Transat A.T. Inc
World Leader in Holiday
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Travel
Vertically Integrated
Volatile Industry
Weak record
Regular unpleasant
“surprises”
Traded as:
Price:
Dividend:
Debt:
Stability:
Rating:
TRZ.B (TSX)
C$6.95
None
Medium
Very Low
D
5i Opinion
Company proFILE
Transat A.T. Inc. (‘TRZ’) is one of
the largest tourism Companies in
the world, and is Canada’s holiday
travel leader. The Company is a
Montreal-based, vertically integrated tour operator, offering services
to more than 60 destinations worldwide. Transat’s core business is to
develop and market holiday travel.
Additionally, the Company owns
its own airline, Air Transat, has
542 travel agencies (including 402
franchisees), has a multi-channel
distribution system incorporating
web-based sales, and holds interest
in the hotel business.
Revenue MIX
Transat operates with five business
segments, which include:
1. Air transportation, in which the
Company owns an air carrier, Air
Transat;
2. Outgoing tour operators, who
make up the Company’s business
by offering a one-stop shopping for
such things as hotels, stays, airline
seats, excursions, and car rentals;
3. Incoming tour operators and
destination services, which focuses
on packaging products within
one country and then marketing it
abroad by its partners;
4. Retail distribution, which consists of providing advice to travelers and selling consumers products;
and
5. Hotels which the Company has
grown into by taking some ownership interest in select hotels in its
key destinations.
Transat generates approximately
70% of its revenue from Canada:
40% from travel by Canadians
traveling to the Caribbean and
Mexico on all-inclusive packages,
and 27% from travel by Canadians
to Europe, mostly in the summer.
The remaining 30% of total revenues come from outbound trips
from Europe; European travelers
to Canada; and inbound services,
retail distribution, and other ancillary services.
© 2012 5i Research Inc. All Rights
Geographically, revenues are approximately 75% from the Americas and approximately 25% from
Europe.
GROWTH PLANS
Transat aimes to be a leader in its
field. It hopes to grow its market
share and tap into new markets;
increase organizational efficiency
and profitability; make the Company more competitive in Canada;
optimize its airline operations and
finalize and implement a development strategy for operational
information systems as cost management of this affects the industry’s already slim margins. To this
aim, it is currently restructuring its
operations, which may not produce
results for a year or more.
ANNUAL Results
On December 14, 2011, TRZ
reported its annual results for fiscal year ending October 31, 2011.
Revenues were up C$159.3 million, from C$3.49 billion to C$3.65
billion, driven by higher average
5i Opinion
selling prices resulting from fuel
surcharge increases. Revenue
growth was held back by a 0.5%
aggregate decline in the number of
travelers.
TRZ’s operating expenses rose
by C$256.9 million or 7.6% from
C$3.37 billion in 2010 to C$3.63
billion, mainly due to higher fuel
costs and the addition of five Airbus 330 aircraft to its fleet. Aircraft
fuel costs rose C$145.3 million or
48.1% during the year. Operating
expenses in the Americas were up
11.8%, offset by a 3.9% decline in
Europe. As a percentage of revenues, operating expenses increased
to 99.2% from 96.4% in 2010.
VALUATION
The Company recently shifted its
focus to reducing its costs, thereby
the FY2011 results were exceptionally dissapointing. Transat has now
reduced its seat capacity in order to
protect profit margins. It has gone
through a restructuring and to realize the benefits from this restructuring will likely take an additional
12-18 months. The Company does
not expect to see a return to profitability until FY2013. The strategy
is also risky as lower seat capacity may have negative impacts for
travellers who may choose another
travel carrier if they cannot get the
travel package they want.
has repeatedly disappointed investors. With a stock down more than
60% in 2011, and a bad history of
“surprising” investors every so often, we don’t believe the company
is going to regain its previously
high valuation levels. Yet its shares
still trade at 18 times price-toearnings, as supposedly investors
believe the worst is over. That may
or may not be true, but it will be a
high price to pay as an investor if
the worst for the company is not
over.
KEY RISKS
The holiday travel industry in general is sensitive to business conditions. Economic factors could have
a negative impact as could factors
beyond the Company’s control,
such as natural disasters, weather
conditions, and pandemics. Additionally, the Company faces fierce
competition, fluctuations in
foreign exchange and interest rates,
fuel costs and supply, changes in
the industry, dependence on its suppliers, dependence on technology,
and dependence on key personnel,
to name just a few. The competitive
landscape is such that new entrants
can often practice extremely aggressive pricing when they enter
the market, and all industry players
suffer until someone blinks or the
new entrant backs off. It is a tough
environment in which to operate.
Considering these execution risks
associated with Transat’s strategy,
and the company’s very uncertain
historical operating history, it is
hard to get excited by the company’s business prospects in the
next few years. The stock used to
be a strong growth story, and now it
is likely a broken growth story that
© 2012 5i Research All Rights Reserved.
Summary and Investment Recommendation
Transat suspended its dividend in
2009. That hurt the stock. Its stock
was clobbered again in 2011. It
operates in a brutal industry. It is
undergoing a change in business
plan that might take two years to
implement and may or not be the
right strategy. In 2009, the company raised $55 million, at $13 per
share, and investors who participated in that deal have lost about half
of their investment so far.
If you expect the stock market to
surge and Transat to suddenly and
miraculously fix all of its probelms
faster than planned then buy its
shares. For everyone else with any
common sense, take another airline
in the other direction as fast as possible.
The stock is down 65% in five
years, not our type of stock.
RECOMMENDATION:
Volatile earnings performance.
Vulnerable to competition.
May never get a growth multiple
”D”