broker report

13 June 2019Helloworld Travel Ltd (HLO)Spreading its wingsRecommendationBuy (unchanged)Price$4.68Target (12 months)$5.70 (previously $5.50)AnalystAlex Mclean 612 8224 2886AuthorisationTS Lim 612 8224 2810GICS SectorHotels Restaurants and LeisureExpected ReturnCapital growth 23.6%Dividend yield 4.6%Total expected return 28.2%Company Data & RatiosEnterprise value $601mMarket cap $574mIssued capital 124.7mFree float 35%Avg. daily val. (52wk) $883k12 month price range $4.00 - $6.45Price PerformanceBELL POTTER SECURITIES LIMITED Page 1(1m) (3m) (12m)Price (A$) 4.29 4.75 4.62Absolute (%) 7.46 -2.95 -0.22Rel market (%) 3.81 -8.49 -8.26Expanding the New Zealand corporate networkHLO has announced that a number of mid to large sized corporate agencies havejoined, or committed to joining its New Zealand Network, following the break-up of theFirst Travel Group. The total combined annualised TTV (Total Transaction Value)coming from these deals is c.NZ$300m (c.5% of FY19 TTV). Gilpin Travel, BarlowTravel and Atlas Corporate have already joined HLO (combined annual TTVc.NZ$130m), the NZ Travel Brokers has agreed to join from June 2019 (annual TTVc.NZ$125m) and a number of other significant agencies in NZ with a combined annualTTV c.NZ$46m have also agreed to join from June 2019.Scale brings buying power and volumeThe network expansion should “provide the NZ business with economies of scalebenefits to assist the Group achieve 25% EBITDA margins in FY20.” Essentially, HLOhas added to its franchise network in New Zealand, providing additional buying powerand volume to the existing network. This increased volume should positively impactgrowth overrides (the key driver of HLO’s revenue margin) and improve the profitabilityof the group through EBITDA margin expansion. Note we are currently forecasting anEBITDA margin of 23.2% in FY20 in conjunction with revenue margin expansion.Without revenue margin expansion and strong cost control, a 25% EBITDA margin isattainable with our earnings forecasts. As a result of the update, we have upgradedour EPS forecasts by 2.6% in both FY20 and FY21.Investment view: PT up 3.6% to $5.70, Maintain BUYOur PT has been upgraded 3.6% to $5.70 (prev. $5.50), accounting for changes toearnings and the time creep in our DCF model. We upgraded HLO in late May taking aview that HLO was well placed to deliver a strong FY19 result in August afterreaffirming guidance in April along with the renewal of a key Government contractwhich is due to be announced before 30 June. These near-term catalysts, along with astrong medium-term growth profile on c.12x FY20 earnings present a compellinginvestment case and supports our BUY recommendation.