Tag Archives: Leisure & Tourism

article 3 months old

Acquisition Prospects Floated For SeaLink

Ferry, barge and cruise business, SeaLink, is managing the transition from the construction phase at Gladstone and broker attention now turns to acquisitions.

-Growth supported by recent acquisitions, potential in New Zealand
-Strong operating cash flow, with benefit of working capital release from Gladstone roll off
-Fuel costs increasing, which could result in lower margins


By Eva Brocklehurst

Ferry, barge and cruise business, SeaLink ((SLK)), expects to report improved profit in FY17, assuming seasonal conditions remains stable over the remainder of the year. Nevertheless, the stock was sold off after the first half results, as Gladstone and south-east Queensland missed forecasts with the winding back of ferry and barge requirements for the construction phase of the Gladstone operation.

Ord Minnett believes the sell-off was overdone. While trimming forecast by around -3%, the broker believes the impact is isolated to FY17 and relates to the transition in earnings at Gladstone. The broker upgrades FY18 forecasts and believes the balance sheet is flexible enough to fund acquisitions, opportunities for which abound.

Earnings in FY17 are expected to provide a foundation from which growth can be achieved through various means. Ord Minnett retains a Buy rating and $5.00 target.

Kangaroo Island revenue was up 4% but was affected heavily in the first half by strong wind conditions. This resulted in around 15 days being cancelled. Looking forward, Morgans anticipates margins should improve with four more coaches to be deployed on the island. This should also reduce sub-contracting costs.

Of note, the broker points to fuel prices creeping higher, having increased by 32% in the half year. While some of this growth in costs can be attributed to a larger fleet, the broker suspects and increasing fuel price will result in lower margins. The company does have some ability to pass this through and find savings by moving suppliers.

The Captain Cook Cruise business in New South Wales and Western Australia benefitted from a first full half contribution for the WA branch, resulting in revenue being up 46%. This was also supported by a 12% uplift from lunch and dinner cruises as well as a stronger charter market.

North Queensland and Northern Territory business delivered 4% revenue growth, with higher contributions from Magnetic Island and Mandorah services being the main drivers. The company has further penetrated the cruise ship market, with improvement in its charter services, up 60% on the prior corresponding half.

Potential Lies In Acquisitions

Morgans considers the stock a clean way to play the in-bound and domestic tourism segment. Nevertheless, SeaLink is trading on a price/earnings ratio for FY17 estimates of 18x and offers 6% growth on the broker's forecasts, suggesting it is fair value. First half operational earnings (EBITDA) were up 38% and imply margins of 25%, in line with expectations.

While the skewing capital expenditure to the first half was higher than Morgans expected, the company has stated there are no major capital expenditure plans in the second half. No specific guidance was offered for FY17, although the company expects profitability to be higher than the prior year.

The broker believes the outlook is robust and sustainable, as international tourism numbers are growing by around 11% per annum and local tourism is solid. Benefits should accrue from the additional commuter routes which are opening up, and the re-deployment of the five Capricornian vessels (Gladstone).

With construction contracts now finalised and a roll-off of earnings of around $2m anticipated in FY17, the company reveals it has been able to add services and extend both hours and vessels for both operating contracts in Gladstone.

In the broker's opinion the largest driver of outperformance will be accretive acquisitions and the company is expected to seek these out both domestically and offshore. Of note, the company's non-compete clause in New Zealand expired late last year. Given the proximity and ease in which vessels can move around these waters, Morgans believes it logical for the company to re-enter the NZ market.

Bell Potter notes the business in Sydney Harbour is delivering improving returns as the company changes its strategy. The Captain Cook Cruises division (NSW and WA) reported an 88% increase in operating earnings. Sydney has reported a 12% increase in sales, attributable to the higher yielding lunch and dinner cruise markets. The broker considers this of major significance, as the turnaround vindicates the company's strategy to move away from in-bound tour groups to free independent travellers.

Meanwhile, as construction work in Gladstone is rolling off, the broker expects declines revenue to be partly offset by continued strength in south-east Queensland. Bell Potter rates the stock Buy, with a target of $4.97. The outlook is underpinned by the company's sole operator status in a number of key markets and exposure to growth in international visitors.

