Small Caps | Feb 16 2017
Ferry, barge and cruise business, SeaLink, is managing the transition from the construction phase at Gladstone and broker attention now turns to acquisitions.
-Growth supported by recent acquisitions, potential in New Zealand
-Strong operating cash flow, with benefit of working capital release from Gladstone roll off
-Fuel costs increasing, which could result in lower margins
By Eva Brocklehurst
Ferry, barge and cruise business, SeaLink ((SLK)), expects to report improved profit in FY17, assuming seasonal conditions remains stable over the remainder of the year. Nevertheless, the stock was sold off after the first half results, as Gladstone and south-east Queensland missed forecasts with the winding back of ferry and barge requirements for the construction phase of the Gladstone operation.
Ord Minnett believes the sell-off was overdone. While trimming forecast by around -3%, the broker believes the impact is isolated to FY17 and relates to the transition in earnings at Gladstone. The broker upgrades FY18 forecasts and believes the balance sheet is flexible enough to fund acquisitions, opportunities for which abound.
Earnings in FY17 are expected to provide a foundation from which growth can be achieved through various means. Ord Minnett retains a Buy rating and $5.00 target.
Kangaroo Island revenue was up 4% but was affected heavily in the first half by strong wind conditions. This resulted in around 15 days being cancelled. Looking forward, Morgans anticipates margins should improve with four more coaches to be deployed on the island. This should also reduce sub-contracting costs.
Of note, the broker points to fuel prices creeping higher, having increased by 32% in the half year. While some of this growth in costs can be attributed to a larger fleet, the broker suspects and increasing fuel price will result in lower margins. The company does have some ability to pass this through and find savings by moving suppliers.
The Captain Cook Cruise business in New South Wales and Western Australia benefitted from a first full half contribution for the WA branch, resulting in revenue being up 46%. This was also supported by a 12% uplift from lunch and dinner cruises as well as a stronger charter market.
North Queensland and Northern Territory business delivered 4% revenue growth, with higher contributions from Magnetic Island and Mandorah services being the main drivers. The company has further penetrated the cruise ship market, with improvement in its charter services, up 60% on the prior corresponding half.
Potential Lies In Acquisitions
Morgans considers the stock a clean way to play the in-bound and domestic tourism segment. Nevertheless, SeaLink is trading on a price/earnings ratio for FY17 estimates of 18x and offers 6% growth on the broker's forecasts, suggesting it is fair value. First half operational earnings (EBITDA) were up 38% and imply margins of 25%, in line with expectations.
While the skewing capital expenditure to the first half was higher than Morgans expected, the company has stated there are no major capital expenditure plans in the second half. No specific guidance was offered for FY17, although the company expects profitability to be higher than the prior year.
The broker believes the outlook is robust and sustainable, as international tourism numbers are growing by around 11% per annum and local tourism is solid. Benefits should accrue from the additional commuter routes which are opening up, and the re-deployment of the five Capricornian vessels (Gladstone).
With construction contracts now finalised and a roll-off of earnings of around $2m anticipated in FY17, the company reveals it has been able to add services and extend both hours and vessels for both operating contracts in Gladstone.
In the broker's opinion the largest driver of outperformance will be accretive acquisitions and the company is expected to seek these out both domestically and offshore. Of note, the company's non-compete clause in New Zealand expired late last year. Given the proximity and ease in which vessels can move around these waters, Morgans believes it logical for the company to re-enter the NZ market.
Bell Potter notes the business in Sydney Harbour is delivering improving returns as the company changes its strategy. The Captain Cook Cruises division (NSW and WA) reported an 88% increase in operating earnings. Sydney has reported a 12% increase in sales, attributable to the higher yielding lunch and dinner cruise markets. The broker considers this of major significance, as the turnaround vindicates the company's strategy to move away from in-bound tour groups to free independent travellers.
Meanwhile, as construction work in Gladstone is rolling off, the broker expects declines revenue to be partly offset by continued strength in south-east Queensland. Bell Potter rates the stock Buy, with a target of $4.97. The outlook is underpinned by the company's sole operator status in a number of key markets and exposure to growth in international visitors.
SeaLink has traditionally operated a fleet of 27 ferries in South Australia, NSW, Queensland and the Northern Territory, offering a range of passenger, freight, dining and charter services. The company also owns a paddle wheeler which cruises along the Murray River. The TSM division, which owns 33 vessels, provides passenger and vehicular barge services across south-east Queensland and in Gladstone, and was acquired in 2015. The company acquired Captain Cook Cruises Western Australia in February last year.
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