Cullinan is in a sweet spot
Since beginning 2017 Cullinan’s lost close to half its market capitalisation – the first time in over five years it’s been significantly derated by the market.
The recent interim results to end-March, characterised by low double-digit earnings growth, failed to inspire a share price recovery. Cullinan must deliver a relatively high earnings growth rate averaging 20% to 25% a year to justify its high valuation.
The tourism sector is recovering nicely but segments of Cullinan’s business are under pressure, mainly due to SA’s contracting economy. However, we think Cullinan’s been overly pummelled and has potential for an upswing.
At a relatively low earnings multiple of 11.5 – compared with its sector rating of 17.6 and the All Share Index’s 19.9 times – the counter looks undervalued. Cullinan’s maintained an average earnings multiple of 24.2 since 2011. However, it’s painfully illiquid: most of the scrip is held by 18 institutions with one, Canadian fund manager Canaccord Genuity, holding at least 77%. So, price discovery is limited, with the bid/ ask spread close to 40% of the counter’s value. You must be patient to accumulate it.
Cullinan’s upgrading its coach fleet is to ensure the company maintains its market share. However, a number of factors influencing tourism are outside of management’s control: the exchange rate; random epidemics such as Ebola; local and global economic growth rates; and various geopolitical factors.
The [reduction] of Ebola has helped SA’s attractiveness globally, but the visa framework is still a challenge despite some progress in removing the most negative aspects from the stringent visa requirements introduced in 2014.
Overall, the tourism industry remains one of few bright spots in SA’s economy. We anticipate the industry will continue to recover from the Ebola scare and visa laws fiasco to maintain high growth metrics. Plus, the rand’s likely to remain under pressure. We think it’s worth speculating on the counter but illiquidity is a real concern. Our view is to cautiously accumulate it.
Cullinan is a holding company with three operating segments: travel & tourism; marine & boating; and financial services. Brands include Thompsons Holidays, Hylton Ross Tours and Pentravel.
This article was first published in the July issue of investor.moneyweb.co.za – Intellidex
The tourism sector is recovering nicely but segments of Cullinan’s business are under pressuredue to SA’s contracting economy.