SeaLink has traditionally operated a fleet of 27 ferries in South Australia, NSW, Queensland and the Northern Territory, offering a range of passenger, freight, dining and charter services. The company also owns a paddle wheeler which cruises along the Murray River. The TSM division, which owns 33 vessels, provides passenger and vehicular barge services across south-east Queensland and in Gladstone, and was acquired in 2015. The company acquired Captain Cook Cruises Western Australia in February last year.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Restructured Aspen Ready To Rock ‘n’ Roll

Stockbroker Moelis has initiated coverage on Aspen Group with the expectation of strong growth in the years ahead.

By Rudi Filapek-Vandyck

Stockbroker Moelis has initiated coverage on property investment and management company Aspen Group ((APZ)) with a Buy rating and twelve month price target of $1.31, suggesting a total return potential of circa 26% from the present share price.

On Moelis' projections, Aspen is poised to grow profits strongly in the years ahead with the broker's modeling assuming EPS CAGR of circa 30% for the period FY17-19. On the back of this growth, dividend payments are expected to rise from 4.5c per share this year to 7c in FY19.

Aspen Group has been restructuring with Moelis observing the business has emerged with a much simplified format focused on affordable accommodation and with a balance sheet that offers the capacity to make accretive acquisitions, enhance park returns via operational initiatives, and undertake value-add activities including site intensification and brownfield developments.

Characteristics that receive the thumbs up from Moelis include exposure to the ageing population and rising inbound and domestic tourism themes, a capital-light development pipeline plus the opportunity to become a consolidator in a largely fragmented industry.

The company is at present debt-free and, assuming gearing of up to 30%, Moelis estimates there is a capacity to spend $65m on new acquisitions. The company is still leveraged to the resources cycle through the Aspen Karratha Village in the Pilbara, but tourism/holiday and mixed-use parks represent the largest part of the business, with retirement villages in Western Australia and NSW coming in third.

As I write this story, the company's official website is unaccessible.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Outlook, Strategy, OPEC And Airlines

Commodities and economic outlook; outlook for equities; OPEC production meeting; outlook for airlines; and Netcomm's NBN contract.

-Commodity boost to budget expected to be undermined by low wages growth
-Oz equities still considered reasonably attractive versus very low interest rates
-OPEC deal should be forthcoming, with surplus scenario likely if it fails
-Noticeable improvement in domestic airline passenger growth and yields


By Eva Brocklehurst

Commodities And Economic Outlook

A surge in the price of a number of Australia's key commodity exports since mid year has been widely flagged to provide a boost to the nation's economy. This includes the additional revenue to the federal government coming from increased tax receipts. The spot prices of three key commodity exports, iron ore, coking coal and thermal coal have risen sharply this year and, more generally, Commonwealth Bank analysts note, the Reserve Bank's non-rural commodity price index is up 17% since June.

Nevertheless, weak wages are expected to be a drag on budget revenues. Annualised wage growth for the September quarter was 1.6%, well below the 2016 budget assumptions of 2.5%. The analysts suspect this will reduce revenues and may offset the gains from higher commodity prices.

The CBA analysts suspect the size and relative strength of the NSW and Victorian economies means economic data presented at the national level is masking weakness throughout the rest of the country. Economic activity in the two biggest states, along with strong dwelling price growth in Sydney and Melbourne, is likely to mean the Reserve Bank prefers to stay on the sidelines in terms of its cash rate. This is despite the fact the rest of Australia could probably do with more easing of interest rate policy.

The analysts note that, during the mining investment boom, Australia was referred to as a "two-speed" economy, where relatively high interest rates and a strong Australian dollar weighed heavily on the rest of the country, while Western Australia, Queensland and Northern Territory experienced full-blown growth. Now this “two-speed” feature applies again, but this time it is NSW and Victoria driving demand and employment growth.

UBS expects the headwinds which have buffeted the economic outlook in the past few years, such as falling commodity prices and the drag from falling capital expenditure after the resources boom, will ease. As such, Australia's growth is forecast to strengthen to 3.0% in 2017, before easing to 2.8% in 2018. Through 2018 UBS expects growth to retrace as the booming housing construction cycle goes into reverse and the initial boost from public sector expenditure fades.

Growth is forecast to slow to 2.5% by the end of 2018. Inflation is expected to remain subdued and only return to the Reserve Bank's 2-3% target in the first half of 2018. UBS expects the RBA to keep the cash rate on hold before starting to normalise rates with a 25 basis point hike late in 2018 to 1.75%.

Equity Strategy

UBS considers a large and/or rapid drop from current levels is a key risk to factor in for equities in the coming year. Australian valuations appear moderately expensive in absolute terms but the market is still reasonably attractive compared with what are very low interest rates.

