Gullivers' itinerary short on history

The frustrating thing about the Gullivers Travel Group's prospectus is that it doesn't provide sufficient financial history to allow anyone to analyse how the company performs in adverse conditions.

The prospectus talks generally about the travel industry being hit by shocks such as the September 11 terrorist attacks, but says they "at worst have caused a flattening of the growth for a short period".

It also says the benefits of the group's diversification (it operates in the wholesale and retail travel markets and has separate brands for holiday makers and business travellers as well as a technology division) "were clearly seen with the group's performance around negative one-off events".

The small print towards the back of the prospectus notes that: "Since a substantial portion of airline travel, for business and leisure, is discretionary, the air travel industry tends to experience greater fluctuations in financial performance during general economic downturns than otherwise."

That sort of downturn "could have a material adverse effect" on the company's performance.

But the only historical financial information provided is for the March 2003 and 2004 years, both boom years for the economy and tourism.

Gullivers founder and managing director Andrew Bagnall said the group had been through a considerable restructuring and previously had been involved in activities other than travel.

"To try and squeeze out what was involved in the travel business was an almost impossible task," he said.

"It would probably have led to more misleading information than information that potential investors could rely on."

Generally, growth has been between 8 per cent and 12 per cent a year.

He disputed that 2003 and 2004 were boom years and said the impact of the latest Iraq war and Sars can be seen in the flattened 2004 results.

Sales for that year rose 4.2 per cent to $395.2 million while net profit was up 4.4 per cent to $5 million.

And the corporate side of the business took a hit when Air New Zealand shifted to its express model in November 2002, because it took six to 12 months to negotiate new contracts with customers.

Corporate sales dropped 10.1 per cent to $125 million in 2004 and the divisions earnings before interest, tax, depreciation and amortisation (ebitda) was down 27.6 per cent to $5.1 million.

Despite this one-off impact, Bagnall is pleased with Air NZ's changes. "I wish they had done it 20 years ago."

That's because travel agents have moved away from commission-based remuneration to charging a fee for service. Agents used to get 3.5 per cent for booking domestic travel or about $6 to $10 per transaction. Now they're charging service fees of between $20 and $30.

Although about 44 per cent of bookings were now made directly with Air NZ, Bagnall said the business that had stayed with agents was much more profitable.

Another shift resulting from Air NZ's changes and the move to discounting generally was that airfares had gone from accounting for about two-thirds of the cost of a holiday package to around one-third.

Bagnall said another trend was that an increased amount of people's disposable income was being spent on travel.

There isn't enough historical information to show whether the company's forecasts are consistent with past results.

It is forecasting that sales will be up 4.8 per cent to $414.3 million in the current March year, rising 12.8 per cent to $467.4 million in the following year.

Net profit is forecast to rise 56.4 per cent to $7.8 million this year and 7.2 per cent to $8.4 million in 2006.

The major reason for the jump in profit this year is that ebitda from corporate travel is expected to double to $6.7 million.

Bagnall said the company had won some big corporate accounts this year and with most of those running between three to five years, there was a high degree of certainty about the earnings outlook. The only revenue included in the forecasts for both years was already contracted.

He said the profit jump also reflected a change in the accounting treatment of volume bonuses the company receives: what would previously have been attributed to 2006 earnings was now being booked this year.

This reflected the more conservation approach required of a public company. "You can be a little more liberal as a private owner."

Investors can also take comfort in the fact that the company carries no debt on its balance sheet.

Bagnall said the board discussed the idea of gearing up ahead of the float but the company's auditors, PricewaterhouseCoopers, advised against it after doing extensive research on similar companies. They wanted "sufficient headroom to provide for exigencies".

It also means the company is well-placed to make acquisitions.

For those who think relying on the reputations of the people running a business is as good a way as any of judging a company's quality, Bagnall has managed to attract an impressive board.

The chairman is Jeff Todd, also chairman of the NZ Guardian Trust and the Dynasty Hotel Group and a director of Sanford and Southern Cross Healthcare.

A former managing partner of Price Waterhouse, he led the Todd Telecommunications Consortium in 1998 which investigated competition in the telecommunications market.

He is also a former director of the Reserve Bank and ANZ Bank and former deputy chairman and a commissioner of the Earthquake Commission.

The other non-executive directors are Rick Ellis, vice-president and managing director of EDS and former TVNZ chief executive; Rod McGeoch, chairman of Sky City and a director of a string of other companies; Rob McLeod, chairman of the Business Roundtable and head of the 1993 taskforce which looked at tax issues; and Paul Norling, founding director of Bancorp.

"I've been put through the mincer in nice ways by the prospective board," Bagnall said.

"This is an industry which is fraught with misunderstanding and a lack of understanding. It's always getting tangled up with the difficulties airlines get into."

While clearly the motivation behind the float is to provide Bagnall, 57, with an exit strategy, he said achieving public status was also a means of giving the company greater credibility.

There had been trade buyers who would have paid somewhat more than the float was realising, but the company's customers' and the staff's preference was for a float.

The company's airline suppliers were also more comfortable with the company remaining independent.

Bagnall said he was committed to remaining at the helm for at least a further 18 months and was keeping a 28.8 per cent stake in the company.

The prospectus shows that his share of the business is being sold for $115.7 million of its total post-float $160 million market capitalisation.

The offer includes businesses he has built up since 1976 and a number of businesses acquired between May 1993 and October this year, for a total cost of $8.5 million.