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Opportunity Knocks At Helloworld

Small Caps | May 31 2016


-Substantial cost synergies envisaged
-Well placed to grow in-bound Chinese tourism
-Upside in whole of government contract


By Eva Brocklehurst

Opportunity knocks as retail travel agency, tour wholesaler and corporate travel management business, Helloworld ((HLO)), transforms into a more stable force in the industry.

Ord Minnett believes this to be the case, considering the merger with AOT Group in February has brought to fruition a management team which is aligned and focused. On this subject, the CEO and related parties own 40% of the stock which is escrowed until February 2018.

The recent history of the company commenced with a disruptive re-branding exercise in 2013, which led to a 26% reduction in its agency network. With the scrapping of a misaligned website and stabilising of the retail network a more solid base has been laid, and the broker envisages the company is now better able to leverage its combined buying power and extract material synergies.

Ord Minnett initiates coverage on the stock with a Buy rating and $3.64 target. This implies capital upside of 23.3% with a FY17 dividend yield of 3.6%. Management has identified $17.1m in annualised cost synergies and savings following the merger with AOT, which in isolation represents a 60% or more uplift to underlying FY15 earnings. This is considerable, the broker maintains, given the company's FY15 earnings of $27.5m.

Conversion of total transaction value (TTV) into revenue has been deteriorating across the business for some time and is well below comparable companies, Ord Minnett observes. Hence, a fresh approach from management and several structural catalysts which are emerging are expected to drive improved outcomes.

Morgans, too, is awaiting evidence the efforts of the new management team are succeeding in turning the business around. The broker expects the merger with AOT will be accretive in FY17 and provide greater exposure to the in-bound tourist market.

AOT is Australia's largest inbound tour operator and is likely to sustain strong structural and cyclical growth, given a growing Asian middle class, a relaxation of visas in China for outbound tourists and increased airline capacity. A lower Australian dollar is also supportive.

Ord Minnett observes AOT is in a position, given its low penetration in China and with Chinese tourists increasingly arriving as free and independent travellers, to offer quality tours, as opposed to shopping tours, in a growing market.

The company's primary corporate travel business, Qantas Business Travel, has also had a varied experience in the last five years. TTV declined in the several years to FY15 before the business was named as the sole travel manager under a whole of Australian government contract (WoAG). Since the merger with AOT, this business has won $100m of TTV across two clients.

Combined with the WoAG business for a full year, this should deliver a 30% uplift in TTV between FY15 and FY16, Ord Minnett contends. Under the WoAG the AOT hotels business is the sole accommodation manager and the broker believes the travel management division is now well placed to win new business.

Deutsche Bank expects significant earnings upside can occur if the company can integrate AOT successfully, noting at the time of the first half results that the company was showing signs of stabilisation and achieving material cost reductions.

There are risks. Looming large is a loss of retail agency share to online and subdued consumer activity. Further to this are external shocks that disrupt travel, increased wholesale competition and contract risks.

Given the free float is less than 10%, the company's volumes do not quality as institutional grade but Ord Minnett suggests a re-rating of the stock should generate increased liquidity, as some may look to trim their positions.

FNArena's database has one Buy (Ord Minnett) and two Hold ratings (Morgans, Deutsche Bank). The consensus target is $2.75, suggesting 5.3% downside to the last share price. Targets range from $2.20 (Deutsche Bank) to $3.64 (Ord Minnett).

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