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Cox & Kings Ltd
F1Q12: Operationally in Line
Quick Comment – Strong-than-expected revenue
and operating profit growth: Cox & Kings reported
revenue, operating profit, and PAT growth of 28%, 22%,
and 5% vs. our expectations of 20%, 17%, and 13%,
respectively. Key highlight of the results: 1) Strong
broad-based revenue growth in domestic and
international business. 2) Operating profit growth was
stronger than our expectations while margins came in
110bp lower than expectations largely on continuing
adverse impact of the earthquake in Japan, in our view.
3) Adjusted PAT growth came in 8% lower than our
expectations driven by lower other income (down 31%
YoY) and higher tax rate (up 500bp YoY).
Key Positives: 1) Domestic revenues grew 30% in
F1Q12, driven by strong growth in leisure travel
business. International business revenue growth was
also strong (23%). 2) Operating profit growth (28%) was
5% higher than our expectations, largely on 29% growth
in the domestic business. 3) C&K continues to invest for
future growth with consolidated ad spending up 31%
YoY in F1Q12, driven by higher ad spending in the
international business.
Key Negatives: 1) Consolidated margin was down
210bp, 110bp higher than our expectations, driven by
international margins (down 570bp YoY). Margin decline
in F1Q12 reflected the 130bp increase in employee cost.
2) Other income was lower than expected (down 31%
YoY vs. anticipated 34% growth). We await clarity from
management on the same. 3) The tax rate at 38% was
500bp YoY higher than our expectations.
What’s in the price: C&K is currently trading at 17x
F2012E earnings (of existing business). In our view, the
potential acquisition of Holidaybreak Plc (HBR) is likely
to be a game changer for C&K. We believe that the
potential to drive synergies in the international business
is large. If consummated, the acquisition will likely be
earnings accretive by ~40-45% for C&K for F2013
(based on our current valuations for C&K and
Bloomberg consensus estimates for HBR).
Long-term story intact; geared to disposable income
growth: Cox & Kings is well placed to capitalize on a potential
inflection in travel expenditure in India and increase value
through synergistic international acquisitions. Indian
operations account for ~50% of consolidated revenue, for
which we expect a 22% CAGR in the next five years. Rising
disposable income, favorable demographics, travel aspirations
of India’s large middle class, combined with food, language
and cultural barriers, are among the key structural drivers of
growth in outbound group tours from India. We reiterate our
OW rating.
Valuation and PT Methodology –We value C&K at Rs327.5
per share based on our base-case DCF model. We assume
NOPAT growth of 15% during F2016-26 and a terminal growth
rate of 5%. We assume that the company will earn a long-term
return on incremental capital employed (ROIC) of around 15%
versus its cost of capital of 11%.
Downside Risks to Our Price Target: 1) Promoter interest in
associate companies; 2) capital investments by C&K in
associate companies; 3) macroeconomic shock; 4) competitive
and fragmented industry; 5) integrating acquired companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cox & Kings Ltd
F1Q12: Operationally in Line
Quick Comment – Strong-than-expected revenue
and operating profit growth: Cox & Kings reported
revenue, operating profit, and PAT growth of 28%, 22%,
and 5% vs. our expectations of 20%, 17%, and 13%,
respectively. Key highlight of the results: 1) Strong
broad-based revenue growth in domestic and
international business. 2) Operating profit growth was
stronger than our expectations while margins came in
110bp lower than expectations largely on continuing
adverse impact of the earthquake in Japan, in our view.
3) Adjusted PAT growth came in 8% lower than our
expectations driven by lower other income (down 31%
YoY) and higher tax rate (up 500bp YoY).
Key Positives: 1) Domestic revenues grew 30% in
F1Q12, driven by strong growth in leisure travel
business. International business revenue growth was
also strong (23%). 2) Operating profit growth (28%) was
5% higher than our expectations, largely on 29% growth
in the domestic business. 3) C&K continues to invest for
future growth with consolidated ad spending up 31%
YoY in F1Q12, driven by higher ad spending in the
international business.
Key Negatives: 1) Consolidated margin was down
210bp, 110bp higher than our expectations, driven by
international margins (down 570bp YoY). Margin decline
in F1Q12 reflected the 130bp increase in employee cost.
2) Other income was lower than expected (down 31%
YoY vs. anticipated 34% growth). We await clarity from
management on the same. 3) The tax rate at 38% was
500bp YoY higher than our expectations.
What’s in the price: C&K is currently trading at 17x
F2012E earnings (of existing business). In our view, the
potential acquisition of Holidaybreak Plc (HBR) is likely
to be a game changer for C&K. We believe that the
potential to drive synergies in the international business
is large. If consummated, the acquisition will likely be
earnings accretive by ~40-45% for C&K for F2013
(based on our current valuations for C&K and
Bloomberg consensus estimates for HBR).
Long-term story intact; geared to disposable income
growth: Cox & Kings is well placed to capitalize on a potential
inflection in travel expenditure in India and increase value
through synergistic international acquisitions. Indian
operations account for ~50% of consolidated revenue, for
which we expect a 22% CAGR in the next five years. Rising
disposable income, favorable demographics, travel aspirations
of India’s large middle class, combined with food, language
and cultural barriers, are among the key structural drivers of
growth in outbound group tours from India. We reiterate our
OW rating.
Valuation and PT Methodology –We value C&K at Rs327.5
per share based on our base-case DCF model. We assume
NOPAT growth of 15% during F2016-26 and a terminal growth
rate of 5%. We assume that the company will earn a long-term
return on incremental capital employed (ROIC) of around 15%
versus its cost of capital of 11%.
Downside Risks to Our Price Target: 1) Promoter interest in
associate companies; 2) capital investments by C&K in
associate companies; 3) macroeconomic shock; 4) competitive
and fragmented industry; 5) integrating acquired companies.
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