Australia Travel Group Ltd (RGX.ASX)

Australia Travel Group Ltd (RGX.ASX)
6 Nov 2014#
Last Price: $0.11*
*post consolidation
$0.0045 pre consolidation
Initiating Coverage
Wot Next?
Valuation: $0.32*
$0.013 pre consolidation
Analyst: Sven Restel
Overview: Australia Travel Group Ltd (“ATG”, “the Company”) is an
Australian services company focused on the travel industry.
Incorporating Holiday Planet, Asia Escape Holidays, and Motive
Travel, its constituent businesses have specialised in the
development, distribution, and sale of holiday, event, corporate, and
leisure cruises packages for more than a decade. ATG was
Corporate Summary*
Shares on Issue
Other Securities
8m Options RGXOA ($0.22, Nov-17)
2.8m Options RGXO ($2.20, Mar-16)
established through a reverse merger with Red Gum Resources Ltd.
Discovery
Development
86.57m
0.13m Options($3.30, Apr-16)
7.5m Options ($0.25, Nov-17)
Delivery
Con Notes $1.5m($0.20, 10% pa Dec-16)
Net Cash
Catalysts: Within an industry that has grown over five per cent pa for
$3m
Market Cap
more than three decades, ATG’s foundation assets offer a platform for
market share and margin expansion. Relaunched retail booking
$18m
*post consolidation and capital raising
engines and cross promotion of ‘in house’ product packages offer
near term synergies. Successful amalgamation, subsequent profit
Revenue
$11m
growth, and further accretive acquisitions are the major value drivers.
NPAT
$0.9m
Hurdles: Whilst the Company is expected to be profitable on a pro
forma basis, its reliance on external capital may not have been
Financial Overview FY15f pro forma
Historic Growth
-
PE
-
Div Yield
-
eliminated. The stock is presently trading significantly below its
scheduled capital raising price. Integration risks surrounding the three
way merger of its foundation businesses are significant and still need
Chairman
to be overcome.
Executive Director
Mr Mason Adams
Executive Director
Mr Michael Croy
Non Exec Director
Ms Jennifer Tobin
Investment View: ATG offers profitable exposure to the expanding
domestic travel industry. We are attracted to the industry’s reliable
Board of Directors
growth profile, and ATG’s potential to capture increasing market share
whilst enhancing margins. Its constituent businesses can provide a
Mr Alan Dodson
Shareholders
profitable, scalable platform to build market share, however near term
integration risks should not be overlooked. Whilst our valuation (post
Directors
29.7%
consolidation) offers a premium of ~60 per cent to the fund raising
New Shareholders
25.8%
price and ~200 percent to recent trade, our investment view is
reserved whilst near term operational hurdles are addressed.
Others
39.4%
Motive Travel Vendors
5.1%
Share Price $
Australia Travel Group Valuation Summary
Method
Assumption
Valuation
Per Share*
Comparables
0.35x TTV
$35.0m
$0.36
CFME
9x FY18f EBITDA
$27.5m
$0.28
Average
$0.32
*per share figures are presented on a post consolidation basis. Valuation is equivalent
to $0.013 pre consolidation
Page 1 of 13 – Copyright © 2014 wise-owl.com – please read disclaimer at the end of this
document for terms
#this report is a reissued version of a research release
dated 28th October. See appendix for further detail
6 November 2014
Company Overview
Australia Travel Group Limited (“ATG”, “the Company”) is an
Australian services company focused on the travel industry. Its
businesses specialise in the development, distribution, and sale of
holiday, event, corporate, and leisure cruises packages.
It’s assets incorporate Holidayplanet.com.au and its affiliate retail
portals (“Holiday Planet”), wholesaler, Asia Escape Holidays (“Asia
Escape”), and agency services provider, Motive Travel.
Australia Travel Group Ltd has been established in 2014 via a reverse
merger with Red Gum Resources Ltd (“Red Gum Resources”
Head Office
Figure 1: ATG is an Australian Company headquartered in Perth
Source: wise-owl
ASX:RGX). Consolidation of Red Gum Resources securities on a one
for 25 basis coincides with the transaction, alongside a $3million $5million equity raising at $0.20/share (post consolidation). Proceeds
are to fund the acquisition and amalgamation of Holiday Planet, Asia
Escape and Motive Travel.
The transaction is scheduled to close by December, and as part of the
offer, 7.5million options exercisable at $0.25 each are to be issued.
Travel services Company with
product development, distribution,
and retail operations
Existing shareholders of Red Gum Resources Ltd retain 40 per cent