Australian earnings looks set to move back to positive growth in FY17 after two years of negative growth but, ex resources, trends appear still quite constrained, UBS observes. The broker remains relatively neutral on the banks, which appear reasonable value while the issue of their capital ratios is pushed out beyond 2017. UBS remains overweight resources.

Deutsche Bank believes the current price/earnings (PE) settings are about right and envisages earnings taking the market 4% higher over the next year. On the equity side, yield stocks have moved in line with bond yields and no longer look rich, with the broker noting the excess dividend yield that yield stocks offer is now close to the six-year average.

The broker likes some yield exposure at these levels and key picks include Telstra ((TLS) and Sydney Airport ((SYD)). In terms of the value trade the broker favours low PE stocks and key picks are Macquarie Group ((MQG) and Suncorp ((SUN)). Deutsche Bank remains a little concerned about domestic growth and expects reductions in official interest rates in 2017.

Australian dollar weakness and the prospect of better US growth leads the broker to include US exposure and key picks include Aristocrat Leisure ((ALL)), Amcor ((AMC)) and Incitec Pivot ((IPL)). In housing the broker sticks with a positive view and key picks include Fletcher Building ((FBU)) and Harvey Norman ((HVN)).


Macquarie believes agreement on production reductions by OPEC (Organisation of Petroleum Exporting Countries) has a 60% chance of success when the cartel meets on November 30, with a low US$50 price range for oil in the event of success and low US$30 on a failure to make a deal. Most OPEC members are at, or near, their production plateau levels, which the broker observes has not been the case since 2014, and should make a deal more palatable.

The form of a potential deal is far from settled. If OPEC fails to agree, Macquarie expects it will lose the power to jawbone the market and be on its way to dissolving, while members would be locked into a crude production race. Failure would force members to maximise production, resulting in large increases from Saudi Arabia, Iraq, UAE, and, eventually, Kuwait.

In this scenario the broker believes OPEC could quickly arrive at 34.5m barrels per day and create an oversupply for 2017 and part of 2018. In Macquarie's view, lower non-OPEC production would not be enough to offset OPEC growth as a result of the failure to obtain an agreement.


Ord Minnett observes a noticeable improvement in domestic passenger growth and yields in September, and what appears to be a more disciplined approach to international airfares to and from Australia by competing carriers. These developments have positive implications for Qantas ((QAN)) and Virgin Australia ((VAH)).

The number of passengers flying domestically grew 3% in September versus the previous September, and represent an improvement on the 2% growth in August and 1% growth in July. This confirms the broker's view that the July-August period was hurt by events such as the federal election.

The broker estimates yields in September in some key routes rose by 3-18% but, while these numbers are encouraging, cautions that average yields across the first quarter of FY17 were still down by 2-13%. In international routes passenger numbers grew by 6% in August, while average yields across the September quarter ranged from down 20% to up 10%.

Netcomm Wireless

Netcomm Wireless ((NTC)) has announced a contract with the National Broadband Network (NBN) for the roll out of its fibre technology (FTTdp or fibre-to-the-distribution point). This technology strikes a balance between the higher speed, but more expensive, FTTP (fibre-to-the-premises) and a technically inferior, but cheaper, FTTN (fibre-to-the-node).

FTTdp uses more fibre than FTTN as it extends to the kerb outside a property. The company's contract is for roll-out likely starting in FY18, which means production needs to start several months in advance.

This is a significant contract for earnings and, accordingly, Canaccord Genuity increases EBITDA (earnings before interest, tax, depreciation and amortisation) estimates by 27% for FY18, while FY19 is increased by 21%. Importantly, in the broker's view, the company is now well placed to win future similar contracts overseas.

Arguably, FTTdp is a bigger opportunity than fixed wireless because it addresses the issues in metro areas, where the majority of the company's target market resides. Canaccord Genuity increases its target to $3.50 from $3.20 and retains a Buy rating on the stock.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Flight Centre’s Earnings Outlook Weakens

Flight Centre has issued weak guidance, signalling a significant skew to the second half in FY17. Brokers are sceptical growth will be easy to achieve.

-Weakness stemming from several avenues including lower yields from lower airfares
-Brokers suggest problems lie with the company's cost base
-Continues to gain market share, providing confidence in the longer term


By Eva Brocklehurst

Ahead of its AGM, Flight Centre ((FLT)) has indicated earnings are likely to be significantly skewed to the second half in FY17. The guidance provided to the market is below broker forecasts and suggests pre-tax profit will be $320-355m for FY17, versus several forecasts that were above or at the top end of that range.

