Is Sealink Travel Group Ltd a buy at this share price?

Credit: StephenMitchell

This morning, ferry and cruise boat operator Sealink Travel Group Ltd (ASX: SLK) announced its financial results for 2016. The market responded well to the news with shares up 8.0% to $4.75 in early morning trading.

Revenue surged 58.8% to $176.7 million for the year and earnings-per-share (EPS) soared 91.9% to 23.6 cents. The company increased its final dividend by 87.5% to 7.5 cents bringing total dividends 2016 to 12 cents up from 7.8 cents last year. The stock currently trades on a fully franked dividend yield of 2.5%.

The results were aided by Sealink’s acquisition of Transit Systems Marine in November 2015 which contributed revenue of $58.4 million and profit before interest and tax (PBIT) of $17.6 million during the period. Sealink also bought Captain Cook Cruises Western Australia for $12 million in May 2016, but it contributed a loss of $0.4 million due to off-peak winter trading.

Excluding acquisitions and prior to corporate allocations, Sealink delivered a 13.4% increase in PBIT to $21.1 million and revenue growth of 5.4% to $117.8 million. This organic growth is likely to continue given favourable trends in the Australian tourism industry.

If low oil prices persist then the cost of flying is likely to fall boosting inbound Australian tourism and Sealink will also gain directly from fuel savings for its 73 vessels. The weak dollar is another potentially transitory benefit whereas emerging middle classes in Asia are likely to underpin industry growth for decades to come. Indeed, Sealink recorded a 37% rise in Chinese customers in its South Australian business in 2016.

The South Australian division delivered an impressive return-on-closing tangible assets (ROA) of 40.9% for 2016 based on PBIT before corporate costs. Sealink’s Sydney based Captain Cook Cruises business returned just 7.2% and generates around half the revenues of the South Australian business at lower gross margins but on a similar sized asset base. ROA for Sealink Queensland returned was a solid 30.7% and  Transit Services Marine recorded 17.3% for the eight months since completion of the purchase. Overall, these are terrific metrics given Sealink owns the vast majority of its boats and ferries.

Net debt was $62.9 million at 30 June 2016, increasing by $54.8 million during the year to partially fund acquisitions. This borrowing level is comfortable given Sealink generated $32.1 million in operating cash flow over the period.

Capital expenditure was $6.9 million, which is under the $7.8 million depreciation charge for the year. Furthermore, purchases of property plant and equipment included outlays for new vessels as well as maintenance of the existing fleet and so sustainable free cash flow probably exceeds reported earnings.

A huge amount of detail accompanied the financial statements which is a credit to management. Segment analysis, acquisition costs, capital expenditure and organic growth were all clearly explained to the benefit of shareholders.

The profitability of Transit Systems Marine will be impacted by the completion of the construction phase of LNG plants in Queensland in 2017. The company forewarned this would happen at the time of the acquisition and is looking to redeploy any unutilised vessels into other regions.

A full year contribution from Captain Cook Cruises Western Australia will compensate for these lost earnings and I wouldn’t be surprised if profits rise again next year given the continued growth of the tourism sector. I estimate that Sealink is trading on an underlying enterprise value-to-earnings ratio (EV/E) of about 20 which looks reasonable for a well-run business operating in an attractive though cyclical industry.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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