Friday, October 11th, 2019
Helloworld Travel Limited (ASX: HLO) provides a diverse range of travel distribution services to consumers and corporates including flights, accommodation and tours. HLO controls Australia’s largest network of over 2,400 independent franchised travel agents.
Although HLO operates in a competitive environment, the business is well positioned for industry consolidation. HLO’s scale in terms of total transaction volume (TTV) enhances bargaining power with travel providers and airlines relative to smaller players, and its technologies create efficiencies for its leisure and corporate travel agent members.
Interestingly, HLO’s capital efficient franchise model is more conducive to TTV growth via consolidation compared with major competitor Flight Centre, which owns and operates its physical retail network.
Despite consistent execution by majority shareholders Andrew and Cinzia Burnes, shares have remained relatively weak and well below the $6 level at the beginning of the year.
Since the Burnes duo took the reins in 2016, HLO grew TTV from $5.8bn to $6.5bn on a lowered cost base. This has translated to very healthy earnings growth. Based on FY20 EBITDA guidance of $83m to $87m, three-year compound annual earnings growth will approximate 27%.
At the prevailing share price HLO trades offers an attractive fully franked dividend yield of 5.5%. This is especially attractive given underlying earnings growth forecast for this financial year is close to 20%. Dividends and growth projects are well-supported by strong cash generation and $18m net cash on the balance sheet. On our numbers, HLO trades at a free cash flow yield of about 10%. In turn, Helloworld screens highly on Clime’s proprietary Quality Score.
In other news, HLO also recently announced a $28m acquisition of corporate travel management company TravelEdge Group. Consideration equates to six times EBITDA, so TravelEdge will be immediately earnings per share accretive. Including TravelEdge’s TTV of $300m, HLO’s corporate travel segment should achieve $2.4bn TTV in FY20.
Within HLO’s franchise network we see further opportunities for growth beyond FY20. This includes improving brand awareness by bringing more operators under the Helloworld brand, enhancing value to agencies via HLO’s new ResWorld mid-office system, and bolt-on acquisitions and partnerships to increase scale. Overall HLO’s competitive position should strengthen over time.
Eventually these opportunities and management’s track record will be better recognised in the market. For now, there are attractive dividends to be collected while we wait.
Authored by Jonathan Wilson, Portfolio Manager for the Clime Smaller Companies Fund