Morgans was expecting a subdued update but the guidance was worse than anticipated. The particularly weak first half results that are indicated - pre-tax profit is guided to be $105-120m versus $145.9m in the prior corresponding half - mean the market is likely to be sceptical about a return to growth in the second half. The broker estimates earnings will be the most skewed to the second half in years and, while the fundamentals are far from stretched, maintains a Hold rating.

The company has cited weakness in the UK following the Brexit vote and in the US associated with the presidential elections as well as adverse currency impacts and lower yields arising from lower air fares. Credit Suisse notes front-end retail operations appear to be running at lower profitability than has formerly been the case. At the same time retail cost structures are growing because of growth in consultants and online expenditure.

One of the main variables in Credit Suisse's assumptions is the assessment of downside risk to earnings forecasts and valuation stemming from a more permanent change in the company's super over-rider income. The yield factor highlighted in the company's downgrade suggests a growing dependence on super over-rider income, the broker asserts, which was an issue in a number of prior results.

Both UBS and Deutsche Bank highlight the view that Flight Centre has a problem with its cost base, not a revenue problem. The drivers of the downgrade to earnings guidance include ticket depreciation, a $10m FX headwind, cost pressures and weak UK and US markets. UBS reduces its estimates to reflect the downgrade and highlights ongoing uncertainty, as guidance assumes ticket prices stabilise in the second half, which could prove optimistic.

Beyond FY17 the broker expects earnings to grow, industry capacity to remain steady and the company continue to win share. The issues driving the downgrade are cyclical and not structural, UBS believes. These are expected to abate as industry capacity normalises throughout 2017 and the catalyst will be some signs of stabilisation in airfares.

A US corporate travel market opportunity exists and UBS believes there is up to 3% earnings accretion available. The US market is large, fragmented and Flight Centre only has a 1% share. Upside risk to estimates are envisaged should the bookings environment pick up. UBS also believes the market is pricing in a structural decline in Flight Centre's Australian earnings and this is overly pessimistic.

Deutsche Bank agrees some of the headwinds are temporary and argues an easing of airfare deflation will not necessarily result in a corresponding slowing of volumes. The broker highlights the clear relationship between consumer demand and airfares, noting that the company used to state that declining airfares were helpful to its business, as Flight Centre is not only selling airfares.

Strong ticket volumes provide consultants with more opportunities to sell other products, such as rooms and ancillary items, which are generally not declining in price.

Flight Centre has continued to gain market share, which provides some confidence that the business is not structurally broken, but Deutsche Bank believes changes need to be made to peg down costs in an environment where high single-digit transaction value growth is no longer achievable. Following the update the broker reduces estimates by 9-11% over the forecast period.

FNArena's database shows one Buy rating, five Hold and one Sell. The consensus target is $33.94, suggesting 13.4% upside to the last share price. Targets range from $28.31 (Macquarie, yet to update on the downgrade) to $37.90 (Ord Minnett, yet to update on the downgrade).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Coal Economy, Telcos, Food And Infrastructure

CPI outlook; Oz economy and coal prices; telcos under an NBN; Ardent Leisure; food inflation; big infrastructure projects.

-Perceptions the RBA's easing cycle is over are misplaced in Macquarie's, Morgan Stanley's view
-Coal price spike sets Australia up for possible trade surplus
-Trading multiples seen unwinding for telcos as the benefits of structural tailwinds dissipate 
-Sugar price rises spearheading likely inflation in some packaged grocery
-Goldman Sachs considers Lend Lease well placed for new major infrastructure projects


By Eva Brocklehurst

Macro Outlook

Australia's headline consumer price index (CPI) in the September quarter was better than Macquarie expected and the outcome removes the trigger for a November cut to the Reserve Bank's cash rate. That said, perceptions that the potential inflection point evident in the headline CPI could mean the easing cycle is over are misplaced in the broker's view.

For its outlook on the cash rate to be derailed, Macquarie believes inflation prospects need to be boosted to the point where the central bank is concerned about containing a sharp break-out in inflation. Morgan Stanley also envisages little change in the low inflation trend.

Core measures of inflation edged down to 1.5% year on year, leaving room for further cuts to official rates in the broker's opinion, if the labour market weakens over 2017. Morgan Stanley expects the slowdown in the housing cycle will impact growth and the labour market over 2017 and into 2018, ultimately prompting the RBA to lower rates another 50 basis points to 1.00% in the second half.

