ALLG – All Leisure Group

Synopsis of Investment Case

The All Leisure Group own and operate a number of leisure cruise ships aimed at providing cruise trips for the mature traveller. The crux of the investment case rests on that this is a strongly cash-generative business serving a specific niche market that is set for grow in the future. The business is currently facing economic headwinds driving down medium term profitability and margin but the decline is cyclical, not structural, and the share price has drastically over-reacted given the foundations have been laid by management for future growth and a return to higher margins. Another possible reason for the share price mistreatment is the superficially worrying balance sheet (especially at a time of investor fear and worry) as the company operates under negative working capital; I believe that this fear is overblown due to a misunderstanding of the nature of the company’s liabilities and will explain in my case why I feel that a negative working capital is a positive thing for the company. The most significant risk in my mind is that of a delisting as the company is heavily insider-owned and is currently trading at an extremely attractive price for the private owner relative to the earnings power of the business.

The Stats

Price – 26.0p
Market Cap - £16.1m
2011 Forward P/E – 6.2 (Panmure Gordon 4.21p forecast)
2012 Forward P/E – 2.6 (Panmure Gordon 10.2p forecast)
2011 Forward Yield – 7.5% (Covered 2.16 times, Panmure Gordon forecast)
2012 Forward Yield – 18.2% (Covered 2.16 times, Panmure Gordon forecast)
Price to Book Value – 0.71
Price to Tangible Book Value – 0.94
Price to Cash Flow – 1.2
Price to Sales Ratio – 0.19
5 yr Average Return on Equity – 29.2%
Net Cash - £6.8m
Sales 2010 - £82.6m
Sales 2005 - £31.7m
5 year CAGR of Sales – 21.1%


Overview of Operations

The All Leisure Group operates a number of cruise trips under four distinct brands:

The Voyages of Discovery:
http://www.allleisuregroup.com/voyages-discovery.html

Swan Hellenic:
http://www.allleisuregroup.com/swan-hellenic.html

Discover Egypt:
http://www.allleisuregroup.com/discover-egypt.html

Hebridean Island Cruises:
http://www.allleisuregroup.com/hebridean-island-cruises.html...

The group began with The Voyages of Discovery in 1997 and have added the other brands through acquisition, the latest being Hebridean Island Cruises acquired in 2009 from administration (a good time to be making cheap acquisitions!)

The company floated in 2007 in order to generate funds to grow the existing fleet of ships and expand the business. The company now owns three ships – the Discovery, Hebridean Princess and Voyager (previously the Alexander von Humboldt) and leases another, the Minerva.

In general, the company’s target market is the more mature and sophisticated customer. My parents have recently got into cruising and for Christmas I bought them the Berlitz 2012 guide to cruises and had a cheeky peek at what they said about the All Leisure Group ships to try and understand them better. Interestingly, the guide’s ratings corresponded closely to the group’s reported repeat customers figures:

“Customer satisfaction scores continue to be pleasing. On mv Discovery’s winter itinerary, 93% of passengers responding to on-board surveys intend to sail with us again. On mv Minerva, 96% of responding passengers intend to sail with us again, whilst on mv Hebridean Princess the proportion of passengers intending to sail on her again was 98%.”

The Discovery was a 3 star, the Minerva a 3.5 star and the Hebridean Princess a 4 star. The company like to boast about their repeat customer base and I think it’s a fair boast – a significant proportion of their revenues come from repeat customers and this is a good sign from a business point of view.

The most interesting observation I got from the guide was that the descriptions of these ships was very different to what you’d most likely think of when you hear ‘cruise ships’ – in my head I had the image of the Royal Caribbean adverts on the TV with the disco, the casino, the swimming pool etc but these ships are very different. For example, in the review of the top ship in the range – the Hebridean Princess – the review actively boasted that it had no amenities with the caveat that “You wouldn’t need it on this ship.” Instead of a disco & swimming pool this ship has a library and guided talks about the history of the ship’s various destinations, with the main activity of the day being ‘dinner’! The company has clearly carved out a niche for their target market and caters to them exclusively. They appeal to a demographic that is only set to grow in the future and it is obviously the intention of the company to capitalise on this growing market; a press announcement from September states:

