Rising Carbon Taxes And Aging Demographics Will Erode Margins

Key Takeaways

• Environmental regulation, demographic shifts, and geopolitical risks threaten long-term demand, operational costs, and revenue stability for Tourism Holdings.
  
• Disruptive mobility trends and lagging vehicle sales undermine the relevance and profitability of its traditional RV business model, increasing margin compression risk.
  
• Strong financial position, ongoing cost efficiencies, and strategic investments in technology and services position the company for sustained growth and margin improvement amid robust global demand.

Catalysts

Operates as a tourism company worldwide.

• The rising likelihood of carbon taxes and stricter environmental regulations across key markets could significantly increase operating and fleet renewal costs for Tourism Holdings, while also making road-based tourism less attractive, eroding long-term demand and putting sustained pressure on both revenue and net margins.
  
• Demographic shifts in major source markets, as aging populations travel less internationally and fewer younger generations show interest in traditional RV experiences, threaten to structurally reduce inbound tourism flows, potentially causing persistent weakness in fleet utilization and core rental revenues.
  
• Ongoing geopolitical instability, unpredictable border or travel restrictions, and elevated risk of future pandemics expose the business to abrupt, prolonged shocks to international tourism, increasing volatility in revenue streams and undermining the stability of earnings.
  
• The company's heavy capital intensity-visible in high and occasionally anomalous non-fleet capital expenditures-combined with lagging vehicle sales in North America and compressed ex-fleet margins, exposes it to negative operating leverage if demand weakens further, increasing the likelihood of margin compression and weaker returns on funds employed.
  
• Accelerating adoption of alternative mobility solutions, electric/autonomous vehicles, and expanding competition from peer-to-peer platforms may undercut the long-term relevance of Tourism Holdings' traditional RV offering, pushing down volumes, underutilizing its fleet, and pressuring pricing and profitability across all regions.

Tourism Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tourism Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tourism Holdings's revenue will grow by 4.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 9.0% in 3 years time.
• The bearish analysts expect earnings to reach NZ$95.9 million (and earnings per share of NZ$0.57) by about August 2028, up from NZ$24.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.0x on those 2028 earnings, down from 19.8x today. This future PE is lower than the current PE for the NZ Transportation industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.09%, as per the Simply Wall St company report.

Tourism Holdings Future Earnings Per Share Growth

Risks

• The company reports continued growth in its core rentals business, with revenue increasing by 8% and EBIT in New Zealand up by 16%, indicating resilience and the potential for further revenue and profitability improvement as fleet utilization rises.
  
• Management emphasizes strong balance sheet health, reduction in build and capital expenditure costs, and no intention to raise capital, which supports the company's financial stability and allows for organic fleet growth that could bolster net margins and earnings.
  
• Merger and cost-efficiency initiatives are still yielding benefits, with further cost-outs expected in coming periods, which should support higher operating margins and free cash flow if effectively executed.
  
• The company expects to capitalize on global rental market growth, particularly in New Zealand and Australia, and foresees continued international tourism demand, pointing to secular trends that could underpin sustained revenue growth.
  
• Technology investments, fleet optimization, and expansion of non-fleet and digital services are positioning the company to not only weather cyclical downturns but also to improve revenue diversification and potentially deliver margin expansion over the medium to long term.

Valuation

• The assumed bearish price target for Tourism Holdings is NZ$1.55, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tourism Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$3.2, and the most bearish reporting a price target of just NZ$1.55.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NZ$1.1 billion, earnings will come to NZ$95.9 million, and it would be trading on a PE ratio of 5.0x, assuming you use a discount rate of 11.1%.
• Given the current share price of NZ$2.23, the bearish analyst price target of NZ$1.55 is 43.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.