Peter Ball, 26 January 2017

Tourism Holdings (THL) is New Zealand’s largest motorhome rental operator and the second largest operator in Australia. It also owns and operates cave licenses including the famous Waitomo caves.


THL acquired EL Monte for an EV of $93.5m. The acquisition was funded by $82.2m of debt and 3.4m THL shares. The acquisition catapults THL’s market share to 28% in the US, behind industry leader Cruise America (52% market share). We expect the acquisition to deliver strong earnings growth and improved returns through scale benefits, synergies and cost rationalization. We expect EL Monte’s return on funds to lift from 8% to 19% overtime.

THL’s gearing will go up since EL Monte was principally acquired using debt. We anticipate net debt/capital to increase to 47% in FY17 but a reduction in EL Monte’s fleet is expected to generate positive cash flows, which will result in gearing decreasing to 41% by FY20. Net debt/EBITDA will temporarily increase to 2x but will decline to 1.3x by FY20. We have assumed a lower dividend payout of 80% vs 90% in FY16, but still within the firm’s 75%-90% payout policy. Dividend imputation could come down from 50% currently if NZ profits decline to less than 50% of overall profits.

We estimate that the vast majority of the firm’s operating earnings stemming from its New Zealand, Australian, US and tourism businesses have strong competitive advantages and are likely to achieve returns well above WACC over the long-term. Our confidence stems from the consolidated nature of the RV rental market in Australasia and the US (with the top 3 players accounting for 75% of the market) perpetuated by THL acquiring major rivals such as Kea United and EL Monte. Furthermore, we estimate that no new entrants have set up shop in the last five years as stringent lending conditions have made it harder for companies to access capital.

Risks to THL include; 1) economic downturn, 2) increased competition, and 3) rising NZ dollar