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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Tourism Holdings</h2>
Beaten Up, Bouncing Back, But Stuck in Neutral
Tourism Holdings’ (THL) rebasing of market expectations for FY20 creates an element of certainty in uncertain times. The company has provided first time explicit earnings guidance for FY20, which further lowers market expectations, but perhaps not as much as the share price was previously expecting, hence the relief rally. The primary drivers of weaker earnings performance of recent periods (US vehicle sales, coronavirus and Australian bushfires) are temporary rather than structural, in our opinion. Earnings should ultimately recover. However, the timeframe and magnitude is unclear and we cannot discount the potential for further downgrades over the coming months. Therefore despite relative valuation attractions (~10x adjusted forward PE, ~6.7% cash dividend yield) we retain a NEUTRAL rating.
What’s changed?
<ul>
<li>Earnings: FY20 NPAT forecast cut -12%; FY21 -5%; FY20 dividend forecast cut to 20c (consistent with dividend policy)</li>
<li>Target Price: Reduced to NZ$3.40</li>
<li>Rating: Retain NEUTRAL</li>
</ul>
Market expectations slip further
THL’s revised guidance accounts for (1) the impact on Waitomo from the reduced Chinese visitation in light of the coronavirus outbreak, (2) the impact of the Australian bushfire on RV rental demand, and (3) potentially larger losses than previously suggested at tech JV TOGO. While revising down market expectations the company also outlined the relative positives in terms of rental demand and vehicle sales in Australasia, and a slowly improving situation in the US. The core business is performing well and continues to create value.
Dividend now almost certain to be cut
THL’s dividend policy is to pay 75%-90% of NPAT (excluding TOGO losses). In FY19 it paid a final dividend outside of this range. We now expect the full year dividend to be cut from 27c to 20c (still providing a cash yield of ~6.7%), with the company likely announcing a 10c dividend at its interim result on 28 February 2020. We don’t expect this to be a surprise to the market in light of (1) the earnings pressure of recent periods, and (2) the capital raising last year.
Temporary challenges; downside risk persists particularly for FY21
We believe the Australian bushfires (notwithstanding the broader climate change issue) and the coronavirus impact on Chinese visitation are both temporary demand issues. While the near term impact may be larger than implied in THL’s guidance (and therefore downside risk remains a feature to both FY20 and FY21 earnings forecast) we expect both to normalise at some stage through FY21. However, a prolonged impact could result in further downgrades.&nbsp;
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Investment View
THL is an RV/campervan centric tourism business executing a value accretive and growth strategy. Improved return on capital in recent years has been driven by better capital deployment, a more competitive cost base, and favourable industry growth trends. However, THL is still susceptible to external tourism shocks and vehicle sales market cycles. We rate THL NEUTRAL.&nbsp;
</div>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Tourism Holdings
Beaten Up, Bouncing Back, But Stuck in Neutral
Tourism Holdings’ (THL) rebasing of market expectations for FY20 creates an element of certainty in uncertain times. The company has provided first time explicit earnings guidance for FY20, which further lowers market expectations, but perhaps not as much as the share price was previously expecting, hence the relief rally. The primary drivers of weaker earnings performance of recent periods (US vehicle sales, coronavirus and Australian bushfires) are temporary rather than structural, in our opinion. Earnings should ultimately recover. However, the timeframe and magnitude is unclear and we cannot discount the potential for further downgrades over the coming months. Therefore despite relative valuation attractions (~10x adjusted forward PE, ~6.7% cash dividend yield) we retain a NEUTRAL rating.
What’s changed?

Earnings: FY20 NPAT forecast cut -12%; FY21 -5%; FY20 dividend forecast cut to 20c (consistent with dividend policy)
Target Price: Reduced to NZ$3.40
Rating: Retain NEUTRAL

Market expectations slip further
THL’s revised guidance accounts for (1) the impact on Waitomo from the reduced Chinese visitation in light of the coronavirus outbreak, (2) the impact of the Australian bushfire on RV rental demand, and (3) potentially larger losses than previously suggested at tech JV TOGO. While revising down market expectations the company also outlined the relative positives in terms of rental demand and vehicle sales in Australasia, and a slowly improving situation in the US. The core business is performing well and continues to create value.
Dividend now almost certain to be cut
THL’s dividend policy is to pay 75%-90% of NPAT (excluding TOGO losses). In FY19 it paid a final dividend outside of this range. We now expect the full year dividend to be cut from 27c to 20c (still providing a cash yield of ~6.7%), with the company likely announcing a 10c dividend at its interim result on 28 February 2020. We don’t expect this to be a surprise to the market in light of (1) the earnings pressure of recent periods, and (2) the capital raising last year.
Temporary challenges; downside risk persists particularly for FY21
We believe the Australian bushfires (notwithstanding the broader climate change issue) and the coronavirus impact on Chinese visitation are both temporary demand issues. While the near term impact may be larger than implied in THL’s guidance (and therefore downside risk remains a feature to both FY20 and FY21 earnings forecast) we expect both to normalise at some stage through FY21. However, a prolonged impact could result in further downgrades.&nbsp;

Investment View
THL is an RV/campervan centric tourism business executing a value accretive and growth strategy. Improved return on capital in recent years has been driven by better capital deployment, a more competitive cost base, and favourable industry growth trends. However, THL is still susceptible to external tourism shocks and vehicle sales market cycles. We rate THL NEUTRAL.&nbsp;

Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Tourism Holdings: Beaten Up, Bouncing Back, But Stuck in Neutral