City Insider - FT journalist David Stevenson on the travel industry

Holidaybreak’s recent interim results although positively received by most investors have left two rather difficult questions lurking in the collective imagination of boring financial types in the square mile.

The first and most important question is why on earth does Holidaybreak continue to persist with a diversified strategy of brands?
We all know by now the conventional narrative: the heritage in the camping business which is now being carefully managed for cash; the solid if not necessarily spectacular Superbreaks business.

It’s all good stuff and I’m sure a great story can be weaved out of the different businesses, built around a narrative of varying cashflows and the different sensitivities to spending patterns.

But it’s not really washing any more as it becomes increasingly obvious that Holidaybreak is a play on the education and adventure sector exclusively – this division now accounts for well over half the revenues and even more of the earnings.

Education, as you know, is sexy, very sexy indeed. The PGL led division is a fantastic niche, with huge predictability of bookings, low volatility of revenues, and a growing European business through the 50% investment in Meininger. 

It’s the kind of growth business that the travel sector has been promising for years and has so far singularly failed to deliver. It lacks nearly all the black box sensitivities of all the other travel segments and can be sensibly valued using any decent cash flow model.

Sadly all that positivity is not reflected in the share price. Let’s imagine for one moment that the City analysts are right and Holidaybreak does hit estimates of between 32p and 35p in earnings in the coming financial year.

With the share price at 274p the last time I looked, Holidaybreak is currently trading at just over 8 times earnings. In private equity land that would be viewed as laughable for a growth business.

The obvious deal to be done here is to unload all the other divisions to someone willing to pay a decent price for Eurocamp and Superbreak and then get the core education/adventure business rerated back to close to 12 or even 15 times earnings based on the growth potential.

Obviously this blinding revelation to yours truly is not unique – a large number of smart investors have carried on investing in the shares for precisely this reason, to no avail so far.

Cue my next rather more difficult question – shouldn’t Holidaybreak hurry up with its transformation before the financials start to look a tiny bit questionable. This second challenge is based on some of the underlying numbers within the interims.

Take for instance the top line stats in the all important education and adventure business. In these interims both revenue and profits growth ground to a halt, as the numbers lagged last year’s equivalents.

The cashflow numbers at the group level were also a tad disappointing with a big drop in cash coming into the group after netting off any new loans. Crucially debt levels are now high and were boosted by the German acquisition.

Obviously there’s still a great deal of headroom on the debt facility but many cautious types might now be worried about the high level of gearing relative to the £179 million market cap.

Taken in the aggregate, all these small indicators suggest that the shine is coming off this particular story and that the group needs to accelerate its focus on future growth. It also places ever more pressure on the management to show that the Meininger deal will work over the cycle – what happens if the all important German market, currently firing on all cylinders, starts to slow down?

Might Meininger be viewed as a top of the cycle deal with a toppy multiple? At the moment I’d be inclined to give Holidaybreak the credit for carefully restructuring without doing anything too spectacular, yet time is beginning to run out and that share price looks a little anaemic. Isn’t it time for more radical action?

While on the subject of radical action, things are looking up at Travelzest. Until fairly recently this had gone off the radar of most institutional investors I talked to. They’d frankly got a bit fed up waiting for news about potential takeovers plus there’s the distraction of the ongoing family legal saga.

Yet the April announcement that an offer might be in the wings has fired up interest, although the share price has remained becalmed. Just to remind you, Travelzest declared that it “is currently in the very early stages of discussions over a potential offer for the entire issued and to be issued share capital of the company. There is no certainty that the talks will result in an offer being made for the Company”.

Obviously a management buyout is the most likely exit route but since April we’ve heard zip. Talking to smaller investors in Travelzest the message is now clear – table an offer and make sure it’s well above 25p.

Clearly the management will be thinking about something closer to 20p to which one fund manager I talked to declared “give us a break. The Canadian business is a potential gold mine and the shares are far too cheap at 16p. 25p or nothing”.