Cox & Kings : Buy when everyone else is pessimistic

Cox and King's stock has been de-rated and saw a severe fall after their acquisition of Holiday Break. But as they say, buy when others are most pessimistic. Let us look why.

The stock should be looked at fundamentally for FY13 and FY14 perspective.

HolidayBreak(HBR) revenue is highly cyclical with 6 months of high EBITDA ( Apr-Sep) and other 6 months of negative EBITDA ( lean period Oct - Mar). Now since  only the last 6 months are being added for FY12, consolidated profits will fall drastically for FY12 ending on Mar 12 for Cox and King.

For the same reasons, EBITDA margins are expected to crash to 21% for FY12, but will rise again to 43-44% for full year FY13, as HBR also operates at 44% EBITDA range.

The prime concern is the high D/E of 3.3 on FY12E, which will fall to around 1.9 by FY14. (There is a moratorium on principal payments).

Strong operational cash flow will see Cash EPS rise to around 30 in FY13E and 36 in FY14E.

While Cox and Kings have made 7 acquisitions in the past 5 years to grow
inorganically, Holidaybreak Plc acquisition costing ~£312 million (~2,200 crore)  will still be a very big challenge.

HBR has almost stagnant revenue and profitability. So realization of synnergies, especially during the lean half of the year will drive things around.

While domestic business of Cox and Kings is on a sound footing, however from FY13 onwards HBR will contribute around 62% of the consolidated revenues. Hence, any slowdown in Europe will moderate revenue growth and profitability for the company.



Let us look into the HBK acquisition in more details :

The deals provides opportunities to
a) Scope of cross selling
b) leverage combined volume across suppliers & partners > Margin lever
c) Better utilization of HB's lean period


Holiday Break mainly operates in four verticals with revenues shares as -
Adventure (22%),
Hotelbreaks(27%),
Education(27%) &
Camping(24%)

Adventure: Provides adventure trip solutions such as wildlife, trekking and scuba diving through its three brands namely Explore, Djoser, and Regal.

Synergies with C&K:
1. Cross-selling HBR products to C&K markets in India, RoW and Oceania
2. Ready for immediate launch of HBR's market ready bouquet of adventure products
3. Combined business volume of C&K and HBR to give them better bargaining power with suppliers

Hotelbreak: Provides domestic short break trips in the UK and the Netherlands through its brands Superbreak and Bookit respectively. Attracts nearly 0.9 million bookings annually.

Synergies with C&K:
1. Leveraging existing C&K operations to book European Hotels through Hotel Breaks
2. C&K outbound currently generates European hotel bookings worth ~US$51 million. combined with Hotel Breaks platform for hotels in India, Middle East and Far East, the combined volume is more than US$293 million

Education: Offers educational tours for UK schools and colleges to international destinations. PGL and Meininger has combined
capacity of ~14800 beds

Synergies with C&K:
1. Utilise existing capacities at PGL/Meininger properties during off peak season from existing C&K customer markets
2. Introducing PGL/NST brands in existing C&K markets for international tours into Europe, Use education centres for accommodation

Camping: Operates under a number of brands offering self catering mobile homes and pre sited tents across various European composites

Synergies with C&K:
1.Utilize existing capacities of Holidaybreak’s camping properties to existing C&K markets like India and Australia

So apparently this does not seems to be a case of diworsification. However management pedigree needs to be ascertained.

How quickly they rationalize the synergies and complete the integration is critical to their success.

Ador Fontech - A boring business and a great stock to buy

ADOR FONTECH

All financials and ratios

http://www.edelweiss.in/market/compfundcomp.aspx?co_code=5062

 

Key Business Highlights:

The company is in the welding services business, providing reclamation, fusion, surfacing and spraying solutions for machinery components in India. The primary business of Ador Fonetch is Life enhancements of vital machinery components. Right from its inception in 1980, the company is supplying products, services and solutions that help in conservation of mineral reserves as well as reducing down time and inventory costs.

Considering the growth in various user industries such as steel, cement, power, mining, metallurgical complexes, Ador Fontech’s core business of recycling and life enhancement provides an increasing window of opportunity.

The company has 2 revenue streams: Manufacturing & Trading

In the trading segment, the company exclusively represents in India renowned international companies like Euro mate, Cepro, Sulzer Metco, Gasflux, Arco plate for their products.

