The Investor - Moneyweb's monthly investment magazine Issue 4 | Page 16

industry has dropped SA from its marketing because of the unfriendly visa regulations. He added that Chinese tourists often travelled at short notice and it was important for them to get visas quickly. In addition, competitor countries such as Zimbabwe offered Chinese travellers visas on arrival. As a result, inbound tourism is expected to be subdued in the interim. It’s not all doom and gloom for Cullinan which has diversified into financial services through acquisitions. Its financial services division registered sixfold growth and contributed 12% towards group operating income, up from just 1.7% previously. a subdued outlook coupled with Eskom blackouts and the promise of further electricity tariff hikes. It’s not looking good for both corporate and household discretionary income, which is responsible for feeding outbound tourism. We have revised our growth forecast in light of these developments. Although our valuation suggests the stock is trading within its full valuation range, there is real downside risk. Investors should also note that the counter is characterised by thin trading as less than 1% is in the hands of retail investors, which limits price discovery. Group revenue growth though was below par, inching up 3% to R456m. Although financial services revenue more than doubled, overall group revenue was suppressed by the travel and tourism division – which provides the lion’s share of group revenue. It declined by more than 8%. Operating profit fell 6.3% to R51.1m, despite the financial services segment growing operating income more than 600% to R6.3m. Headline earnings fell 8.1% to 5.02c/ share and the dividend was halved to 1c/share. Bull Factors The stock traded at lofty valuations for the better part of last year and only started coming down towards the end of the first quarter of 2015. We suspect the market rerated the share when it became apparent that the government was not going to back down from its harsh visa policy. The stock actually advanced after these results were released. • Apart from financial services, the boating division also impressed, benefiting from the weakening rand. And management is optimistic about outbound tourism, which has performed remarkably well in this poor economic environment. But some caution is needed here given 16 ISSUE 4 – JULY 2015 • • • Established brands and supply chain networks in the tour operator space Diversified business mix protects it from exchange rate swings Comfortable gearing profile reduces risk and supports balance sheet gearing Bear Factors • • Visa regulations a threat to inbound tourism growth Uneven global economic recovery poses a threat to tourism & leisure sector Low barriers to entry Nature of business: A holding company with operations in tourism, marine and financial services. The group operates four major tourism segments: tour operating, retail travel, coach charter & touring and marine & boating. Brands include Thompsons Holidays, Hylton Ross Tours and Pentravel. Glacier Enterprises & Chester finance fall under Cullinan Financial Services which provides bridging, marine and project finance. Disclosures: The analyst has no financial exposure to the instrument discussed. The opinion represents his true view.■