 2.2pp to ROCE (15.1%).

Positive currency translation in the US business added NZ$2.1m to EBIT; without the positive impact from currency, the EBIT increase in FY16 would have been 13% instead of 20%.

EBIT margin of 13.9% compared with 13.7% (FY15) and 10.1% (FY14).

Rentals NZ EBIT up 26% on FY15 due to the strength of the inbound tourism market and a number of initiatives including flex fleet (which resulted in an increase in peak fleet of 8% and a reduction in year-end fleet of 3%), the impact of two Recreational Vehicle (RV) Supercentres and selling RV accessories online.

Strong cost containment in the Australian business (up 1%) saw EBIT in Australian dollars up 10% (11% in NZ dollars) in spite of challenging market conditions.

EBIT in the US division was up 16% in US dollar terms and because THL has been able to maintain fleet turnover within 18 months ROCE remains very strong at 27.7%.

The US EBIT margin fell from 18.1% in FY15 to 17.7% due to additional costs incurred to support fleet growth (increased by 85 RVs to 698 at 30 June 2016); management expects that EBIT margins will continue to be slightly lower in the future due to a step change in overhead costs incurred to manage increased activity levels.

Inbound visitors to NZ grew by 11% in the year to 30 June 2016 but revenue from the Waitomo Caves attraction and Kiwi Experience grew by 21% and EBIT grew 30% on FY15. Visitors from Asia and in particular China are a major driver of increased visitor numbers and the Waitomo Caves remain a popular attraction for tourists.

Costs increased by NZ$3.0m to NZ$5.9m due to planned expenditure on the Mighway start-up and the costs of developing the TCEx initiative and the integration of the GeoZone business.

The RV manufacturing JV produced a net profit before tax share of NZ$1.7m, which was flat on FY15.

The share of NPAT from the UK-based Just Go business was NZ$0.3m; the UK fleet increased by 15% for the 2016 summer season and management report positive trends in demand.

Exhibit 1: FY16 versus FY15

NZ$m

2016

2015

Variance

Revenue

NZ

103.8

89.9

15.4%

Australia

68.3

66.1

3.3%

US

70.2

50.7

38.5%

Tourism

36.3

29.9

21.4%

Total*

278.6

236.6

17.7%

EBIT

NZ

15.4

12.2

26.2%

Australia

6.8

6.1

11.5%

US

12.4

8.9

39.3%

Tourism

10

7.7

29.9%

Group support costs

(5.9)

(2.8)

110.7%

Total

38.7

32.1

20.6%

Source: Tourism Holdings. Note: *Revenue excludes interest income.

Outlook

As was the case in 2015, the company did not provide specific guidance but promised an update at its Annual Meeting, to be held on 18 October 2016. It confirmed that it was on track to meet its target of NPAT of NZ$30m by 30 June 2018 and noted the positive outlook for inbound tourism in all markets and the impact that may flow from the Lions tour, scheduled to start in June 2017 and expected to boost business during the off-season in NZ.

Management confirmed that a key focus for the business was to sustain dividends over the longer term and noted that the FY16 dividend of NZ$0.19/share was at the upper end of the dividend distribution policy of 75-90% of reported NPAT.

Net debt at 30 June 2016 of NZ$79m (up NZ$10m from FY15) was within the Moody’s Baa target range and debt facilities with Westpac and ANZ were renewed during the year, with maturities of three to five years for the term debt and 18 months for the revolving working capital facility. Net debt to EBITDA remains at less than 2x EBITDA.

The graphs below illustrate:

Revenue per division from FY12 to FY19e;

EBIT per region from FY12 to FY19e;

Net debt and interest cover from FY14 to FY19e; and

Cash conversion from FY14 to FY19e.

Exhibit 2: Revenue per division FY12-19e

Exhibit 3: EBIT contribution by region FY12-19e

Source: THL data, Edison Investment Research

Source: THL data, Edison Investment Research

Exhibit 4: Net debt and interest cover FY14-19e

Exhibit 5: Cash conversion FY14-19e

Source: THL data, Edison Investment Research

Source: THL data, Edison Investment Research

Exhibit 2: Revenue per division FY12-19e

Source: THL data, Edison Investment Research

Exhibit 4: Net debt and interest cover FY14-19e

Source: THL data, Edison Investment Research

Exhibit 3: EBIT contribution by region FY12-19e

Source: THL data, Edison Investment Research

Exhibit 5: Cash conversion FY14-19e

Source: THL data, Edison Investment Research

Forecasts

We have adjusted our forecasts to include the expectation of strong top-line growth offset by increased costs as THL continues to invest in new fleet initiatives such as Mighway and in deepening the level of customer engagement. The impact on NPAT and EPS is marginal. Our earnings adjustments are set out in Exhibit 6 and we have included FY19e for the first time.