“Our research shows that demand for cruising amongst our target audience has increased over the past few years and in order to continue to meet and exceed customer expectations, we have expanded our fleet as a direct result of specific customer feedback. We aim to be proactive in what is a challenging time for the economy and travel industry as a whole and see 2012 being an exciting year for All Leisure Holidays and our three discovery cruising brands.”
I’m quite a fan of the strategy this company has plotted out here and I think they have a highly defensible market niche with solid growth opportunities for the future. The current headwinds are all cyclical issues* due to the poor economic situation, not long term structural challenges, but these cannot last forever and even under these poor conditions the company is still able to make a respectable profit.

*N.B. The company also had issues arising from the Egyptian unrest and the Icelandic volcano in previous years. Whilst this kind of ‘event risk’ is always present it masks the underlying ‘true’ profitability of the business. Here’s to hoping for an uneventful future!

Overview of Financials

Up until 2009 operating conditions had been very good, with the company achieving stellar growth from the reinvested capital and with a consistently high operating margin (14.2%, 11.4%, 11.2% and 11.3% for 2005-2008 respectively) and excellent return on equity (78.5%, 33.4% & 32.3% for 2006-2008 respectively) however the onset of the financial crisis significantly impacted the group’s profitability. To quote from their most recent trading update:

“As outlined in our half year statement of 29 July 2011, against a backdrop of unprecedented natural disasters and geo-political events, challenging market conditions, reduced discretionary customer spending, persistent low interest rates, increased oil prices and a weak pound, exacerbated by increased Air Passenger Duty and inflation, Winter trading is extremely challenging.”

Currently, everything looks bleak! Operating margin in 2009/2010 has tanked to 3.5% and 3.7% respectively and the company even posted an accounting loss last year due to having to mark their derivatives to market (as these are hedging derivatives this is largely an accounting timing issue and operating cash flow was positive in the year). However, all the issues cited are not structural but merely what you’d expect from a company in a cyclical industry – profits are lower in weak years for the economy but higher in strong years; a fair valuation would be based on the average expected profit across the business cycle.

On first analysis the balance sheet looks worrying given that, as of 30th April 2011, Current assets were £14.1m compared to current liabilities of £40.4m. Of these liabilities, the vast majority (£36.9m) are down as ‘Trade and other payables’ however further examination of the financial notes gives a more detailed explanation. Whilst the interim results don’t break it down, the last annual report shows that 73.4% of these liabilities are ‘Accruals and deferred income’ – assuming the same percentage in the interims would give £27.1m of these liabilities falling into this category.

So what exactly is this ‘Accruals and deferred income’? If it’s a liability, who is it owed to? What it actually represents is a discrepancy between the business receiving cash and when the business can record an operating profit. Customers pay cash upfront far in advance of the cruise but the business cannot record this cash as a ‘profit’ as the cruise hasn’t been provided yet and so a corresponding liability has to be created. As way of explanation for those who aren’t too familiar with the accounting involved here’s an example:

1. Customer buys a cruise trip, pays £1000 to the company:
a. Balance sheet shows: £1000 in cash as a current asset and £1000 in deferred income as a current liability. The deferred income liability perfectly ‘cancels out’ the cash asset so the book value is unchanged, hence…
b. Income statement shows no change

2. The company provides a cruise to the customer at a cost of £600
a. Balance sheet shows: £400 in cash as a current asset and £0 in deferred income as a current liability. There is now a net gain in book value of £400 so…
b. Income statement shows a £400 profit

So in reality this large liability isn’t that bad at all. Once the profit is realised it disappears and the fact it is growing shows the business is expanding. In fact, I’d argue that the occurrence of this liability is actually a bonus! Let me explain why I think this is so: as the business grows, this item will always expand as more customers pay more cash up front. The accounts confirm this, as the ‘accruals and deferred income’ line has grown from £17.8m in 2008 to £24.5m in 2010. This cash is a free form of financing for the company – there are no interest payments to be made on what is effectively a short term loan from the customers – and the business can use this cash to finance its operations. Because the size of this ‘loan’ grows as the business grows, it means that the operating cash flow benefits from the expansion of the business. This can be seen directly in a comparison of operating cash flow to profits: 74.8p of operating cash flow per share has been generated in the past five years compared to profits of 38.3p per share.