The broker highlights the risk of a hard landing within apartment construction and argues that a broad downturn in housing would put up to 200,000 jobs at risk and mean unemployment would rise to 6.5%.

Oz Economy And Coal

Cuts to coal supply in China have meant coal prices have surged. Initial contracts for hard coking prices spiked by 116% in the June quarter to US$200 and spot prices rose another 20% to around US$240. Thermal spot and semi-soft contract prices also rebounded around 50%.

Together, coal prices, weighted by Australia's export share, have more than doubled and UBS observes this spike adds around $3bn per month to export values. The broker suspects the country's trade deficit will probably disappear in coming months, and may even turn to surplus.

If the price spike is sustained through the December quarter, total export prices are likely to rise around 5%, quarter on quarter. Assuming broadly flat import prices, it would also mean the terms of trade turn up 5%. Hence, even with some retracement of coal prices next year, nominal GDP appears set to grow 5% in 2017.

At face value, the spike in coal prices is a positive for government budgets but the broker's channel checks suggest the Commonwealth's MYEFO (mid year economic and fiscal outlook) will largely look through the price hike, given the May budget already projected nominal GDP of 4.25% in 2016/17 and 5% from 2017/18 onwards.


The easy money has been made in tier 2 telcos over the last ten years, Morgans asserts, as the sector has enjoyed structural tailwinds and the benefits of many acquisitions. More diverse companies, combined with low interest rates and strong earnings growth, have resulted in trading multiples virtually doubling from long-term averages of 6 to 12 times enterprise value/EBITDA (earnings before interest, tax, depreciation and amortisation).

This is now unwinding and the broker expects while Telstra ((TLS)) has never re-rated and it has most to lose under the National Broadband Network, it remains well hedged against this loss. The stock is considered relatively safe and holding up with respect to NBN market share.

Morgans expects TPG Telecom ((TPM)) could de-rate further, as unlike Telstra it is not compensated for NBN losses. The company needs to either double its consumer customer numbers, grow corporate share or reduce costs from iiNet.

Vocus Communications ((VOC)) has de-rated and now looks interesting to the broker. There is little risk to NBN earnings as the company already pays the higher access prices. Still, Morgans suspects investors will want to witness the integration of recent acquisitions and the cash flowing before revisiting the stock.

All the above three carry Hold ratings from the broker. Morgans prefers global satellite re-seller Speedcast International ((SDA)) in the sector, rating it Add, as it has a much larger addressable market and therefore a substantially longer pathway for growth.

Ardent Leisure

The Dreamworld fun park has been closed until further notice after four fatalities at the site. Theme parks previously represented 33% of Ardent Leisure's ((AAD)) FY16 group EBITDA  excluding health clubs, Citi observes.

The broker invokes lessons from the UK where Merlin had an accident in its Alton Towers park in June 2015 at the start of its peak trading season. There were two serious injuries but no fatalities. The principal cost to the group was a fine of GBP5 million. Citi calculates that attendance fell 20-30% at the park following the incident and the share price has now recovered to levels at which it was trading prior to the incident.

Based on the Merlin experience, Dreamworld attendance is expected to be adversely impacted over the upcoming peak Christmas period. Revised forecasts assume Dreamworld continues to trade but at lower attendances over FY17, and maintenance capex increases over the short term.

FY17 and FY18 EBIT (earnings before interest and tax) forecasts fall by 27% and 18%, respectively. The broker requires more clarity surrounding the cause of the incident and the duration of the park closure before returning to a Buy recommendation, and downgrades to Neutral.


The Australian supermarket sector has languished with industry growth of 3.2% over the past year but Citi believes low inflation will not last forever and fresh produce inflation is likely to rise. In 2017, some packaged grocery categories could also experience higher inflation.

Using wholesale data, banana prices were up 25% on the east coast and potatoes, tomatoes and lettuce have seen inflation of 18-52%. Fresh produce is about 10% of supermarket sales and recent inflation could add 1.0-1.5% to industry sales growth in the September quarter.

While there is clearly more supermarket competition with Aldi's growth and profile, Citi assesses most of the low inflation is a reflection of lower raw material prices. Many packaged groceries have experienced deflation such as in beverages, bakery and cereals, pet food and toiletries. However, the basket of soft commodities in these products is starting to rise, the broker observes, particularly for sugar. Sugar prices are up 85% for September 2016.