of the merged entity. Issued capital amounts to $13.5million, or
$0.16/share.
Asset Overview - Holiday Planet (100%)
Holiday Planet owns and operates retail travel portals specialising in
leisure travel. It provides holiday and cruise packages, flights and
hotels via the following portals:
▪
HolidayPlanet.com.au
▪
CruisePlanet.com.au
▪
FlightPlanet.com.au
▪
HotelPlanet.com.au
Established in 2001, Holiday Planet has a 13 year operating history
servicing over 50,000 customers. It’s cruise division is a Platinum
Agent for Princess Cruises and one of only nine Diamond Agents in
Australia for P&O Princess Cruises. These accolades are awarded
based on sales and marketing performances.
The business was acquired by ATG as part of its recent reverse
merger transaction. Consideration was 18.75million shares,
$0.75million cash, and convertible notes with a $0.25m face value
(10% pa coupon, $0.20/share conversion price, two year term). The
transaction also saw Holiday Planet’s founder, Alan Dodson, become
Executive Chairman of ATG, and senior executive, Michael Croy,
assume the role of Operations Director.
Page 2 of 13
Figure 2: Holiday Planet’s cruise division is a Platinum Agent for
Princess Cruises and one of only nine Diamond Agents in
Australia
for
P&O
Princess
Cruises.
Source: Company announcements
6 November 2014
Development Strategy
Over the next 12 months, ATG intends to progressively relaunch the
Holiday Planet portals with new state of the art search and booking
engines.
Figure 5: Proposed open pits and site layout as per Jambreiro
Bankable Feasibility Study. Source: Centaurus
By Q4 2014 its cruise division will launch a search-book-pay service
covering 90 per cent of the world’s leading cruise lines. In addition, a
‘Seniors Planet’ portal is scheduled for launch focused on retiree
travellers. This market segment (aged 55+) accounted for a quarter of
short term departures by Australian residents in FY14.
A similar offering focussed on Asia is also planned for launch in mid
Robust economics at net pricing
above $40/tonne
Figure 3: The CruisePlanet portal in action. Source: Holiday Planet
2015. It is expected to focus on air/accommodation packages for high
volume travel destinations in the region, complimenting the Asia
Escape Holidays acquisition outlined below.
Asset Overview – Asia Escape (100%)
Packaged holiday wholesaler
Asia Escape Holidays is a wholesaler of packaged holidays to more
than 3,500 independent travel agents in Australia. Specialising in
destinations throughout Asia, existing hotel and supplier partnerships
in the region provide the foundation for Asia Escape’s competitively
priced packages. Agents transact with Asia Escape via a centralised
digital booking system.
Established in 1997, Asia Escape has a 17 year operating history.
Achieving Total Transaction Value of $32.5million in FY14, Asia
Escape stands as one of Australia’s largest privately owned
independent travel wholesalers.
It was acquired as part of ATG’s recent reverse merger transaction.
Consideration was 10million shares and $0.75million cash, and
convertible notes with a $0.75m face value (10% pa coupon,
$0.20/share conversion price, two year term). Its principal, Mason
Adams also joined the board as Executive Director.
Development Strategy
ATG aims to deliver value through greater utilisation and expansion of
Asia Escape’s existing distribution network. Organic growth strategies
include the introduction of three new long haul destinations to the
network, and increased penetration amongst east coast retailers.
Asia Escape’s amalgamation alongside Holiday Planet also provides
the opportunity for downstream expansion, direct to the traveller.
Page 3 of 13
Figure 4: Asia Escape has been operating for 17 years.
Source: Asia Escape
6 November 2014
Asset Overview – Motive Travel (100%)
Motive Travel is a Perth-based provider of travel agency services. It
specialises in corporate and event packages. Established in 1987,
Motive Travel has a three decade operating record.
It’s team of 16 experienced travel consultants possess a collective
industry knowledge base exceeding 300 years. Motive Travel’s
current proprietor, George Michalczyk, assumed ownership in 1989.
Figure 5: Motive
Source: Motive Travel
Travel
was
established
in
Motive Travel has Qantas Platinum travel agent status
Acquired by ATG as part of the recent reverse merger, consideration
incorporated 5million shares, $0.5million cash, and convertible notes