This situation of negative working capital is unusual – most businesses require positive working capital and hence growing the business requires cash investment in more working capital to expand whereas here growing the business increases the size of the negative working capital and generates cash! As the ultimate aim of businesses is to generate cash this is a very positive thing and is a large part of the reason that this business can generate good returns on equity despite require large capex investment in the ships themselves.

Once this liability is understood, the balance sheet actually looks in considerably better shape with no debt and £6.8m of net cash as of April 2011. This will have been boosted by the profits from recent trading as well as the recent £2m awarded due to a victory in a court case against an insurance company.

Another nice little perk is that the company is taxed under tonnage regulation for ships and does not pay the usual corporate tax. As a result, taxation expense is very low, in the low single digit range. More profit for the shareholders! I’ve had a little look on Google for any kind of indication that this tax situation may change in the future and can’t find anything so I’m assuming this will be the case going forward.

Discussion of Management

The board and two other senior executives between them own 73.5% of the business so there’s a big incentive for the directors to behave responsibly in running the business! If anything this level of ownership is too high and creates delisting worries. Experience wise the board’s history is very impressive, with all board members having extensive travel and leisure experience. A number of the directors bought shares back in July 2010 for 42p, significantly above the current market price. Total management compensation in 2010 was £895k, up from £803k in 2009. This doesn’t seem completely unreasonable although the rise from 2009 to 2010 doesn’t seem particularly warranted given operating performance has yet to recover.

Discussion of Risk Factors

The company lay out the risks involved with the business in their annual report so rather than repeat what they say there I’ll just add some of my own commentary to the ones I think are significant.

The economic risk is a big one due to the company being in a cyclical sector, operating in multiple currencies and being exposed to the oil price. The company do manage this risk to an extent using derivatives to hedge their exposure but this risk will always be present and if you believe the economy has further down to go this could push the business into negative profitability given operating margins are already down to ~3-4%. I’m a believer in regression to the mean and don’t believe that the economy will be terrible forever; given that the vast majority of business value comes from the profits many years into the future I’m a holder on the long term view of the business and hold no strong opinion about the short term prospects.

Event risk is also always present but I consider this as only a hindrance to short term profitability. An allowance should be made in the valuation for this, but so long as any event doesn’t affect the risk of the business as a going concern I don’t consider it worth losing sleep over.

The key risk from a private shareholder perspective now must be the temptation of the management to take the company private. 71.8% of the company is not in public hands so it doesn’t seem like it’d be difficult to organise a delisting if management was so inclined. If, as I believe, the company is trading at a significant discount to a reasonable estimate of business value then this temptation must be significant and this risk should be considered to be high.

Valuation

So, how much is this business worth? I shall assume that operating margin in good times is 11.2% and in bad times is 3.5% (taking the lowest of each margin achieved from 2005-2008 and 2009-2010 respectively). If we make the assumption that good and bad times occur in equal frequency, this implies an expected long-term average operating margin of 7.35%. Sales for 2011 are forecast to be about £89m, implying an expected long term profit of £6.5m at current sales levels. If this is reasonable, then it implies the current business is only trading at 2.5x average ‘expected’ profit over the business cycle. Even if my assumptions are too optimistic, this is a huge margin of safety. This seems exceptionally harsh for a business that has no debt, net cash, a strong sales growth record, good cash flow generation, a high average return on equity and a solid, defensible market niche.

Whilst I don’t like setting target prices I feel the true value of this business is many multiples of the current market price but I don’t know when this will be realised – I suspect it may only be when the economy fully recovers and I have no idea if 2012 will be the year for this. I picked this share for the competition as it seems to be a bit under the PI radar at the moment and I think the discrepancy between price and value is huge and offers good prospects for the longer term investor. I own this share for the long term growth prospects and the recovery play and whilst I don’t know if it’ll do the business for the share competition it looks to be a decent investment for those with a longer time horizon.

Best of luck to all in the competition and as always DYOR!

Mark

I might be wrong but does the Queen herself not occasionally hire the Hebridean Princess for breaks around the Scottish Islands (I think they may have used this ship since the Royal Ship was taken out of commission some years ago).
I'm sure it was on TV a few days ago. Perhaps one of the local stations though.