Exhibit 6: Earnings adjustments FY17e and FY18e and new FY19e forecasts

NZ$000s

FY17e

FY18e

FY19e

New

Old

Variance

New

Old

Variance

New

Revenue

298,484

275,016

8.5%

313,644

289,570

8.3%

326,790

EBITDA

80,255

79,907

0.4%

84,862

84,578

0.3%

90,484

EBIT

45,923

46,233

-0.7%

50,234

50,576

-0.7%

55,809

NPAT

27,354

27,193

0.6%

30,259

30,149

0.4%

34,120

EPS (cents/share)

23.6

23.7

-0.2%

26.2

26.3

-0.6%

29.5

DPS (cents/share)

21.5

21.5

0.0%

23.5

23.5

0.0%

25.5

EBITDA margin

26.9%

29.1%

-2.2%

27.1%

29.2%

-2.2%

27.7%

EBIT margin

15.4%

16.8%

-1.4%

16.0%

17.5%

-1.4%

17.1%

Source: Edison Investment Research

Return on capital employed exceeds 14% target

When THL began its journey to restore return on capital employed, it set a target of a long-term average of 14% for the company and for all divisions.

At 30 June 2016 the target had been exceeded (15.1%). However, two divisions – Rentals NZ and Rentals Australia – were still sub 14%, with the Australian division still challenged by a softening local economy. Exhibit 7 sets out the ROCE performance by division in FY16 versus FY15.

Exhibit 7: ROCE by division

FY16 (%)

FY15 (%)

Variance (pp)

Rentals NZ

13.0

10.6

2.4

Rentals AU

11.6

10.8

0.8

Rentals USA

27.7

23.5

4.2

Rentals total

15.6

13.0

2.6

Tourism group

37.1

30.7

6.4

Operating divisions

17.9

14.9

3.0

Group

15.1

12.9

2.2

Source: Company data

Exhibit 8 highlights the improvement in overall ROCE from FY12 to FY16 and includes our forecast for continued improvement in FY17e and FY18e.

Exhibit 8: ROCE and average capital employed from FY12-18e

Source: Company data, Edison Investment Research

Valuation

Our updated DCF valuation has increased to NZ$3.72/share (from NZ$3.44), mainly due to rolling forward our model by one year, updating our slightly revised forecasts and reducing our terminal capex assumption to reflect reduced stay in business capex as a result of the flex fleet and other initiatives designed to reduce capital required. Note that for each additional NZ$1m of capital expenditure in the terminal year, our DCF decreases by NZ$0.05 per share.

The updated DCF valuation of NZ$3.72/share implies c 16% upside from the current share price. We expect that this gap will continue to close as management puts more ‘runs on the board’. In our view, its performance to date of lifting ROCE from 5.2% in FY13 to 15.1% in FY16 and its earnings growth profile highlight the attractiveness of THL’s shares. There is no company directly comparable with THL. We note that the NZX All-Share is currently trading on a P/E of c 20.6x and dividend yield of c  3.75%.

Exhibit 9: DCF valuation (in NZ$m)

Sum of PV of FCF

251.6

PV of terminal value

258.2

Implied enterprise value

509.8

Net debt (FY16)

79.0

Implied equity value

430.8

Number of shares in issue (m)

115.7

Equity value per share (NZ$)

3.72

Source: Edison Investment Research

Exhibit 10: Financial summary

NZ$000s

2014

2015

2016

2017e

2018e

2019e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

226,668

237,264

278,933

298,484

313,644

326,790

Cost of Sales

(58,005)

(60,287)

(79,241)

(86,176)

(91,037)

(94,323)

Gross Profit

168,663

176,977

199,692

212,308

222,606

232,467

EBITDA

 

 

61,322

65,561

73,599

80,255

84,862

90,484

Operating Profit (before amort. and except.)

