Tag: Australian Market

Business Strategy and Outlook

To diversify from regulated PBS revenue, API acquired the Priceline chain of health and beauty stores in 2004.Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, Morningstar analyst have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush. However, Morningstar analyst believe the market growth opportunity is skewed to the premium end rather than Priceline’s mass-middle positioning and consequently forecast below-market average revenue growth for the retail business. This is despite its loyalty program that differentiates Priceline from key competitors .

Similarly, Priceline’s growing online sales will likely lead to a subdued outlook for in-store sales. Morningstar analyst forecast same-store sales climbing at just 1% per year, less than inflation. Moreover, the shift of sales from physical stores to online places pressure on margins due to challenges in evolving the cost base at the same rate.

Offsetting these challenges, API’s acquisition of the Clear Skincare clinics in fiscal 2018 offers significantly higher profitability. With gross margins above 80%, Morningstar analyst expect the rollout of Clear Skincare clinics to help API’s earnings recover in the short term and permanently reduce its exposure to the PBS.

Woolworths’ Offer for API Has Been Withdrawn but Wesfarmers’ Offer Still Stands

In yet another unexpected turn, Woolworths has withdrawn its non-binding proposal to acquire no-moat Australian Pharmaceutical Industries, or API, for AUD 1.75 per share made on Dec. 2, 2021. Following completion of due diligence, Woolworths was not convinced it could achieve the financial returns it requires. However, the takeover offer from Wesfarmers remains in place and is not subject to due diligence, which completed in October 2021. Accordingly, Morningstar analyst have decreased  API fair value estimate by 13% to AUD 1.53, back in line with  standalone assessment of API and Wesfarmers’ takeover offer.

Financial Strength

API is in a sound financial position with net debt/adjusted EBITDA of 0.6 times at fiscal 2021. We forecast leverage to remain under 1.0 over our forecast period, with API comfortably able to afford a 70% dividend payout ratio and continue to expand its retail footprint. We forecast a total of AUD 250 million in capital expenditures over the next five years, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding.Working capital management has improved over a number of years, almost halving the net investment in working capital to 5.6% of sales over the 10 years to fiscal 2021. We forecast investment to be roughly maintained at an average of 6.2% of sales.

Bull Says

• The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace. 
• API’s corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS. 
• Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Morningstar analysts recommend eligible shareholders subscribe to Corporate Travel’s Share Purchase Plan, or SPP. It is the AUD 25 million component of a total AUD 100 million underwritten capital raising to fund the AUD 175 million acquisition of Hello World Travel’s corporate and entertainment travel business in Australia and New Zealand. An institutional placement has already raised AUD 75 million (at AUD 21.00 per share) and the remaining AUD 75 million of the purchase price will be funded by an issue of new shares (also at AUD 21.00) to the vendor when the deal completes in the March quarter of 2022.

Morningstar analysts support the SPP which will be priced at least 11% below our fair value estimate as well as  lifted  fair value estimate on Corporate Travel by 7% to AUD 23.50 per share on Dec. 15, 2021 when the deal was first announced. The SPP offer price will be the lower of AUD 21.00 and the five-day average price of Corporate Travel shares during the five trading days up to the SPP closing date (likely Jan. 20, 2022). As this SPP price will be lower than morningstar intrinsic assessment (and the current stock price), Morningstar analyst see value in subscribing to the offer.

Further, Morningstar analysts see the acquisition as opportunistic, struck amid a pandemic. It is a playbook that was used by no-moat-rated Corporate Travel with the October 2020 AUD 275 million buy of Travel & Transport in North America. The Helloworld unit is bite-size (6% of Corporate Travel’s enterprise value), operates in the group’s home market of Australia and New Zealand (with two thirds of business in domestic travel), and synergies are likely to be easier to extract than from the Travel & Transport purchase. As such, management’s projected AUD 8 million synergy is conservative, at just 36% of Helloworld’s pre pandemic EBITDA. This compares with Travel & Transport where the projected AUD 25 million synergy is 61% of the unit’s prepandemic EBITDA, with its extraction making good progress to-date.

Company Profile

Corporate Travel Management provides travel services mainly for corporate customers across the Americas, Australia and New Zealand, Europe, and Asia. The company has built scale and breadth through both organic growth and acquisitions. As of 2021, Corporate Travel is the world’s fourth-largest corporate travel management company based with pro forma, pre-COVID-19 total transaction volumes of AUD 11 billion, but it remains a relative minnow in the highly fragmented USD 1.5 trillion global market. The company offers expertise and personalized service to corporate clients spanning several industries such as government, healthcare, mining, energy, infrastructure, and construction. Before the pandemic, more than 60% of the group’s client travel was domestic (within the country) in nature.

(Source: Morning Star)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since late March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created a 

unique squeeze on the group. It is considered that the measures to execute a severe reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates significant earnings in Australia and New Zealand. Unparalleled scale and brand strength in the domestic travel market has provided buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is rarely assumed that this is sufficient to protect the company against online competitors over the next 10 years.

Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s considerable scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the warning from online competitors increasing, we believe physical stores are likely to increasingly lose relevance longer term.

From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strength

As at the end of September 2021, there was AUD 969 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. It is believed, this is sufficient liquidity for Flight Centre to see through until mid-2023, even if total transaction volume remains at around 30% of pre-COVID-19 TTV levels.

Bulls Say’s

• A strong balance sheet allows Flight Centre to take benefit of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to address specific market segments more effectively. 

• Brand strength provides a powerful foundation for the blended online/physical store offering. 

• Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.

Company Profile 

Flight Centre Travel is one of the largest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.