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Weak rand not enough for Cullinan

High PE difficult to justify.

This article was first published in Moneyweb Investor. To read the magazine click here.

An incongruent policy framework at ministerial level has caused much damage to South Africa’s tourism industry and to Cullinan’s earnings. Globally, the industry has become extremely competitive with countries jockeying for market share and investing heavily in marketing their attractions.

While tourism was recovering from the Ebola scare in Africa and xenophobia attacks in South Africa, the home affairs ministry introduced draconian visa laws. That ensured that South Africa did not benefit from the fast-depreciating rand, which is a major consideration for international tourists. The ministry has since backed down on some of the more stringent measures but Cullinan’s results for the year to end-September reflect this deteriorating operating environment.

Cullinan recomm

Cullinan table 1


United Nations World Tourism Organisation data show that tourism accounts for 6% of global exports (about $1.4 trillion) and China is the world’s largest outbound market with total expenditure of $129 billion in 2013. Early last year Cullinan CE Michael Tollman said China’s tourism industry had dropped South Africa from its marketing because of the unfriendly visa regulations. He said Chinese tourists 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. 

Cullinan share price performance (rebased)

Cullinan graph

Cullinan’s marine and financial services divisions recorded remarkable growth but the tourism division, which contributes the lion’s share of group income, pulled down the overall group performance. This was due to the combination of factors listed above which resulted in a marked decline in inbound tourism. Tourism revenue dropped 10% to R740 million while the marine and financial services segments increased 30% (to R63.3 million) and 86% (to R123 million) respectively.

Trading profit for the tourism division declined 28% to R95.6 million. The marine division grew trading profit 56% to R3.2 million. The financial services segment saw a phenomenal 214% increase in trading profit to R5.2 million. Group headline earnings fell 18.6% to 7.03c/share and the dividend was reduced to 2c/share from 3c/share.

While the World Travel and Tourism Council forecasts that South African tourism will grow at an annual rate of 4.3% in the next decade. Forwardkeys – a travel data intelligence company – recorded an 11% year-on-year decline in South African international arrivals from June to August. This is similar to the 10% fall in Cullinan’s tourism income for the year to end-September. The group recorded decreases across the board with major declines reported from China, Japan, Malaysia, Singapore, India, South America, the US and Europe. The cooling of the Chinese economy may yet hit international arrivals even harder. 

Reputation is the cornerstone of tourism and South Africa’s has been badly damaged. The unfriendly visa regulations are being reversed but it is difficult to tell the extent of damage that they caused at this point. However, South Africa’s world class tourism infrastructure may well help the recovery.

The other two divisions, marine & boating and financial services, have been recording encouraging growth numbers in the past two years and management reckons there is room for further growth. This may partly offset the waning tourism revenue. Cullinan’s ungeared balance sheet supports growth of its financial services division. But metrics for the year-end results have exposed a high degree of operating leverage, with operating earnings falling by more than ten times the drop in revenue.

Cullinan has been investing in anticipation of growth, improving the standard and quality of its coach fleet as well as expanding its depot in Cape Town. It has also rolled out a new online customer interface platform. Tourism business depends heavily on word of mouth so ensuring high service quality is a priority in this fragmented industry characterised by numerous small competitors. 

In summary, a number of key issues will influence South African tourism in the short term: the exchange rate; visa regulation legacy effects; global economic activity (specifically China) and oil prices.

Cullinan has a high price:earnings valuation of 21 (industry: 17). Its PE has remained at high levels for the past five years with an average valuation of 25 (industry: 18). This can be partly attributed to poor price discovery as a result of its illiquid register with less than 5% of the scrip available to retail investors. It is quite probable that South African tourism will recover, but Cullinan’s PE valuation demands high growth that we think might be difficult to come by in the medium term, given the tricky operating environment. We advise investors to dispose of this counter until earnings growth visibility improves.

Bull Factors

  • Weakening rand bodes well for inbound tourism
  • SA’s competitive, world class tourism infrastructure
  • Cullinan’s renowned brand and service offering

Bear Factors

  • Draconian visa laws and xenophobic tendencies have damaged SA’s reputation with international tourists
  • Negative legacy of Ebola virus
  • Weak South African economy bearish for domestic and outbound tourism
  • Uneven global economic activity, specifically weakening Chinese economy, threatens inbound tourism
  • From an analyst perspective, we apply a discount on company results/projections due to poor presentation of financial data by management

Cullinan table 2

Nature of business: Cullinan is 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.



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