Jenny Ruth: Picking up the pieces

Tourism Holdings has staged a spectacular recovery over the past couple of years.

Two years ago, the company's shares were trading below 90c after it had failed to meet profit forecasts time after time and its profitability had fallen to almost nothing.

It wasn't a good look for a company with a habit of regularly getting into financial strife. It had slumped from a $17.7 million profit in 1995 to being at the mercy of its banks three years later.

When managing director Dennis Pickup took over in October 1998, the company was a mess of more than 60 trading companies and joint ventures, which included a ski field, hotels and helicopter tour operations as well as its major earner, its campervan rentals division. Analysts viewed the company as a bit of a black box, so poor was its reporting.

Pickup set about streamlining the business, selling off a myriad of assets and reducing debt, with the result that profitability started to improve dramatically.

Then it paid $62 million for the Britz campervan business, a fierce rival to Tourism Holdings' Maui brand in New Zealand and Australia.

From then on, it kept on disappointing the market until profit slumped to just $255,000 in 2002.

But now the company has two years of greatly improved results under its belt - a net profit of $8.7 million in the year to June 2003 and an $11.2 million profit last year.

Its shares have recovered to more than $2.

Rob Mercer, of Forsyth Barr, has long believed in the company's potential and notes that the stock has been one of the top 10 performers in the market for two years in a row.

"It's not everybody's cup of tea and it has had earnings volatility. Not everybody's fortunate enough to have a monopoly and you don't invest in tourism because it's predictable," Mercer says.

Many of the reasons behind its last slump were beyond the company's control, particularly the post-2000-Olympics slump in tourism in Australia, the September 11 terrorist attacks in 2001, the collapse of Ansett and a recession in Germany, a major market for the campervans.

Even now, the company's Australian operations are under-performing. Unlike the booming New Zealand market, tourism is still in recovery mode in Australia.

"We will never regret acquiring the [Britz] business," said Pickup. "Whether we paid too much is secondary to the fact that, in the long term, it will be of great benefit to the shareholders."

"It certainly lessens our dependence on the high volatility of the summer seasons in New Zealand."

The New Zealand campervan operations are achieving returns of some 25 per cent on capital but the Australian campervan operations are achieving only about half the company's overall 14 per cent return. Despite that, earnings before interest, tax and amortisation (ebita) in the December half jumped 22 per cent to $5.5 million.

The company's customers in Australia don't want to drive vast distances and typically fly to a tourist destination and then pick up a campervan. Ansett's collapse upset the economics of the business because cheap flights to such destinations vanished.

The company has just finished a review of its Australian operations, using consultants to help determine whether its business model could be made to work and Pickup thinks they can achieve the 14 per cent return on capital level by 2007.

A lot of that optimism is based on the rejuvenation of competition in the Australian airline market. It is also based on some of Tourism Holdings' competitors throwing in the towel.

In the latest six months, the company bought the Hertz Australia and Cruise New Zealand campervan fleets and their associated forward bookings. Unlike the Britz acquisition, it bought the assets and not the businesses and didn't pay any goodwill.

And German tourists are travelling again, although Pickup said the dependence on that market had been greatly reduced. It used to account for about 60 per cent of the Australian business, but was now only about 30 per cent.

The company is now attracting more domestic Australian customers and tourists from Britain and New Zealand, with the latter attracted by the 20 per cent-plus drop in the cost of transtasman flights.

Previously, the Australian campervan business had a pattern of making all its profits in the first half. In the last second half, its ebita was just $400,000 but Pickup says that will change this year.

"It's not only going to be cash positive but profit positive in the second half."

Mercer isn't as optimistic about the outlook for the Australian operations. He said that at worst the company could always recover its investment by selling the campervans (it is continually selling them anyway as part of its constant fleet renewal programmes).

Another of the company's divisions, the coaching business, has also been under-performing. Part of that has now been addressed by the sale of its Oz Experience coaches, which contributed a $1 million loss to the latest first-half result, and the company estimates that it will knock $2 million off the full-year result.

The coach division's overall ebitda fell from $3 million in the second half of 2004 to a $1 million loss. Pickup said these problems were of the company's own making and were now being addressed.

Among the company's attractions division, which includes the Waitomo glowworm caves and black-water rafting, the Milford Sound Red Boats and the recently acquired Fullers Bay of Islands, its Kelly Tarlton aquarium also produced a disappointing result.

However, that was because it was building a new attraction that allows people to interact with 200kg stingrays (the company says they are trainable and respond well to humans) which opened just before Christmas. It is the first new attraction added to the facility since 1995.

The company's shares have eased off their highs since the first-half result was announced and were trading at $1.80 yesterday, largely because it was a slightly disappointing $4.9 million compared with the company's $5 million forecast made at the annual meeting in November.

(The shares were also depressed by the sell-down in March of a 13.6 per cent stake by Gunther and Brenda Gschwenter, the former owners of Britz.)

Mercer said that corporate costs jumped from $1.7 million in the second half of last year to $3.2 million in the latest six months. That was largely because of the consultancy costs of its Australian review, higher technology costs and a charge for executive remuneration related to options issued to management - the latter reflecting the improvement in the company's share price last year.

The full-year result probably won't be all that exciting. The company reported that it expects it will be between $10.5 million and $11.5 million. Only if it achieves the upper end of that range will it exceed last year's $11.2 million profit.

But Mercer is positive about the outlook for the company, largely because of what is happening in the airline industry, particularly Air New Zealand's move to boost its capacity to Asia and Los Angeles and the move by Qantas to increase its capacity.

He is forecasting the company will report a $16 million profit for the year ending June 2006 and $18.7 million the following year and values its shares at $2.66.

The numbers

Tourism Holdings HQ: Level 9, 68 Shortland St, Auckland.
Profile: The company runs rental campervan operations in Australia and New Zealand, builds the campervans in its fleet, runs coaches in New Zealand and various tourist attractions in New Zealand, including the Kelly Tarlton aquarium, the Milford Sound Red Boats and Waitomo Caves tours.
Key financial statistics: The company reported a $4.9 million net profit for the six months ended December, up 15.3 per cent on the previous first half.
Market capitalisation: $176.7 million.
Major shareholders: Tower with 9.3 per cent, Axa with 9 per cent and the K.D. Cushing Family Trust with 8.5 per cent.
Key executives: Managing director Dennis Pickup and chief financial officer Ian Lewington.