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Tourism set for bumpy ride

By Peter V O'Brien

Friday 5th September 2003

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Companies associated with tourism were relieved they weathered the effects of the Iraq war and the Sars virus in the six months ended June.

An examination of the sector in The National Business Review in March suggested the companies were on a roll after good half-year results.

That was before the war and Sars. Air New Zealand chief executive Ralph Norris' views reflected those of others involved in the broadly defined tourism sector, although he referred specifically to his company and the airline industry.

"However, by the beginning of the second half of the financial year the industry again faced massive problems," he said.

"With the threat and subsequent reality of war with Iraq and the outbreak of Sars, many passengers again chose to delay or cancel travel plans. Load factors quickly fell below break-even levels on some flights to Asia and this resulted in losses."

Sars would also have affected the airline's inbound loadings, because the virus scare was mentioned in reports from companies whose tourist customers travelled here on Air New Zealand.

The airline's return on average shareholders equity was relatively high, partly because the relationship between equity and total assets (the proprietorship ratio) was relatively low at 27.9%.

CDL Hotels operates 28 establishments under the Millennium, Copthorne and Kingsgate brands, the last changed recently from Quality Hotels, thereby qualifying as a "tourism-associated" company.

It has listed subsidiaries involved in residential land development (CDL Investments) and Australian property (Kingsgate International Corporation), the latter being only a modest performer.

CDL Hotels' equity ratio was 73.2% at June 30, Australia was a drag on profit and the whole group was coming off a low base.

A 4.8% annualised return on average equity and earnings a share annualised at 4.7c were unlikely to start a bull run in the stock but there could be room for more share price improvement, given last week's 33c base.

Net operating cashflow of $24.85 million in the six months ended June was 10.3% down on the $27.71 million received in the corresponding period of the previous year.

Strong operating cashflow is the basis of any company's financial health but is rarely mentioned in company reports.

The tourism-associated companies referred to cashflow in three cases.

Tourism Holdings was emphatic about the matter, saying it continued to generate strong operating cashflows, which at $40.3 million for the year ended June, reflected "the strong application of THL's "cash is king" programmes and the underlying financial strength of the company."

Operating cashflow of $40.3 million on total revenue of $175.18 million (including any accruals) and assets of $240.55 million was impressive, as would similar relationships be in any company.

New Zealand Experience said strong operating cashflows and the sale of surplus land in Christchurch allowed the group to repay all borrowings in the year ended June and to have cash on deposit.

Air New Zealand noted a "strong improvement" in operating cashflow, which increased from $56.2 million in 2002 to $523.1 million in the year ended June.

It was an impressive figure, given total revenue of $3.64 billions and assets of $3.7 billion.

The "tourism-associated" concept encompasses the seven companies' activities, although some might be classified under different industry groups.

CDL provides accommodation for overseas and domestic tourists, as does Sky City Entertainment Group, the latter also offering casino and cinema facilities, although New Zealanders would vastly outnumber overseas tourists in cinema going.

Auckland International Airport says it handles more than 70% of all international visitors, which associate it firmly with tourism.

Companies involved in tourism rarely, if ever, refer to the domestic market of holidaymaking New Zealanders.

Those people use all the facilities, whether hotels, Shotover Jet's attractions, Tourism Holdings' campervans and "experiences" assets, or New Zealand Experience's Rainbow's End theme park.

New Zealand Experience's preliminary report referred to function activities at the Auckland park and special events and said the facility enjoyed a higher public profile among families, companies and sports groups.

That showed the importance of domestic tourism, even if the people travelled only a few kilometres.

CDL managing director Tsang Jat Meng said the international visitor market had been fickle in recent years. Concentration on the domestic market as an integral part of growth had been a key CDL strategy in recent years.

Adoption of the proposal for a universal four weeks holiday break could boost domestic tourism provided recipients use the extra time away from home.

There could be share price improvement available in the sector but investors must assume international terrorist incidents and similar matters will become "normal" scenarios rather than unusual.

Tourism-related shares

Company Price Price Change Return EPS (c) Hist

29.8.03 28.2.03 28.2-29.8 Av Equity P/E


--------------------------------------------------------------------------------

Air New Zealand $0.51 $0.52 -1.9% 17.3%(1) 5.1c 10.0
Auckland Airport $6.30 $5.46 +15.4% 13.0% 27.4c 23.0
CDL Hotels $0.33 $0.29 +13.8% 4.8%(2) 4.7c(2) 7.0
NZ Experience $0.22 $0.19 +15.8% 14.7% 2.1c 10.5
Shotover Jet $0.85 $0.76 +10.6% 14.0% 7.4c 11.5
Tourism Holdings $1.42 $1.02 +39.2% 5.1% 8.8c 16.1
Sky City $8.97 $8.67(3) +13.4% 11.6% 51.0c 17.6


(1) Convertible pref shares included in equity

(2) Annualised

(3) Adjusted for shares brought back between March and June

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