Three decade operating record
with a $0.5million face value (10% pa coupon, $0.20/share conversion
price, two year term). Motive Travel’s principal, George Michalczyk
was appointed to ATG’s senior management team as part of the
transaction.
Development Strategy
Motive Travel delivers ATG a unique inventory of travel products and
added support service capability. ATG is expected to enhance value
of Motive Travel by distributing its unique products using the Holiday
Planet portals and Asia Escape agency network, as well as other
cross selling initiatives.
The acquisition enhances customer service delivery potential across
the group. Existing call centre capacity can be expanded to service
the Holiday Planet and Asia Escape units, and provide foundations for
a future retail presence. Technologies provided by the relauched
Holiday Planet portals are expected to provide operating efficiencies
within Motive Travel.
Financial Performance
Whilst its constituent businesses have all operated for more than a
decade, ATG has a limited operating history. On a pro forma basis,
the Company is expected to generate Total Transaction Value of
$100million in FY15. We estimate this could deliver revenue in the
order of $11million and net profit in the order of $0.9million.
However integration risks associated the three businesses requiring
amalgamation, and ongoing acquisition plans create uncertainty over
ATG’s funding position. Whilst potentially profitable, there may remain
a need for external capital to assist with the integration and expansion
process.
Page 4 of 13
Pro forma TTV $100million
1987.
6 November 2014
Subsequent acquisitions are expected to be scrip based and honour
the following criteria:
▪
Profitable
▪
Minimum 10+ years in operation
▪
Debt free
▪
Strong management
▪
TTV between $20million-$50million
▪
Complimentary to existing operations
Defined acquisition strategy
ATG Financial Summary
Issued Capital
$13.5m
$0.16/share
Post Acquisition Funding
$3m
Nov ’14 equity issue at $0.20/share
FY15 TTV
$100m
Pro forma forecast
FY15f EBITDA
$1.5m
Pro forma forecast
Table 1: ATG is forecast to generate Total Transaction Value of $101million on a
pro forma basis in FY15. Source: wise-owl
Valuation
ATG’s investment appeal rests in its potential to successfully integrate
its three foundation assets, and subsequently expand profitability
through organic initiatives and further acquisitions.
We have focused our appraisal on the existing businesses, utilising a
Comparables based approach and Capitalisation of Future
Maintainable Earnings (“CFME”) methodology.
Whilst accretive acquisitions are part of the Company’s growth
strategy, our appraisal is based on its current capital structure, hence
assuming that no further external funding is required.
Our Comparables approach arrives at a valuation of $35.0million,
which equates to $0.36/share. Our CFME method arrives at a
valuation of $27.5million, or $0.28/share Applying equal weightings
both methods delivers an aggregate valuation of $31.5million or
$0.32/share.
ATG Valuation Summary
Method
Assumption
Valuation
Per Share*
Comparables
0.35x TTV
$35.0m
$0.36
CFME
9x FY18f EBITDA
$27.5m
$0.28
Average
$0.32
Table 2: Our two appraisal methods suggest ATG may be worth $0.32/share
*per share figures are presented on a post consolidation basis. Source: wise-owl
Page 5 of 13
Valuation $0.32/share
6 November 2014
Comparables
Our peer based valuation of ATG is based on a universe of publicly
listed companies focused on the provision of travel services.
Valuations presently range between 25 per cent and 55 per cent of
Total Transaction Value, with the mid point being in the order of 40
per cent.
Travel Service Valuations
0.6
Market Cap to TTV
0.5
0.4
0.3
0.2
Comparables valuation $0.36/share
0.1
0
WOTIF.COM
HOLDIN
CORPORATE
TRAVEL
HELLOWORLD FLIGHT CENTRE WEBJET LTD
LTD
TR
Figure
6:
Valuations
of
comparable
Source: Bloomberg, Company announcements.
travel
service
companies.
Whilst ATG’s focus on luxury travel products yield’s higher margins
than certain comparable Companies, we have adopted a mid range
Total Transaction Value multiple of 0.35x for this integration phase.
The resulting comparables based valuation is $35million, or
$0.36/share, fully diluted.
ATG Comparables Valuation Summary
Metric
Assumption
Comment
Total Transaction Value
$100m
FY15f pro forma
Multiple
0.35x
Current industry mid point
Valuation
$35m
$0.36/share*