25,494

35,878

42,316

45,923

50,234

55,809

Intangible Amortisation

(1,637)

(1,583)

(1,629)

(1,687)

(1,687)

(1,687)

Exceptionals

0

0

0

0

0

0

Other

0

0

0

0

0

0

Operating Profit

23,857

34,295

40,687

44,236

48,547

54,122

Net Interest

(5,694)

(4,446)

(4,218)

(4,009)

(4,048)

(3,946)

Profit Before Tax (norm)

 

 

19,800

31,432

38,098

41,913

46,186

51,863

Profit Before Tax (FRS 3)

 

 

18,163

29,849

36,469

40,227

44,499

50,176

Tax

(7,047)

(9,750)

(12,093)

(12,872)

(14,240)

(16,056)

Profit After Tax (norm)

12,753

21,682

26,005

29,041

31,946

35,807

Profit After Tax (FRS 3)

11,116

20,099

24,376

27,354

30,259

34,120

Average Number of Shares Outstanding (m)

110.8

112.5

114.1

115.7

115.7

115.7

EPS - normalised (c)

 

 

10.0

17.9

21.4

23.6

26.2

29.5

EPS - normalised fully diluted (c)

 

 

9.5

17.0

20.5

22.7

25.1

28.3

EPS - (IFRS) (c)

 

 

10.0

17.9

21.4

23.6

26.2

29.5

Dividend per share (c )

11.0

15.0

19.0

21.5

23.5

25.5

Gross Margin (%)

74.4

74.6

71.6

71.1

71.0

71.1

EBITDA Margin (%)

27.1

27.6

26.4

26.9

27.1

27.7

Operating Margin (before GW and except.) (%)

11.2

15.1

15.2

15.4

16.0

17.1

BALANCE SHEET

Fixed Assets

 

 

256,355

274,227

280,539

282,131

279,421

282,149

Intangible Assets

20,790

20,753

21,087

19,400

17,713

16,026

Tangible Assets

228,957

244,412

253,483

256,762

255,739

260,154

Investments

6,608

9,062

5,969

5,969

5,969

5,969

Current Assets

 

 

39,180

44,054

53,296

46,490

53,882

56,861

Stocks

17,281

15,996

21,752

11,002

11,534

11,913

Debtors

15,119

17,820

25,943

19,955

20,974

21,862

Cash

3,479

6,526

3,020

2,952

8,793

10,505

Other

3,301

3,712

2,581

12,581

12,581

12,581

Current Liabilities

 

 

(61,653)

(59,884)

(62,280)

(54,588)

(56,199)

(57,288)

Creditors

(46,121)

(56,005)

(61,905)

(54,213)

(55,824)

(56,913)

Short term borrowings

(15,532)

(3,879)

(375)

(375)

(375)

(375)

Long Term Liabilities

 

 

(73,986)

(83,986)

(97,281)

(97,281)

(97,281)

(97,281)

Long term borrowings

(66,607)

(71,884)

(81,650)

(81,650)

(81,650)

(81,650)

Other long term liabilities

(7,379)

(12,102)

(15,631)

(15,631)

(15,631)

(15,631)

Net Assets

 

 

159,896

174,411

174,274

176,753

179,823

184,440

CASH FLOW

Operating Cash Flow

 

 

53,390

33,420

26,186

84,301

94,922

95,306

Net Interest

(6,429)

(4,546)

(4,218)

(4,009)

(4,048)

(3,946)

Tax

(2,996)

(4,695)

(9,449)

(12,872)

(14,240)

(16,056)

Capex

0

(3,369)

(10,605)

(42,612)

(43,605)

(44,089)

Acquisitions/disposals

27

6,576

3,267

0

0

0

Financing

949

756

2,209

0

0

0

Dividends

(7,802)

(14,655)

(19,439)

(24,875)

(27,189)

(29,503)

Net Cash Flow

37,139

13,487

(12,049)

(68)

5,841

1,712

Opening net debt/(cash)

 

 

119,647

78,660

69,237

79,005

79,073

73,232

HP finance leases initiated

0

0

0

0

0

0

Other

0

(4,064)

2,281

0

0

0

Closing net debt/(cash)

 

 

78,660

69,237

79,005

79,073

73,232

71,520

Source: Tourism Holdings accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 9258 1161

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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