US tax rate boost for Tourism Holdings

Tourism Holdings is key beneficiary of United States tax reform.

Tourism Holdings Ltd (THL) is the key New Zealand beneficiary of United States tax reform, which will boost its US-derived income from 2019.
Forsyth Barr broker Suzanne Kinnaird said the payback on its acquisition of El Monte, in the US, would consequently be sooner and greater than previously anticipated.

US President Donald Trump's Tax Cuts and Jobs Act lowered the US federal corporation tax rate from 35% to 21% for tax years beginning on or after January 1, 2018.

THL's earnings benefit would be about $3 million in 2019, equivalent to about 6% of group net profit.

US operations were expected to contribute 35% of group earnings before interest and tax in the 2018 financial year, rising to 38% in 2019, Ms Kinnaird said.

THL's current effective US tax rate was 40%, falling to 27% when the changes took effect.

Its tax obligations included federal corporation tax, which would fall from 35% to 21%, and state taxes, which differed from state to state. THL's largest state exposure in the US was California, which imposed a rate of 8.84%.

Looking at the company's prospects, Ms Kinnaird said the management team at THL had executed very strongly on a clear strategic drive to improve economic returns by reducing capital intensity, improving industry structures and enabling technology solutions to lift performance.

As a result, earnings had increased significantly in recent years, assisted by increasing tourist numbers.

Among the key drivers for the company were visitor arrivals from Europe, underpinning demand for motorhome rentals in Australia, New Zealand and the US.

Consumer confidence in origin countries, currency rates and oil prices were all key drivers of tourism numbers, she said.

In the US, following the strategic acquisition of El Monte, the No2 US recreational vehicle (RV) rental player, deal success would ultimately be reliant on the two companies working together.

THL operated in a volatile trading environment. The company was investing in lower-capital solutions to better match supply and demand and lift returns. The solutions included Flex Fleet and the peer-to-peer service "mighway".

Industry capacity in New Zealand declined following the consolidation led by THL in 2012, Ms Kinnaird said.

Since then, a much improved demand backdrop and escalation in industry yields had led to new market entries. In the US, market structure had been improved by THL's El Monte acquisition.

Among the risks for THL were new operators entering the motorhome rental market, attracted by improving industry returns.

New competitors, including Shareacamper (NZ, Australia and Germany), RV Share (US), Outdoorsy (US) and Campanda (US, Europe, UK and Australia) might take share from existing peer-to-peer rental companies, she said.

Lower economic growth in Europe, the UK and other key origin countries for THL could threaten earnings.

Forsyth Barr had raised its earnings forecasts to reflect the benefits of the US tax rate changes and revisions to currency assumptions, given a lower NZD/AUD cross rate.

"Our forecasts are materially higher than consensus, even after taking into consideration the US tax benefits."

Forsyth Barr's revised 2020 profit of $56 million was well in excess of management's $50 million target. Forsyth Barr now expected it to achieve its $50 million target one year earlier, in 2019, Ms Kinnaird said. The share target price had been increased to $5.60 from $4.75, driven by US tax benefits and other factors.