Table 3: Parameters and key results of our Comparables valuation. *per share figures are
presented on a post consolidation basis. Source: wise-owl
Page 6 of 13
6 November 2014
Capitalisation of Future Maintainable Earnings (CFME)
Post amalgamation, we have projected the Company’s financial
performance for the next three financial years to a level that
represents a sustainable earnings capacity. To our estimation of
future maintainable earnings, an industry based multiple has been
applied to arrive at a valuation of the Company.
Whilst ATG’s growth strategy incorporates accretive acquisitions, our
financial projections are based on the organic expansion potential of
its existing operations. Through a combination of TTV growth and
margin expansion, we project EBITDA of $3million by FY18.
ATG CFME Valuation Summary
Metric
Assumption
Comment
FY18f EBITDA
$3.0m
2.25% of FY18f TTV
Multiple
9x
Current industry median
Valuation
$27.5m
$0.28/share*
Table 4: Parameters and key results of our CFME valuation. *per share figures are presented on
a post consolidation basis. Source: wise-owl
Current industry trading multiples range from seven to nine times
EBITDA. With a multiple of 24x, Corporate Travel Management
(CTD.ASX) appears to be an outlier, attributable to its growth
trajectory. Hence for ATG we have applied a multiple of nine times
EBITDA to arrive at our CFME valuation of $27.5million, or
$0.28/share
Industry Multiples
10
EV/EBITDA
8
6
4
2
0
CORPORATE FLIGHT CENTRE WEBJET LTD
TRAVEL
TR
WOTIF.COM
HOLDIN
HELLOWORLD
LTD
Figure 7: Industry trading EV/EBITDA multiples supporting our CFME valuation.
Source: Bloomberg, wise-owl
Page 7 of 13
CFME valuation $0.28/share
6 November 2014
Investment View
ATG offers profitable exposure to the domestic travel industry, which
has benefited from short term international departures increasing at
average rates exceeding five per cent pa for more than three
decades.
We are attracted to the industry’s stable growth profile, and ATG’s
potential to capture increasing market share whilst enhancing
margins. Its constituent businesses can provide a profitable, scalable
platform to build market share, however near term integration risks
Valuation represents substantial
premium to recent trade
should not be overlooked.
In transforming ATG’s three, formally private, constituent businesses
into a single growth focused enterprise, evidence of cultural,
operational, and financial success are critical catalysts.
Whilst our valuation of $0.32/share represents a premium to recent
trading levels, the ‘three-way’ merger providing foundation for ATG
needs to be successfully executed for such capital appreciation to
materialise. Therefore, as we monitor the Company’s integration
phase, we initiate coverage, reserving our investment view.
Page 8 of 13
Reserving investment view pending
integration of ‘3-way merger’
6 November 2014
Risks
Technical Risks
There are integration risks surrounding the ‘three way’ merger of
Companies providing the foundation for ATG. There is no guarantee
that expected benefits will accrue. There are also risks surrounding
the relaunch of ATG’s Holiday Planet portals over the next 12 months.
There is no guarantee the upgrades will function as expected.
Market Risks
To a significant degree, ATG’s future financial performance will be
influenced by international and domestic travel expenditures by
Australian’s. Short term international departures by Australian’s have
increased at an average annual rate of ~6 per cent pa for more than
three decades, but there is no guarantee the trend will continue.
Funding Risks
ATG has a limited operating history, and whilst its constituent
businesses have a reported history of profitability as independent
entities, there is no guarantee their amalgamation will transpire
without reliance on external capital. Additional funding may also be
required to execute management’s acquisition growth strategy. In
either scenario, there is no guarantee the company will be able to
procure necessary finances, or in circumstances that enhance
existing shareholder value.
Competitive Risks
Online distribution and sale mechanisms have significantly lowered
barriers for new entrants into the travel industry. There is no
guarantee the Company will be able to profitably preserve existing
market shares of acquired business or that growth initiatives will
deliver sustained benefits.
Page 9 of 13
6 November 2014
The Bulls & The Bears
The Bulls Say

