Western & Oriental - Buy at 1.5p

The travel sector is currently experiencing some difficult short-term issues. Volcanic ash, the economic downturn, weak sterling and frequent strikes by militant employees have significantly harmed the bottom lines of many UK companies in recent months. While AIM listed Western & Oriental has suffered like most of its peers its investment case is a little more compelling. With recently released results being ahead of management expectations and the shares currently trading at a discount to net cash, our stance is buy.

Key Data

Spread: 1.25p - 1.75p

Market Capitalisation: £5.39 million

Net Cash (at 31/03/2010): £6 million

Number of shares in issue: 359.66 million

Ticker: WEST

Contact: David Howell, 020 7821 4078

Company Description

Founded in 2002 Western & Oriental is a specialist in luxury travel, operating as a travel agent, tour operator and event organiser. Listing on AIM in March 2006 the firm originally had three divisions - Western & Oriental Travel, Regent Holidays and The Mediterranean Experience. However, between its IPO and the end of 2007 an acquisition spree significantly expanded the operations. The 12 companies bought in that period are:

- At IPO - Ranch America, a provider of holidays to high end ranches in the US, for an initial £300,000 and Lyton Cooper, a skiing, Hawaiin holiday, conference and incentives and corporate voucher redemption business, for an initial £945,000.
- April 2006 - Travel Management Team, a Yorkshire based conference and incentive travel business, for an initial £250,000.
- August 2006 - Harlequin Worldwide Travel, a luxury tour operator based in Essex, for £469,362.
- September 2006 - South American Experience, a specialist tour operator based in Pimlico, London, for £1,753,593
- November 2006 - Made to Measure Holidays, a provider of tailor-made luxury ski and summer lakes and mountains holidays, for an initial consideration of £420,573.
- January 2007 - Tropical Locations, a luxury tailor-made holiday provider, for £175,000.
- July 2007 - Key2Holidays, a specialist tour operator offering holidays and travel principally to Dubai, the Middle East and the Indian Ocean, for an initial £1,700,000.
- July 2007 - Eclipse Conference Management, which operates a Conference and Incentive travel business based in Central London, for an initial £3.1 million.
- September 2007 - Villa Select, a luxury villa operator, for an initial £2,491,947.
- September 2007 - Galka Golden Tours, a luxury tour operator based in Kiel, Germany, for an initial €500,000.
- December 2007 - Rainbow Tours, a specialist tour operator to Africa, for an initial £4,169,046.

As it stands today Western & Oriental operates through two divisions. These have been consolidated from the acquired businesses after the company suspended its acquisition strategy in 2008 in light of the worsening economic conditions. 

W&O Travel is the company's tour operations business and following a recent re-branding mainly trades under the W&O Travel brand. The Regent Holidays and Key2Holidays brands do remain to a certain extent however. 

The Conference, Incentive & Business Travel segment is headed up by the W&O Events brand. W&O is a specialist event management agency and is made up of the former Eclipse, Lynton Cooper and Travel Management Team businesses. Typical events organised by the company include award shows, product launches, conferences and the like, with other services including travel management and motivational teambuilding events. Clients are mainly in the automotive, pharmaceutical and finance industries.

Financials & Recent Trading

Results for the six months to 31st March 2010 showed many signs of improvement after the economic downturn hit trading in 2008 and 2009. Total revenues for the half were down, as expected, by 12.3% to £24.9 million. Certain brands however put in a good performance, with the Tropical Locations and Key2Holidays businesses showing growth of over 50%. Administrative expenses fell by £0.1 million to £4.8 million and actions taken to further reduce expenses are expected to be seen in the second half. At the pre-tax level (before separately disclosed items) the company made a loss of £0.9 million from a profit of £0.2 million in the first half of 2009. These was as a result of the lower sales, a decline in higher margin event sales hitting margins, the previous period enjoying income from certain forward exchange contracts and as Easter fell into the second half of the year.

Across the divisions, the W&O Travel business posted revenues up by 1.2% at £16.7 million as consumer confidence improved and sales initiatives targeted at certain products delivered positive results. In W&O Events, revenues fell by 27% to £8.7 million as clients in the automotive and financial sectors in particular were affected by the economic downturn. At the period end the order book across the business stood at £21.6 million, a 14.3% year-on-year increase, the rise coming mostly from the travel business. Another encouraging sign is that here forward bookings have increased from an average of 8 weeks forward to 12 weeks.

On the balance sheet cash stood at £6 million at the period end and the company was debt free. While there was a £1 million cash outflow in the period cash balances actually rose as cash flow was boosted by the proceeds of a £2 million placing just before the period end. The funds were raised at 1.5p per share - a 29.4% discount to the then market price. They are to be used to fund organic growth via new marketing initiatives, including the hiring of a new sales manager and search engine optimisation initiatives. Several directors took part in the placing but contributing £1.5 million, giving it a 27.8% stake, was Options Cassoulides, a company quoted in Cyprus which has a pan-European conference organising and a printing business. Options Cassoulides has confirmed that it will retaining the shareholding as a trading investment.

Like many others in the industry Western & Oriental also recently announced how it had been affected by the closure of European airspace following the eruption of Icelandic volcano Eyjafjallajokull. The main impact of the closure happened at a time of slow activity for the group, with the skiing season just finished and the summer season only just begun. Any significant costs associated with the event are expected to be separately disclosed in the 2010 full year results.

Management

David Howell has been Chairman of Western & Oriental since December 2005. He was previously the Chief Financial Officer of lastminute.com and Group Finance Director of First Choice Holidays. Howell is currently a Non-Executive Director of The Berkeley Group Holdings, Aquis Hotel & Resorts SA and Blue 360 Grados SA.

Group Managing Director Ian Neale is also a travel industry veteran. He worked for British Airways Speedbird for nine years before moving to The Travel Business Limited where he headed up special events and conferences for a number of the UK’s leading blue chip companies. He went on to co-found two niche travel companies - Simply Tropix and Worldwide Sales & Marketing before moving to online travel company deckchair.com as Commercial Director.

Kerry Golds, Tour Operations Director, joined Western & Oriental in January 2007 and is responsible for the tour operating businesses. He previously worked at Travel2Travel4 between June 1985 and February 2006, playing a key senior management role throughout the development of that business.

Bull Points

- consumer confidence appears to be returning slowly to the travel sector

- resilient performance from the Travel business considering the economic difficulties

- strong net cash position and the company is debt free

- recent cash injection from Options Cassoulides is an encouraging sign

Bear Points

- markets remain competitive following economic downturn

- many short-term issues remain in the travel industry

- Sterling remains weak against the Euro and other major currencies, discouraging holidays to these destinations

- British Airways strike affects the company as it is a preferred flying partner

- has not yet made an annual profit during its time on the market

- retained losses stand at £9.9 million so dividend payments look to be a long way off

Forecasts

* EBITDA forecast
Source: Company accounts & Collins Stewart

Recommendation

Shares in Western & Oriental have performed terribly since the company listed, currently being down by 93% on the IPO placing price of 22p. At the current 1.5p they trade on a forecast price to earnings multiple of 5 times for 2011, which falls to just 2.1 times in 2012 should forecasts be met. We understand that the market does not rate the firm highly due to its loss making history and current troubles in the industry, but should these forecasts be met we believe that the shares could be worth several times their current value. Even if these forecasts are not met we still rate the company highly as a long-term play on the growth of the travel industry. What's more the £6 million of net cash, which equates to 1.67p per share, provides significant downside protection. With the shares having dipped slightly today we see this as an ideal entry point. Buy.

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