WEEKLY STOCK COMMENT: TOURISM HOLDINGS
Roy Davidson, 19 April 2018
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.
The market for RV rentals in NZ, with an estimated supply of around 4,500 motorhomes, is largely consolidated with the top three players accounting for 75% of supply. THL has led the industry consolidation by acquiring its two main rivals Kea and United rentals in 2012 which resulted in an estimated 20% reduction in supply between 2012-2015, addressing overcapacity that prevailed during the GFC. This also boosted THL’s market share from 27% in 2012 to around 45%, making it the largest player in NZ. Apollo is currently THL’s largest competitor and listed on the ASX in 2016 with a mandate to grow. Jucy (not listed), the third largest player, is mainly in the smaller campervan market where THL does not have a major presence.
THL acquired 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.
Management expects underlying net profit after tax to rise to $50m in FY20 from $30.2m in FY17 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 break-even in FY17 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 for THL include 1) increased competition, 2) regulatory change, and 3) economic downturn.