Goldman Sachs updates its infrastructure construction tracker to reflect the latest high priority projects and also for the recent awards of rail rolling stock contracts. The broker now estimates a pipeline of over $38bn in major infrastructure projects. From a top down perspective, a 3.4% compound growth rate in infrastructure construction investment is estimated over 2016-19.

Four mega projects underpin the pipeline, these being the Sydney metro rail city & south west phase, the Melbourne metro rail tunnel, the WestConnex (Sydney) and Western Distributor (Melbourne) road projects. These four represent 90% of the project pipeline and are due to be awarded in late 2017.

The broker notes Lend Lease ((LLC)) and Cimic ((CIM)) have the capability to participate as equity investors in public-private partnerships, which have been increasingly deployed in Australian infrastructure projects. Lend Lease has won 40% of the $5bn of projects awarded since the start of 2016, compared to its 12% market share in 2015.

This compares favourably to Cimic, where market share declined to 30% in 2016 from 73% in 2015. Goldman Sachs expects the recent momentum in market share will underpin growth in Lend Lease's Australian construction business.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Star Entertainment Ascends On Buoyant Inbound Tourism

Star Entertainment is harnessing the buoyant inbound tourist market with its marketing strategy aimed at drawing more business into its casinos.

-VIP patronage in Sydney a highlight and The Star well placed for competition
-Benefits of Chinese tourism largely still to play out across all properties
-Plans to tap the under developed premium mass market


By Eva Brocklehurst

The Star Entertainment Group ((SGR)) is intent on harnessing spending from inbound tourists and has established a proactive marketing strategy aimed at increasing the amount spent in its casinos. Several factors have combined to make Australia a more attractive destination for casino visits, brokers believe, including increased investment in VIP facilities, increased business activity from China and improved airline capacity, along with deeper relationships with junket operators.

The company’s flagship property in Sydney, The Star, has grown market share to 9.1% from 0.7% over the past two years, UBS observes, with the venue boasting several advantages.Tables have benefitted on the main floor from strength in the Sydney property market and an improvement in the loyalty program, UBS contends. While the broker expects market share growth will slow it remains comfortable with a view that The Star will achieve a 10% share.

The highlight for Morgan Stanley from the FY16 results was the VIP patronage in Sydney, which grew 15% in the second half, versus a 10% decline in the broader Australian market. The broker suggests this is an indication of the “gateway” benefits offered by Sydney, as well as the company’s ability to attract VIP players. The theme is expected to prevail out to FY21 and also signals to the broker that The Star is set up well for new competition.

Morgan Stanley observes, at an FY17 price/earnings ratio estimate of 19x, competition and margin risks are adequately priced into the stock, with valuation still attractive. Mass casino patronage may have slowed in the second half and more normalised rates of growth in the first quarter around 4% are expected but Morgan Stanley remains constructive about the medium term.

The broker was also surprised to learn that tourists only account for around 3% of Sydney revenues, highlighting the fact that recent robust mass growth has been achieved just with core local patrons. Morgan Stanley believes the benefits from Chinese tourism growth are yet to be meaningfully felt and the investment to increase the company’s share of the Chinese tourist wallet and tap the under-developed premium mass market should drive further earnings growth and improve the defensive nature of the customer base ahead of the new competition in Sydney.

That said, costs could increase over FY17/18 as management develops its “premium mass” offering but Morgan Stanley remains positive about this investment, as the market is both lucrative and under-penetrated. Nevertheless, equally, there is little revenue to be had against the expenditure in the near term.

Credit Suisse notes two capex growth projects should drive earnings in FY17 and FY18, with the Sydney gaming floor expansion and premium status to improve the company’s capacity to attract low-tier players and upgrade players to premium clients. The broker notes the premium mass market in Sydney is around half as developed as that of Melbourne.

The second project, on the Gold Coast, is the company’s new six-star tower will introduce premium mass and VIP capacity. Management has indicated there is pent up demand for premium product in that jurisdiction. Credit Suisse is erring on the side of caution in its FY17 forecasts, given ongoing renovations and re-branding. The broker believes the company has sufficient funding capacity for the upcoming capital expenditure.

Given the disruption from capital works and increased marketing spending, Deutsche Bank reduces forecasts by 8% to reflect lower earnings from The Star and the increased investment. The broker does note competition in Sydney has been delayed to at least 2021 and the Queen’s Wharf project in Brisbane provides longer-term growth opportunities.

