Small Caps | Jul 06 2016
This story features HELLOWORLD TRAVEL LIMITED, and other companies. For more info SHARE ANALYSIS: HLO
-Synergy guidance upgraded
-Agency numbers stabilise
-Dividends expected end FY17
By Eva Brocklehurst
Retail travel and tour wholesaler Helloworld ((HLO)) has impressed brokers, with material improvements in earnings expectations following substantial cost synergies generated from the recent AOT merger.
The company has undergone considerable changes over several years to its corporate structure, after a series of mergers with Harvey World Travel, Travelscene, Qantas Holidays and QBT. The latest is the merger with AOT Group in January this year.
Bell Potter likes the strategy the new management team has put in place following the merger. The company has upgraded synergy guidance to $17.1m from its original estimate of $7.6m. The broker's analysis suggests this guidance is reasonable, driven mainly by the streamlining of HQ administration costs, IT systems, advertising and personnel changes.
Bell Potter envisages the enlarged group will provide an opportunity to review key contracts with customers and suppliers, providing margin upside. Indeed, management has identified an opportunity to leverage the $5bn plus in transaction value with suppliers to improve revenue margins.
The finalising of new agreements with Qantas ((QAN)) and Jetstar are examples. This is the first commercial deal Jetstar has completed with a travel distributor in Australia, the broker observes.
AOT's largest business is its inbound division. This is one of the larger providers of inbound travel services in Australia. There is an important growth element contributing to the inbound division, with the recent strength in holiday arrivals in Australia from key source markets such as the UK, USA and Singapore, with upside from the rapidly expanding Chinese tourist business.
The company's QBT Corporate Travel business has suffered from a loss in market share and declining client activity over recent years and the broker notes the award of the whole-of-Australian-government contract in late 2014 has restored profitability, given the increased scale. Opportunity to recover further market share is envisaged.
Bell Potter expects the company to resume paying dividends following the release of the FY17 results. The broker assumes a modest pay-out ratio but then expects this to increase as the company delivers consistent results.
Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, initiates coverage on Helloworld with a Buy and target of $4.01, expecting a material improvement in earnings in coming years.
Ord Minnett initiated on the stock in May with a Buy rating and $3.64 target, noting the company has undertaken a number of transformational mergers and is executing on operational improvements and cost reductions aimed at rationalising corporate overheads. The broker expects re-rating catalysts to stem from these efficiencies as well as the stabilisation of retail store numbers.
Bell Potter also perceives the main challenge for the group is to stabilise travel agent numbers after a number of departures in recent years. The new team has worked to address concerns by removing costs and ending the strategic alliance with Orbitz.
The company's agency network shrank by 26% following the re-branding and launch of a misaligned website, brokers note, but anecdotal feedback suggests these numbers have steadied, providing a base for a return to growth.
Both brokers share the same concerns regarding the risks, which include a loss of retail agency share to online and subdued consumer activity as well as external shocks which disrupt travel. A portion of earnings are also subject to both short and long-term contracts and there is a risk that one or some of these could be lost.
Bell Potter acknowledges operating results since the Stella merger have been disappointing with earnings and revenue declining in FY14 and FY15. Prior to the merger with AOT, retail travel agency business was the key contributor to earnings.
Subsequently, the team has quickly moved to address the problems that stemmed from the loss of agents and the broker believes the actions to date provide important insight into the new approach, with recent evidence in the new contracts with PwC and the NT government.
See also, Opportunity Knocks At Helloworld on May 31 2016.
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