Tourist troubles

By Fiona Rotherham

Thursday 1st August 2002

International visitor numbers are rising and tourism-related companies are reporting good profits. Why, then, is the country's leading tourism operator, Tourism Holdings, doing so badly? Fiona Rotherham investigates

Life is looking up for New Zealand's tourism industry. Last year's US terrorist attacks deterred travellers and Ansett's collapse sent Air New Zealand into a tailspin, but the latest figures show international visitor arrivals increased by 6.5% in May, and visitor numbers have increased by an average of 4.9% each month this year. Tourists are also staying longer and spending more than in previous years.

Tourism New Zealand chief executive George Hickton says the market has "well and truly recovered", with travellers regarding this part of the world as a safe alternative. He's predicting 6% to 8% growth this year and next, despite the rising dollar making the trip here more expensive.

On the back of the recovery, tourism-related operators such as CDL Hotels and Auckland International Airport have reported improved results. But not Tourism Holdings. New Zealand's largest tourism company has warned its result for the year ending June is likely to be break-even at best, with a small loss possible. Already its first-half earnings, at $2.65 million, were 61% down on the previous year.

At that time, the company blamed the global tourism downturn and Ansett's demise. But investors now want to know why profits at THL - whose assets include Britz and Maui campervans and car rentals, coach tours and scenic helicopter flights, and tourist attractions like ski fields, Kelly Tarlton's and the Waitomo Glow Worm Caves - aren't keeping pace with others in the more robust tourism market.

Management points to several factors. All THL's operations rely heavily on international tourists. Other tourism operators, particularly accommodation and air travel, are able to smooth out volatility with domestic and business travellers.

THL also points to its high fixed costs compared with some other operators, making it more sensitive to a sharp downturn during the peak season. And it's had high depreciation costs this year after replacing its ageing motorhome and coach fleet.

THL's businesses in both New Zealand and Australia also rely on particular nationalities: Germans hiring its campervans, Japanese riding its buses and Americans spending up large on its attractions. While Asian visitor numbers overall are up - 15.5% and 7.1% for the month and year ended May - visitors for THL's key markets are down.

Take the campervans. Some 60% of THL's $200 million revenue last year came from its motorhome and car rentals business. But German visitor arrivals to New Zealand for the month and year ended May this year were down 25.2% and 9.1% respectively. American arrivals fell 1.2% in May compared with the same month the previous year. The number of Japanese was up 5.1% for the month of May, but it was 5.5% lower on a 12-month basis.

Cleaning up

THL started out as South Island helicopter operation The Helicopter Line and gradually transformed into the country's largest pure tourism operator (excluding hotels and airlines). Under chief executive Dennis Pickup, who took over in 1999, the company's hodge-podge of businesses has been cleaned up. But the share price hasn't reacted. Peaking in late 1999, it's been downhill since then. In fact a 20% fall in May to a low of 80 cents sparked an inquiry from the stock exchange's Market Surveillance Panel. The company said it had nothing new to report.

One reason investors are losing faith in THL is a history of wildly optimistic forecasts. Management won no friends twice downgrading the company's profit forecast last year from $26.8 million to $14–$16 million to a final result of $13 million. And this was a whopping 51% below what the company forecast in its 1999 investment statement.

Since May, THL's share price has recovered to around 95 cents - still well below analysts' valuations, which range hugely from $1.05 to $1.85. "The market is not in the mood to forgive companies that don't meet expectation," says McDouall Stuart analyst Chris Stone. "THL raised quite a bit of money at the peak (for the Britz acquisition in 1999), then the bad news started to flow. It will have to demonstrate earnings performance before investors start re-rating it." Stuart is expecting the share price to gradually creep up this year and profits to fully recover by 2004.

UBS Warburg's head of research sales Richard Leggat says it's too early to be confident until sustained profits are delivered. "We're forecasting reasonable earnings recovery to June 2003 but the market is not prepared to factor that into the share price until they see evidence the company can achieve better returns."

Are THL's bosses to blame?

Management has got some things right. THL has a strong, conservatively geared balance sheet and Pickup has worked hard to reduce debt and the group's high fixed costs. Management quickly introduced a "Cash is King" initiative after September 11 to prune expenditure, deferring $9 million of capital expenditure and speeding up sales of its non-core assets. Negotiations are underway for the sale of its aviation assets and Treble Cone skifield. Its 50% shareholding in Milford Sound Flightseeing was sold for a small profit last month.

"They've done the right thing with the Cash is King initiative and it is a case of the company waiting out a recovery. The summer season will show if there is a pick-up in earnings," says Nat Vallabh, senior analyst for AMP Henderson, THL's largest shareholder with an 8.4% stake.

THL says the outlook is good in New Zealand, especially with Air New Zealand increasing capacity.

But crucially, the company's bottom line is still being dragged down by its operations in Australia, which account for 40% of revenue. Australia's tourism recovery is much slower than New Zealand's, with international visitor arrivals for May recording a 2.6% fall. THL's backpacker transport Oz Experience has been turned around but the rentals side is still causing pain. It wasn't performing well even before September 11 and has dived since, not helped by competitor Avis discounting heavily to replace revenues lost from its association with Ansett.

THL is criticised for the time taken to bed down the acquisition of Australia's number one motorhome operator, Britz, in 1999. As with the Air New Zealand-Ansett takeover, THL found the Britz fleet was older and more poorly maintained than it thought and says synergy benefits have taken longer to achieve than expected.

"They paid too much for it and underestimated how difficult it would be to merge two different cultures. The strategy, though, was a good one. It is better to be Australasian than just New Zealand," says Forsyth Barr research head Rob Mercer.

Should THL cut its losses and run? Sean Murray, THL's general manager commercial, argues the fundamentals behind the Britz purchase haven't changed. Growth long-term will still come from Australia, even if it takes a couple of years to fix the problems. "We haven't got it right. We can't just throw our hands up in the air and walk away, because Australia is where the opportunities lie."

Fiona Rotherham
fiona@unlimited.net.nz

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