Thursday, May 24th, 2018
Adventure tourism provider Experience Co (EXP) has a growing profile in Australia’s booming tourism industry, a market that will benefit from the rising Asian middle class over the next decade.
Recently, shares tumbled following April’s downgraded earnings guidance, which resulted from unseasonably adverse weather patterns. In spite of the weather risks inherent to EXP’s operations, we see this as more a one-off as opposed to an underlying problem. So the question is, has the set back opened an investment opportunity? Let’s take a look.
When EXP listed in March 2015 as “Sky Dive the Beach”, the company was a sky diving operator with 15 drop zone locations around Australia. Over the subsequent three years it focused on expanding by geography and offering, involving $134m of acquisitions and $62m capex (for context EXP’s market cap at the time of writing is $360m).
EXP now offers a variety of adventure experiences in addition to skydiving, including canyoning, helicopter tours, hot air ballooning, island day trips, rafting, rainforest tours, and reef tours. Its geographic reach now includes New Zealand and Far North Queensland, where EXP generates over half of its earnings. To date, EXP has executed a bold growth program without any hiccups (notwithstanding the weather).
Figure 1. EXP business portfolio
Although barriers to entry are relatively low within adventure tourism, EXP achieves scale economies via marketing, sales and back office administration. These economies may seem dubious, however EXP mostly competes with smaller operators and sole traders. EXP’s national brand, relationships with major tourism organisations and networks, and fully functioning booking technology are valuable advantages.
Back to the April update, the specific reason for the downgrade was that Cairns and Port Douglas received 35% and 48% of annual rainfall in March alone, significantly impacting skydiving and adventure operations. The bad weather persisted into April and affected other areas along the east coast. Total average processing rates for skydiving in March were 75% versus 84% in 2017. Due to lost business days across the portfolio, EXP downgraded FY18 revenue from $138m to $128.5m and EBITDA from $36m to $30.5m.
We’re confident EXP can achieve sound organic growth over time, given its market position and the broader tourism tailwinds. To date however, acquisitions have driven most of the growth and we’d expect the company to continue this path given the fragmented industry structure. All else equal, over the medium-term, EXP should achieve above average growth (vs industry at ~5%).
Also worth noting, FY19 will include the first full year contribution from acquisitions totalling $56m in December (Big Cat Green Island Cruises & Tropical Journeys), which will drive earnings from around $15m in FY18 to $25m in FY19. On this basis, EXP is trading at about 15 times forward earnings and in-line with the broader market.
The balance sheet is moderately geared with $27m net debt, well within annual operating earnings.
Figure 2. Valuation metrics
In addition cash flow should improve in the coming years (shown below in red). The reduced capital expenditure over FY19/20 assumes slowing growth capex.
Figure 2. Earnings and cashflow estimates
Overall, we think EXP is an interesting business that is in the right space at the right time. Presently it’s neither cheap nor expensive.