Company Overview: SeaLink Travel Group Limited (ASX: SLK) engages itself in tourism and public transport services. It has a presence in Australia and the international markets in London & Singapore. The company operates a diverse multi-modal transport business, with presence in both land and marine transport businesses, which includes Transit Systems’ Australian public bus, light rail and international public bus transport operations.

SLK Details

Growth in FY21 Performance Driven by Acquisition & Contract Wins: The company has moved over 207 million customers in FY21 via ~3,800 buses, 117 vessels and 24 light rail vehicles. It is also wary of environmental concerns and is focused on zero-emission technology. In this regard, it has recently placed one of Australia's largest orders for electric buses.

JV Agreement for West London Bus Operations:

On 22 September 2021, the company has entered into binding agreements to form a JV with RATP Dev UK Ltd. The proposed JV is expected to be named as RATP Dev London Transit Ltd (RDLT).

• The transaction relates to SLK’s current West London public bus transport service operations conducted by its wholly owned subsidiary Tower Transit Operations Ltd (TTOL).
• RDLT plans to acquire the operations of Westbourne Park London TTOL bus operations and those of London United Busways Limited and London Sovereign Limited.
• On completion of the transaction, TTOL’s immediate parent Tower Transit Ltd will hold a 12.5% interest in RDLT.
• The parties under consideration intend to complete the transaction in December 2021, subject to certain precedent conditions.

Look at FY21 Performance:

The company delivered decent performance during the year with improvement in top-line and bottom-line figures.

• The Group posted record revenues of $1.17 billion in FY21, reflecting an increase of ~88% over FY20. The growth has been aided by the impact of TSG acquisition, new contract wins, and rebound in performance from Marine & Tourism segment.
• Underlying EBITDA grew by 85.2% to $167.5 million in FY21, driven by decent EBITDA contribution from Marine & Tourism despite the COVID-19 headwinds.
• There has been an increase in depreciation and amortisation costs during the year, owing to the impact of TSG acquisition.
• On the back of the stellar performance during the year, the management declared a fully franked final dividend of 9 cents per share.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 51.81% of the total shareholding, while the top 4 constitute the maximum holding. Smith (Neil Espie) and Bennelong Long Short Equity Management Pty Ltd  are holding a maximum stake in the company at 28.68% and 5.80%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported a turnaround in net margin performance to 3.2% in FY21, compared to negative 2.2% in FY20. ROE also improved to 6.3% in FY21, from a level of negative 3.6% in FY20. It ended the period with cash & short-term investments of ~$104 million and total debt of $465 million as of 30 June 2021.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Safety Risk: The Group’s line of business and operations is prone to the risk of safety of its customers as well as employees.
• Regulatory Risk: Its operations is also exposed to prudent regulatory measures, which can have an impact on its profitability and ease of doing business.
• Asset Risk: SLK depends on its physical assets and their performance for continued cash flows, and any damage or impairment to those assets could impact the Group’s performance.

Outlook: The company expects to continue with its growth momentum moving ahead and plans to increase its tendering capabilities. It also plans to improve on its facilities and explore value accretive opportunities for acquisitions, both at the domestic and international levels. SLK is optimistic about its business prospects going forward, underpinned by increasing liquidity and contract wins. It also anticipates warm weather and increasing pace in vaccination to be the likely catalyst for growth for Marine & Tourism in late H2FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SLK is trading below its average 52-weeks’ levels of $5.670-$10.640. The stock of SLK gave a positive return of ~23.45% in the past one year and a negative return of ~17.83% in the past three months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ median EV/Sales, considering the increase in debt-to-equity ratio, impairment risk, and uncertain business conditions due to COVID-19 spread. For the purpose of valuation, few peers like Aurizon Holdings Ltd (ASX: AZJ), Qube Holdings Ltd (ASX: QUB), Alliance Aviation Services Ltd (ASX: AQZ) have been considered. Considering the expected upside in valuation & current trading levels, impressive performance in FY21, growth in top-line & bottom-line, agreement to form a JV for West London bus operations, gradual easing of travel restrictions and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $7.37, (as on 19 October 2021, 02:50 PM (GMT+10), Sydney, Eastern Australia).

SLK Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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