Following the recent release of the its full year result for financial year to 30 June 2018 (FY18), we researched Helloworld Travel (ASX:HLO), a stock we have successfully recommended in the past.
Overview of Helloworld Travel
Helloworld Travel is a leading Australian & NZ travel distribution company, comprising retail travel franchise operations, destination management services (inbound), air ticket consolidation, wholesale, corporate and online operations. The Company’s strategy is to provide an integrated travel solution by aligning distribution from its bricks and mortar franchise network with on-line distribution platforms. HLO has six retail networks in Australia, including Helloworld, Helloworld Travel Associate, Helloworld Business Travel, MyTravel Group, MTA and the recently-acquired Magellan Travel Group and Asia Escape Holidays businesses.
Key Investment Considerations
We consider that the likelihood of exceeding FY19 EBITDA guidance and the potential for further acquisitions to be the key factors underpinning any re-rating in the share price from current levels. As we contend in our commentary below, we hold reservations in regards to both points. This, in our view, warrants a cautious view on HLO at present, notwithstanding that the shares ae currently trading on an undemanding 1-year forward P/E multiple of ~15.3x.
1. The Potential to Exceed EBITDA guidance for FY19
At the FY18 results release, the Company guided to FY19 EBITDA in the range of $76-$80m, which implies a 19.6% increase in EBITDA over FY18. A key factor as to whether HLO can achieve the guidance is the extent to which there is evidence of stabilisation/improvement in airfares. This is because the FY19 guidance assumes international airfares remain flat.
Consensus EBITDA estimates for FY19 are currently at the top end of the guidance range. Taking the Company’s EBITDA margin guidance of 22.5% for FY19, based on our calculations, revenue growth of ~8.5% in FY19 is required in order to achieve consensus EBITDA estimates for FY19.
We consider this to be a big jump in revenue growth performance. This is given that revenue growth was flat in FY18. While there is potential for revenue margin to improve – as HLO leverages its superior supplier contracts through the Magellan business and improving the mix of airfares sold – we consider the required step-up in revenue growth for EBITDA guidance to match consensus EBITDA estimates FY19 may not be achievable. Especially as the key sensitivity factor is flat-to-improving international airfares, which at this stage does not appear a certainty given recent heavy discounting in FY17.
Other opportunities to drive higher group revenue margin include improving the mix of airfares sold through the network and selling more cruise product through the wholesale businesses. Hence, we consider the risk to the EBITDA guidance for FY19 to be on the downside. It is also worth noting that underlying EBITDA of $65.2m for FY18 was within the guidance range of $63-67m.
2. Further Acquisitions
Acquisitions are a key factor in the future expansion of both the retail network and the product offering to support this network.
While funding capacity for acquisitions have recently increased, we consider that HLO is likely to become more reliant on cash levels to fund acquisitions, as there is now reduced headroom in its debt facilities. The increased reliance on cash to fund any further acquisitions is significant, given that the seasonality in cashflow reduces/increases the cash component of the available funding from half-year period to half-year period, which means that an equity raising may still be required to fund any further acquisition opportunities.
Having recently completed the acquisition of Magellan Group, in addition to a number of smaller bolt-on acquisitions, we consider that HLO is likely to focus on bedding down these acquisitions before further acquisition opportunities are considered. In particular, further improvement in the cost base of the new acquisitions is needed, as this factor contributed to the acquisitions of Magellan Travel Group (finalised in March 2018), Flight Systems (April 2018) and Asia Escape Holidays (May 2018) adding only a modest $0.5m to EBITDA in FY18.
The Technicals for HLO
HLO has spent most of this year trading sideways in a range before breaking out a couple of weeks ago on strong volume. There is a chance that we see higher levels over time. However for now, we are likely to see a dip. Whilst that would represent a better entry point for those confident on business, we can’t be too sure that a dip, if any, will be greater than a few percentage points from current levels. The next major resistance level is up near $6 so that would be our first target from here.
Michael Gable is managing director of Fairmont Equities.
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