Both financial journalists and city analysts alike share a dirty secret. Although the job of both august camps of professionals is to report on the facts as we find them, the sad reality is rather different.
Most of us actually spend a disproportionately large amount of our time dabbling in the dark art of speculation, putting two and two together to sometimes make 4, but mostly to make 5 or numbers beyond.
This is, of course, a reckless activity for the large part, but sometimes a random series of stories does add up to something rather more substantial, especially when you step back and look at the bigger picture.
I’d contend that this is currently the case in the specialist travel market where a series of announcements have started more than few market commentators speculating on some unusual tie ups. To understand this, it’s worth looking at the two weeks at the back end of February and the beginning of March.
Our focus is on three very distinct announcements, two of them relating to the wider Tui group and one to Holidaybreak. The two Tui announcements refer to a recent credit upgrade on the German parent’s debt and the additional announcement of a joint venture by the UK based travel group in the adventure space. The Holidaybreak angle relates to an interim management statement.
Add it all up and I think one can begin to mount an argument for Tui finishing off its consolidation in the specialist travel market by eventually snapping up HolidayBreak. And the logic? The 10% plus operating margins on offer in specialist adventure and educational markets.
The first announcement to catch my eye came in the form of a joint venture between Tui and Australian based Intrepid travel, which combines Tui’s adventure brands into one 60/40 JV (no cash has changed hands).
Tui reckons that by bringing together the two businesses they should be able to pull out about £10 million in cost savings. Intrepid is the junior partner in this arrangement with over 100,000 customers, revenues of £69.4 million and profit before tax of £5.3m.
Tui’s adventure brands by contrast (outfits in The Adventure Company, Exodus and TrekAmerica) cater to more than 240,000 customers, boast revs of £185 million and profits of £6.8m. Combine the two groups together and you have net assets of £27 million and a business that should be able to produce £12 million in pre tax profits before any cost savings and quite possibly closer to £20 million after the restructuring.
If this new JV does pull off those projected numbers, Tui will have a business that will boast profitability that isn’t that far off those achieved by Holidaybreak’s education and adventure division. And by a bizarre quirk of fate Holidaybreak also announced its trading numbers on the same day, drawing attention, yet again, to its slow but steady transformation into a specialist education and adventure business.
Chief executive Martin Davies released some credible numbers in the interim management statement which showed that although sales intake was down 3% and a trend towards late bookings, the group had still booked 61% of its target for the whole year.
Overall Davies affirmed that Holidaybreak should hit numbers that will be in line with analysts’ expectations, which the market is suggesting should be around 37p in earnings per share, give or take a penny or two either way.
Crucially Martin also updated the City on progress at Holidaybreak’s own little sideline venture, namely its 50% stake in German education business Meininger (purchased last year at a cost of about £30 million).
According to Holidaybreak’s chief: “Sales intake for the current financial year is 25% ahead of last year. The strong performance is driven by good like-for-like trading together with successful site openings in 2010. Management are targeting an additional four sites this year in Germany and Austria which will bring the portfolio to a total of 14.”
Moving back to the UK the core education and adventure business (revenues of about £217 million and profits of just under £20 million) seems to be on target with the adventure business trading ‘satisfactorily’, although Egypt clearly had an impact.
Over in PGL (the schools specialist) business “the UK centres are 96% booked for 2010/11. Our newest centre, Liddington, continues to perform strongly with a 100% re-booking rate from schools who visited in 2010. For this season, 200 additional beds have been added at Liddington to bring capacity to 600”. Those numbers aren’t bad when you consider the likely squeeze on schools budgets in 2011 and 2012.
The last bit of our puzzle relates to Tui’s German parents. At the beginning of March some good news landed on the finance director’s desk, in the shape of a positive note from credit analysts S&P on the corporate debt structure. According to S&P Tui AG has been a very well behaved pupil simplifying its “asset structure through shareholder loan repayments, and we now see more value stemming from its main investments and operations.
“We are therefore revising the recovery rating on TUI’s senior unsecured debt…. These repayments follow a recovery in profitability at TUI’s 35.3%-owned subsidiary TUI Travel plc and 49.8%-owned subsidiary, Hapag-Lloyd AG. This combination of factors, in our view, increases the visibility over the value and recovery potential from TUI’s various assets.
In our opinion, this supports higher recovery prospects for the senior unsecured debt holders. “However, we note that the recovery prospects remain relatively volatile as they are linked to equity valuations”.
Small announcements like this one from S&P matter greatly. In and of itself it is a small development barely worth a tiny news story but it talks to a slow positive re-evaluation of Tui AGs prospects by the bond community. Put simply it means that Tui AGs finance director will find it easier to raise new credit, and at lower prices. Obviously it doesn’t require a genius to work out what that money might be used for.
In particular I’d suspect that if Tui AG does finally get around to tidying up its empire with a bid for Tui Travel plc, we should also expect some side line moves and a deepening of the strategy to scale up the specialist travel business. Cheaper debt and more favourable bond market opinion allows Tui to carry on consolidating this niche business perhaps by taking a tilt at Holidaybreak’s own clearly successful brands.
In fact education might be the real target – rather than adventure – as PGL is clearly a business that an integrated European operator can start to scale up and extend into related brand territories.