Macquarie envisages high growth in FY17 tourism revenue from increased spending and the tailwinds from hotel refurbishments, yet acknowledges the disruption is greatest for non-gaming revenues in Queensland. The broker highlights the Queensland VIP turnover, down 35.3% in FY16, does reflect a relatively small revenue base which is exposed to large fluctuations.

The impact of the hotel construction in the Gold Coast is expected to be felt in the first half before easing back in the second half. After that, the Gold Coast is expected to grow substantially, with the completion of the re-development at Jupiters anticipated in 2018 coinciding with the ability of this casino to participate in significant tourism growth. Planned seat growth from mainland China into Brisbane is reported to be 54% and Macquarie anticipates the addition of a six-star hotel on the Gold Coast will bring overall demand synergies and cross-selling opportunities.

Macquarie expects Sydney to continue its high levels of growth derived from overseas visitors in FY17, albeit at more modest levels in the second half as the company starts to cycle a sustained period of exceptional international growth.

Morgans tempers earnings forecast because of the increased costs associated with the brand and loyalty strategy and the interruptions with the refurbishments at both The Star and on the Gold Coast. The broker expects operating leverage to return to the business from FY18 following the completion of the capital works.

FNArena’s database shows six Buy ratings and two Hold. The consensus target is $6.48, suggesting 6.7% upside to the last share price.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Treasure Chest: Buying Opportunity In Mantra Group

By Eva Brocklehurst

Weakness in hotel operator Mantra Group ((MTR)) is overplayed and the stock presents a significant buying opportunity according to Bell Potter, who has reviewed the reasons given for the weakness and finds little justification.

Airbnb has been cited as a cause but the disruptor is actually expected to increase travel options as it entices a new type of consumer, who was unlikely to be a hotel client in the first instance. Airbnb, which enables people to rent their home as a vacation option, has garnered appeal in major European cities because of the prohibitive cost of accommodation for leisure travellers.

Citi recently reviewed its take on Airbnb, upgrading Mantra to Neutral from Sell and dousing the argument that Airbnb was a substantial threat in the immediate term. The broker still believes the threat is real but expects the impact will be further into the future. Another substantial positive for Citi is that Mantra ratings have improved on Tripadviser.

In addition, Airbnb is unable to cope with group bookings which are an important component of hotel revenue, Bell Potter contends. Meanwhile, a share price decline in US hotel stocks has corresponded with the fall in Mantra's share price, which suggests to the broker there has been a de-rating of the whole sector over the last 12 months because of the downgrade to the global economic outlook.

The other reasons cited for Mantra's weakness are recent senior management changes, which Bell Potter believes should not be interpreted as a sign that all is not well with the company. There are also negative perceptions regarding the acquisition of Ala Moana Hotel in Hawaii, but the broker regards the hotel as providing upside risk to earnings from strong operational management.

This was a sensible expansion, in the broker's view, and a first step to exploring a range of international opportunities. There is also considerable potential to improve the earnings profile of the Ala Moana property. Morgans is of similar view, noting this is a key tourist destination with high occupancy.

Bell Potter also contends there is no indication domestic opportunities have diminished. Rather, the revenue outlook is favourable for the Australian hotel segment given a lack of new supply amid improving domestic demand. The strength of the inbound holiday market from Asia, and particularly China, adds support to this view.

The broker expects margins have further upside potential, as Mantra builds more direct bookings and its brand outside Australia. One of the limitations of the business is that there is little recognition of the company outside of Australia, the broker asserts, and this is something which can be changed, perhaps via a strategic partnership with a global hotel chain.

Bell Potter, not one of the stockbrokers monitored daily on the FNArena database, retains a Buy rating and $4.68 target. The database has two Buy and five Hold ratings. The consensus target is $4.24, suggesting 23.7% upside to the last share price. Targets range from $3.45 (Citi) to $5.05 (Morgan Stanley).

A softer outlook resulted in Credit Suisse downgrading to Neutral from Outperform earlier this month, having re-assessed forecasts for FY17-18 in the light of industry commentary on revenue trends. The broker acknowledges that upside exists in terms of mergers or acquisitions, estimating Mantra can spend up to $100m and achieve a 10% accretion in FY17.

Still, a more robust organic outlook is required for Credit Suisse to justify a higher multiple and the stock is expected to be range bound near term. Credit Suisse retains a $3.75 target.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Turnaround Progressing Rapidly For Helloworld

-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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Opportunity Knocks At Helloworld

-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).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Is Flight Centre Downgrade Just Short-Term Turbulence?

