Key points of interest Revenue: increased 85.7% to A$172.3m....

Key points of interest

• Revenue: increased 85.7% to A$172.3m. While this was lower than our forecast, we had assumed an increased contribution from CanaDream (timing issue) and higher used fleet sales in North America and NZ which were delayed into the 2H to maximise margins (and benefit rental sales in the case of NZ).
• EBIT: of A$28.1m benefitted from the acquisition of CanaDream (North America A$15.0m vs A$7.1m the pcp) and recent Australian RV dealership acquisitions (Australia A$11.6m vs A$6.1m the pcp). Normalised EBIT of A$26.2m was in line with our forecast after adjusting for one-offs (A$2.5m revaluation gain on the CanaDream investment and A$0.4m of acquisition related costs).
• Statutory NPAT: was A$16.0m (vs A$9.7m the pcp) or A$14.2m after the one-offs mentioned above (in line with our forecast). This includes a proforma contribution from CanaDream (full 12 month contribution). NPAT was A$0.3m lower based on statutory accounting for CanaDream (11 fewer days of contribution in 1H18).
• DPS: ATL declared an interim dividend of 2cps, compared to 0.5cps the pcp and equating to a payout ratio of 25% of underlying NPAT. Management noted that it expects its FY18 payout ratio to be in line with its dividend policy (c45-55% of NPAT) and we therefore expect the final dividend will play ‘catch-up’ following the lower interim.
• Balance sheet: At balance date, ATL reported statutory net debt of A$197.6m. This compares to A$120.1m at 30 June 2017 and A$93.9m the pcp. This largely reflects the timing of the capital raising prior to 30 June while the corresponding acquisitions didn’t settle until early FY18. All else being equal (ie excluding any future acquisitions), ATL's net debt position should only increase with the size of the fleet (eg in the US as the footprint grows and occasionally in strong markets like NZ this year)

Divisional commentary

Australia

Australian revenue +133% to A$104.3m, driven by the new RV dealership openings and acquisitions. ATL reported Australian RV sales of A$71.2m (vs A$14.6m the pcp), which implies that the base rental business revenue contribution was A$33.1m (+c10% vs the pcp). Statutory EBIT of A$11.6m benefitted a one-off gain at acquisition of A$2.5m (revaluing the existing shareholding in CanaDream; non-cash). Based on our estimates, underlying EBIT of A$9.1m was +49% on the pro-forma pcp EBIT of A$6.1m.
The integration of recent acquisitions is progressing well, with ATL’s Adria and Winnebago brands now being sold by all acquired dealerships. Additionally, the Vivid camper dynamic fleet is performing in line with expectations. Management commented that year-to-date forward bookings are in line with expectations. Additionally, new and used unit sales volumes are in line with ATL’s expectations.

New Zealand

New Zealand revenue +3.3% to A$13.8m, driven by an improved rental performance reflecting buoyant industry conditions and a slight increase in fleet. ATL reported New Zealand RV sales of A$2.5m (vs A$4.2m the pcp). We understand the fall in RV sales (ex-fleet) was due to some inventory being held over to satisfy strong rental demand over the high season. These units are expected to be subsequently sold down in 2H18. Based on the RV sales figures provided, this implies that the NZ rental revenue was A$13.8m (+7% the proforma pcp). We understand that this growth was hampered by negative translation effects vs the pcp. The Vivid camper dynamic fleet was also rolled out in November 2017, with management commenting that is was performing to expectations. A statutory EBIT figure of A$2.1m was reported (vs A$2.4m proforma the pcp) We understand that this relates to the ‘reallocation’ of ATL’s Other/Eliminations balance and excluding this, the divisional EBIT contribution increased vs the pro-forma pcp. The reported EBIT margin of 15.5% was down on the pro-forma pcp (15.5% vs 17.9%), however we believe these are not comparable due to the reallocation of overheads which would benefit the reported 1H18 EBIT. Management also commented that year-to-date forward bookings are strong.

North America (US and CanaDream)
North America (NA) reported revenue of A$55.4m (+73% on the pro-forma pcp). We flag that this excludes 11 days of CanaDream due to acquisition timing. We highlight that July is a key seasonal month for the business and forecast that these 11 days would have contributed cA$3m of additional revenue. ATL reported NA RV sales of A$19.8m (vs A$17.7m pro-forma the pcp). However, North American fleet sales are behind management’s expectations due to a conscious decision to hold off sales for better margins in more favourable weather conditions (occurring now). Management commented that vehicle sales in the 2H18-to-date are progressing and expected to perform better over 2H18. Based on the RV sales figure provided, this implies NA rental revenue of A$35.6m (vs A$14.3m pro-forma the pcp). Pleasingly, ATL noted that the CanaDream division has performed above expectations, with record levels of rentals in US and Canada occurring in 1H18. The division recorded a statutory EBIT of A$15.0m (vs A$7.1m the pcp). The EBIT margin was 27.0% (vs 22.2% the pcp), however we note that this is skewed to the 1H due to: 1) the seasonal strength in the CanaDream business over this period; and 2) lower than expected rental fleet sales (assume these are done a ~0% EBIT margin).

Outlook commentary

• Comfortable with consensus NPAT: On the result call, management noted that it was comfortable with consensus NPAT forecasts (excluding the A$2.5m CanaDream non-cash gain and A$0.4m of acquisition costs) of ~A$19-19.5m. MorgansE currently sits at A$19.1m.
• US tax changes: ATL provided guidance regarding its US tax rates. Following recent changes to the tax legislation, the federal tax rate has reduced from 34% to 21% (effective 1 Jan 2018). As a result ATL expects its group effective tax rate to be approximately 32% in FY18 and 25% in FY19.
• Manufacturing facility synergies: ATL noted that it expects benefits from the Brisbane manufacturing facility to emerge in FY19 (not quantified). ATL previously guided to an additional A$1m of rental costs to be absorbed from FY18 in relation to the new manufacturing facility. However, the company has not guided to any efficiencies/upside from the new facility (removal on manufacturing constraints at the previous warehouse and scale efficiencies). We expect efficiencies relating to lower input costs and supply chain efficiencies and increased manufacturing capacity could be meaningful in time.

Changes to forecasts

Following today’s result disclosure, we have the following changes to forecasts. Higher divisional EBIT forecasts have been offset by a lower tax rate and higher debt/interest cost assumptions. In FY18, our group EBIT forecast has increased, however higher net interest costs and a higher tax rate than we had forecast leads to a c2.8% downgrade vs our previous EPS forecast.

Valuation and price target
Our blended valuation and price target (DCF, PE, EV/EBIT) falls to A$1.93 per share (from A$2.03), largely due to an increased debt position. ATL continues to screen attractively: 14.4x FY19F PE (c13.7x pre-amortisation); 3.5% yield; and offering a solid double digit EPS growth profile. However, after a reasonable share price rally, we pull back our rating to Hold (from Add). Key risks include: increased competition, seasonality, tourism related shocks, P2P movement, FX, movement in fuel price and deterioration of general macro conditions.