Sealink Travel Group (ASX: SLK) is a tourism and transport company operating in the same industry as companies like Flight Centre and STA. One thing that distinguishes their business model, however, is the company’s focus on operating the end travel service, as opposed to simply buying products like airfares in bulk and reselling them to consumers at a higher price.
Captain Cook Cruises rallied strongly on the back of the positively received acquisition of Transit Systems.
The company is rallying off the back of their recent acquisition of Transit Systems, which helps them to successfully expand into offshore markets. With prominent Aussie international expansion success stories like Afterpay in the market, investors are viewing companies that make the choice to expand overseas much more favourably.
Sealink’s recent acquisition of Transit Systems will be funded by a mix of cash that the business already has, and an underwritten equity placement. They are raising $154m from the offer, out of the $635m that they will need to fund the acquisition. Since they are mostly using their underutilised balance sheet to fund the acquisition, the market warmed to the deal since investors could upgrade earnings expectations on the news, since the deal is widely expected to be EPS accretive.
The company controls the Captain Cook Cruises brand, which means they can realise all the profits from successful marketing efforts. This puts them a world apart from other companies in the travel industry, allowing them to obtain large market shares and a degree of pricing power in niche markets like cruises on Sydney Harbour. This allows them to maintain margins of around 10%. In light of strong cash flow conversion, this is indicative of the business’s moderate earnings quality, which is why the market prices it on 21.9x earnings.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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