ATG will be uniquely positioned within the growing travel
industry, with vertically integrated operations encompassing
product development, distribution,
transactional retail platforms

full
service
and
Its foundation assets have long, profitable operating histories
and personnel from these business now form the ATG
management team

Profitable amalgamation of the three foundation assets,
subsequent earnings growth, and value accretive acquisitions
provide catalysts for the stock

Our base case valuation represents a significant premium to
current trading levels
The Bears Say

Competition in the travel industry is high and ATG’s vertically
integrated strategy requires a higher degree of fixed costs
than more recent ‘online’ entrants

The proposed ‘three way’ business combination providing the
foundation for ATG may be a complicated operational
exercise, incurring unexpected cultural and integration costs

Risks surrounding the integration process may dominate
trading until their synergies are financially validated

Valuation is contingent on successful integration of three
foundation businesses
Page 10 of 13
6 November 2014
Management
Alan Dodson – Chairman
Alan was founder of The Holiday Planet Group in May 2001. Alan has
successfully guided the company since its inception and has spent
more than 38 years in the travel industry in Australia and the United
Kingdom. Alan’s key responsibilities within the Group include
company development, finance and overall Sales and Marketing
Strategy.
Mason Adams – Executive Director
Mason brings 17 years of travel wholesaling experience to the group
and was an early founder of Asia Escape Holidays. Mason has
successfully grown Asia Escape’s wholesale reach from 85 agents to
over 3,000 travel agents in Australia. Mason’s key responsibilities
within the Group will include growth of the wholesale distribution
channels and marketing.
Michael Croy – Executive Director
Michael joins the group with over 30 years experience in the travel
industry. Michael has extensive knowledge of international and
domestic tourism markets having served with JetsetTravel for some
20 years including the last 10 years as WA State Manager prior to
joining Holiday Planet.
Michael joined the Holiday Planet Group in 2002 where his
responsibilities included information technology management and
recruitment in addition to the overall logistical and operational
management.
Jennifer Tobin – Non Executive Director
Jennifer is a partner of law firm Minter Ellison where Jennifer advises
in relation to a broad range of matters including mergers and
acquisitions, capital markets and regulatory compliance. Jennifer is
currently a director of Red Gum Resources Limited.
Jennifer’s role encompasses advice on business acquisitions,
directors’ duties and the Corporations Act. Jennifer is member of the
Corporations Committee of the Business Law Section of the Law
Council, and a Member of the Australian Institute of Company
Directors
Page 11 of 13
6 November 2014
Appendix – Financial Projections
Financial Year
2015
2016
2017
2018
TTV
$
100,000,000
$
112,000,000
$
125,440,000
$
135,475,200
Revenue
$
11,000,000
$
12,320,000
$
13,798,400
$
14,902,272
EBITDA
$
1,500,000
$
2,240,000
$
2,822,400
$
3,048,192
CFME Valuation Summary
Maintainable EBITDA
FY18f
$
Multiple
EBITDA
9.0
Valuation
$
per share
$
3,048,192
27,443,728
0.28
Notes
1. All figures in AUD unless stated other wise
2. Per share figures are presented post consolidation
# This report is a reissued version of research release dated 28th October, 2014. Amendments have been made to pro forma revenue projections on
pages 1 and 12.
Page 12 of 13
6 November 2014
Archives
Glossary
Buy
Increasing value of established business operations is likely to
yield share price appreciation
Spec Buy
Increasing value of a new or developing business operation is
likely to yield share price appreciation.
Hold
There exists an even balance of risks
Sell
There is elevated risk of share price depreciation.
Stop
Our recommended, pre determined sell price, to be executed
if the share price fails to appreciate
Australia Travel Group (RGX.ASX)
Nov-14
Initiating Coverage
Company Life Cycle Categories
.
Discovery
Assets typically at a concept stage, yet to demonstrate
commercial potential. Company reliant on external capital
Development
Feasibility and commercial trials are a primary focus.
Company reliant on external capital
Delivery
Assets are typically generating cash flow. Company has an
operating focus & may no longer rely on external capital
Analysts
Sven Restel
Imran Valibhoy
Tim Morris
[email protected]
[email protected]
[email protected]
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