-Top line growth to continue
-Margin sustainability in question
-Further downside from online drift?


By Eva Brocklehurst

Broker suspicions were proven correct after Flight Centre ((FLT)) acknowledged profits were likely to fall in FY16, just two weeks after leaving forecasts unchanged but suggesting meeting guidance was not a foregone conclusion.

The company is guiding to a decrease of 2-5% in profit compared with FY15, after previously forecasting growth of 4-8% and, as also expected, the downgrade is predicated on the uncertainties surrounding Australia's federal election and the UK vote on an EU exit, as well as revenue margin contraction.

Morgans suspected a downgrade would be forthcoming but this was worse than forecast. Consequently, the broker has little confidence in the short-term earnings outlook and believes earnings uncertainty will continue into FY17, in a tough consumer economic environment.

Top line growth is expected to continue, with the company signalling FY16 total transaction value (TTV) growth of over 8.0% but airfare competition in several jurisdictions has affected over-riders, which has resulted in margin contraction for Flight Centre.

Morgans downgrades FY16 and FY17 forecasts by 5.6% and 6.0% respectively. The share price weakness over recent weeks is, in quantum, greater than the implications from the downgrade, the broker contends but, given the uncertainties, a Hold rating is retained. Morgans lowers its target to $36.10 from $41.00.

One positive, unearthed by Ord Minnett, is that Australian leisure travel was not a primary driver of the soft outlook. The broker finds this refreshing news, as the segment has had a tough period. The company has also said that Australian leisure and corporate TTV growth was ahead of the Australian Bureau of Statistics outbound growth rate of 4-5%.

Combined with strategic investments, Ord Minnett expects TTV growth to translate into no earnings growth for Australia, but takes some encouragement from the TTV statistics. Otherwise, the broker estimates the organic decline in profit in FY16 implied by the forecasts is in the order of 7-10%, after backing out the uplift from Top Deck, other acquisitions and the FX benefit in the UK and US. The broker reduces profit forecasts by 6.8% and 10.1% for FY16 and FY17, respectively.

Deutsche Bank downgrades to Hold from Buy. The broker notes falling airfares used to be good for Flight Centre, given lower prices stimulated sufficient volume uplift to more than offset the deflationary impact. This time, turnover is still growing, which suggests sentiment is not so bad, but a margin trend is emerging.

Airline competition and capacity increases behind the declines in airfares mean the company's TTV is split across more carriers. This does not deliver the amount of growth to incumbent suppliers which would earn the super over-riders that have underpinned Flight Centre's margins in the past. Deutsche Bank suspects the trend is here to stay and will be compounded by continued cost growth.

Macquarie had anticipated the downgrade and expects the transition to online travel business will continue to impact margins in coming years. Flight Centre enjoys margins around 13.5%, the broker notes, whereas Australian onlinie competitor WebJet ((WEB)) has an income margin of 9-10%. The broker does not agree that the stock offers value at current levels.

Given the high fixed cost nature of the business, the significant operational leverage in the retail business is a concern. Same-store metrics, on a revenue and earnings basis, continue to be negative so, the broker observes, as store growth slows or even stops so too will revenue. Cost growth, on the other hand, is expected to continue to significantly erode earnings margins.

On Macquarie's estimates Flight Centre will deliver negative earnings growth in FY20 and, with further downside to come from online cannibalisation and market share losses, this is not the time to buy the stock. Underperform rating retained.

UBS takes a different view. The broker believes the drivers of the downgrade are cyclical, rather than structural changes such as online travel agents winning share. UBS now forecasts a 3.0% decline in FY16 profit with Australian profit to be flat, US profit below FY15 and the UK down in constant currency terms.

For over ten years the broker observes the market has questioned the sustainability of Flight Centre's “high touch” travel business and the share price is factoring in a long-term structural decline in earnings. The trends include airlines and hotels going direct to consumers, growth in online-only sites and growing consumer competence in booking online. Yet UBS believes these risks have been overplayed and the company is well placed to grow earnings in the medium term.

Flight Centre has just one Buy rating now (UBS) on the FNArena database. There are five Hold ratings and one Sell (Macquarie). The consensus target is $36.91, suggesting 16.3% upside to the last share price. This compares with $41.27 ahead of the news. Targets range from $28.26 (Macquarie) to $41.44 (Credit Suisse, yet to update on the downgrade).

See also, Flight Centre Flags Cautious Outlook on May 9 2016.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.