Cox & Kings: Leisure travel business offers steady earnings growth

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Published: November 28, 2017 3:54:44 AM

The recent change of hands in the minority stake in Holidaybreak (HBR) sets a benchmark EV of c.£600 million for HBR, and implies a significantly higher EV/Ebitda multiple (c13x FY18ii) for HBR than we ascribe (10x) in our SOTP for Cox & Kings (C&K).

Cox & Kings, Leisure travel business, travel business, steady earnings growth, steady earnings, earnings growth, Holiday breakThe recent change of hands in the minority stake in Holidaybreak (HBR) sets a benchmark EV of c.£600 million for HBR, and implies a significantly higher EV/Ebitda multiple (c13x FY18ii) for HBR than we ascribe (10x) in our SOTP for Cox & Kings (C&K). (Image: Facebook/coxandkingsvikasmarg)

The recent change of hands in the minority stake in Holidaybreak (HBR) sets a benchmark EV of c.£600 million for HBR, and implies a significantly higher EV/Ebitda multiple (c13x FY18ii) for HBR than we ascribe (10x) in our SOTP for Cox & Kings (C&K). Furthermore, our estimates project nearly 50% growth in HBR’s Ebitda over FY18-20, driven principally by aggressive bed addition at Meininger. If we increased our target EV/Ebitda multiple to 13x, our SOTP valuation would increase by c.Rs 60 per share to Rs 420. Meanwhile, C&K’s other businesses remain steady and leverage is comfortable. We understand from media reports, that SSG Capital’s purchase of a 34.4% stake in HBR from The Rohatyn Group, announced on November 16, was at an aggregate EV of c.$800m (c.£600m). This implies an EV/Ebitda multiple of c.13x, based on our FY18 estimate of £46m of Ebitda from HBR. It also implies that HBR’s EV has been marked up from £512m in 2012 to £600m now despite the divestiture of numerous businesses. Meininger’s expansion plan is expected to ramp up its bed count from c.8,500 currently to c.15,000 by March 2019 and c.25,000 by March 2022. Although Meininger’s Ebitda is unlikely to grow in FY18 due to substantial investment in senior management addition, FY19-20 could see Ebitda almost doubling versus FY18 levels.

This is the key driver of the nearly 50% growth we project in HBR Ebitda over FY18-20. The leisure travel business (both in India and overseas) continues to generate steady earnings growth despite competitive pressures. Working capital did increase in H1FY18 and is a concern; yet, overall net debt-to-Ebitda remains comfortable at c.2.5x. At a 12x FY19ii P/E, valuations are attractive. Our SOTP too suggests a substantial discount to fair value, even at just a 10x EV/Ebitda multiple for HBR (versus the 13x benchmark set by the recent transaction).

C&K announced on November 16th that SSG Capital has acquired The Rohatyn Group’s 34.42% stake in Cox & Kings’ subsidiary, Prometheon Holdings (UK), which is the holding company of HBR. According to media reports, the transaction was consummated at an aggregate enterprise value of c.$800m (i.e., c.£600m). We understand that net of outstanding debt at HBR, the equity valuation works out to c.£484m. The implied value of C&K’s 65.58% stake in HBR is therefore c.£317m. The Rohatyn Group had acquired the stake through a buyout of PE firm Citigroup Venture Capital International (CVCI) in 2013.

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