The products and services of the company can be categorized as follows:

• Low heat input welding alloys
• Hard-facing and wear resistant products
• Welding,cutting and welder safety equipment
• Fon reclamation services
• In-situ reclamation services
• Therma spray technology,services and solutions

Business Outlook - 20% of current biz is from cement plants; next largest sector is Steel. Mining is also increasingly becoming a large business (contributes 5% in revenues now up from 3% in the past). Mining and Auto's will be growth drivers in the future along with shipbuilding. Additionally recent investments in cement and proposed investments in steel also will contribute.

The company offers its services to mining industries, power plants, railways, road transport workshops, sugar mills, cement plants, fertilizer and chemical plants, defense workshops, shipping industries, oil drilling, refining and transportation industries.

Industry Outlook:

The size of welding consumables and equipment market in India is approximately Rs2,400 crore. Consumables account for roughly 70% and equipment for 30% of the market. Ador has 20% market share of organized players.

With strong growth in Infrastructure and engineering activities, the overall size of the machineries/equipments needs to be serviced in terms of maintenance/repair/reclaim is growing very fast.

The organized sector of the industry has only a few major players (unorganized or small scale sector account for almost 50% of Indian welding market) and the organized sector is expected to reap the benefit of economic development in coming years.

The manual welding techniques account for 80% of the Indian market, the automation sector is also gaining popularity as it provides sufficient economies of scale.

Key Positives:

• It’s a zero debt company and being in services, no major Cap-ex is needed; so there is no need to raise fresh debt. Further, the higher growth in bottom line in comparison to top line has reflected the improvement in operational efficiency of the company.          

• The company serves capital goods /Machinery segment as - “Life Enhancement / reclamation for Vital Machinery Components”.  

• Strong entry barrier: High domain knowledge, oligopolistic market structure. The increased complexity in reclamation welding, requirement of higher automation and the need for minimal downtime of equipment should favour the larger players like Ador vs. unorganized competition. 

• Number of key technological collaborations with global players to offer such services across wide range of equipment or machineries.

• The company aims to increase ratio of manufactured products to traded goods, focus on high growth products and end users in order to increase margins & drive bottom line. The contribution to revenue from the high margin services business has also been increasing

• Growing market size: With strong growth in Infrastructure and engineering activities, the overall size of the machineries/equipment needs to be serviced in terms of maintenance/repair/reclaim is growing very fast.

• Competitive strength - Reclamation welding does not have international standards etc. Therefore, internal knowledge becomes a key competitive strength and track-record is basically what brings in new business. Extremely difficult for a totally new competitor to gain market share. New product additions, ease in handling of machines/equipment etc. are providing new dimensions towards value added business solutions.

• R&D is a part and parcel of the business but is not typically visible in financial statements as it is mostly expensed in manufacturing/service costs. 

• Typically, the consumables (manufactured+traded) used in the solution  account for 90-95% of the bill. The labour and finishing services account for typically 5-7%. The consulting model may also explain the stable, relatively high margins, despite a slowdown in the Industrial segment that other welding companies are faced with. 

• Further, industries in general are benefited by way of greater productivity, resulting from lesser downtime. This unique predisposition, places the organisation on a consistent growth platform.

 

Key Risks:

Performance Warranties - Are an integral part of the business and will continue to be present. However, historically they have a track record of not having to pay any substantial warranties due to lower than promised performance of repair work/equipment.

          

HR - Substantial training needs to be provided to get a fresh technical person ready to face the customer. Attrition is ok but some employees do leave for MNC competitors both in India and abroad. However, the skills are so specific that hardly any cross-industry attrition happens. Growth in business is not proportional to employee growth especially with increasing automation.

         

This company is greatly leveraged on the exclusivity of contracts with its principals...and there are great many number of them but do we have any information as to the average number of years to expiry of these contracts.

Ador has several small scale companies run by the family which makes products that are then sold by it. However, that seems to be the nature of the business and Ador also purchases from third party manufacturers (local and abroad).

Steel is the major raw material and rising steel prices is a cause for concern. Depressed steel prices until 2009 helped the company to keep its raw material costs under control. However, with the rise in excise duty and other input costs going up, steel prices are set to rise again which will be a concern for Ador

High Capital Appreciation in spite of no P/E re-rating

Ador Fontech has returned 28% CAGR in the past 9 years. That's because even if there is no P/E re-rating and as long as there is EPS growth, there will be stock price appreciation.

As on March 31,2011 it had cash of Rs. 29.73crores. Netting off cash the company is available for about Rs 140 crores while it earns Rs 18.36 crores and gives a dividend yield of 2.56%. This is a stock with high RoE and low payout ratio. The company is reporting a RoE of 41% when more than half of assets are in cash.