Roy Davidson, 6 July 2017

Stock Comment - Tourism Holdings THL

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


Tourism Holdings (THL) recently acquired the US based EL Monte for an enterprise value 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 rationalisation. 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 New Zealand profits decline to less than 50% of overall profits.

Management expects underlying net profit after tax to rise to $50m in FY20 from $24.4m in FY16 on the back of continued growth in tourism and the impact of EL Monte’s acquisition.  THL expects EL Monte’s EBIT to rise to US$11.9m in FY20 from US$6m in FY16 through a substantial reduction in employee and property lease costs. It also expects associated company profits to grow significantly driven by growth in Just Go Europe and Action Manufacturing. The latter in particular is seeing strong growth from third party sales such as ambulances.

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 the cost of capital 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.

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