Jesttech

Good spot Jesttech, indeed the Queen herself has hired out the Hebridean Princess for private cruises - it's that good!

http://www.dailymail.co.uk/travel/article-1299700/Queens-Heb...

http://www.dailymail.co.uk/travel/article-2045516/Hebridean-...

If anything the articles help give an indication of how specialist the cruises are and hence give a flavour of the market niche that ALLG are targeting - the mature, sophisticated and relatively well-off traveller. I really like how they have a defined market niche and aren't competing with the big P&O type cruises.

Hi Mark

Excellent post.

The nice thing about Roger Allard, the driving force behind the company, is he has been round the block several times, but is still well short of 60.

I suspect the risk of taking the company private is overplayed in your concerns. RA has plenty of money, so a quick win is less important than keeping his funding options open. He is quite capable of, for example, finding a nice chunk of cash-strapped Thomas Cook that he believes he could transform, and making them an offer.

More here: http://www.wtmlondon.com/page.cfm/action=ConfSpeaker/Speaker...

Hebridean was started by a passionate enthusiast who sold out for a decent price. It was then passed through hands of varying degrees of (in)competence. The problem is capacity - a 49-berth ship cannot have its performance transformed positively, because there is a revenue ceiling. On the other hand it can lose money, as the fixed costs are high. It needed a skilled operator, and will probably do very well for ALLG.

Can't argue that there may very well be decent recovery story here, although as you say, this may not be the year.

Thanks for the research

Jon

This situation of negative working capital is unusual – most businesses require positive working capital and hence growing the business requires cash investment in more working capital to expand whereas here growing the business increases the size of the negative working capital and generates cash! As the ultimate aim of businesses is to generate cash this is a very positive thing and is a large part of the reason that this business can generate good returns on equity despite require large capex investment in the ships themselves.

There is of course a flip side to that: if the business shrinks, there's a cash flow hit from the reduced size of the negative working capital as well as all the other, more usual problems of a shrinking business...

Gengulphus

Hmmm, managed to lose the post I had just written so a summary of the negatives as I see them:-

1. Spread - quoted today as 24-28p makes it difficult to make a profitable investment.

2. Corporate website - many parts are unchanged since 2007 when they listed, including information which is contradicted by more recent updates. Doesn't show much respect for minority shareholders in my view.

3. Key individual risk. Roger Allard is listed as Executive Chairman and owner of over 50% of the shares. I know nothing of his personal circumstances but his health, a divorce, an accident etc could have a major impact on the company.

4. Very difficult to understand the relative importance of parts of the business. Hebridean Princess is the best regarded ship but tiny compared with the 700 berths on other boats. They talk of private charter and school cruises but no idea how significant they are. Discover Egypt appears to be entirely subcontracted but their most recent trading update says they have contracted for no capacity beyond spring 2012. Does that mean the loss of minimal amounts of revenue, or a significant high margin, low cost revenue stream?

The investment is not for me, so I am not going to delve deeper, but offer the above thoughts for others to mull over.

Andy

Thanks all for the comments so far, raised some things I hadn't considered before.

Jon - Very much hope you are correct around my delisting concerns! It's probably the thing that worries me the most on a long term view of things. I agree around Roger Allard's CV - it's highly impressive and gives me the confidence that he has the capacity to grow the company successfully and to navigate these tough waters with some smooth sailing (sorry, couldn't help myself on the puns...)

Gengulphus - Very true, a sharp contraction in sales could be a big worry but the trend, even in the past few difficult years, has been a margin contractions with sales growth continuing. The net cash position with no debt provides some comfort; a risk well worth bearing in mind though and monitoring.

Andy - Always good to hear a contrary opinion as we all need our positions challenging, thank you. With regard to your points:

1 - The spread isn't great but I've found you can buy inside the spread to some extent; as I intend to hold my position in a timescale measured in years and not so much as a short term trade it affects me much less on an annualised basis - I wouldn't recommended this share for anyone with a shorter time horizon. As I believe the upside here is many multiples of the current price I'm comfortable taking the spread.

2 - Agree that some parts of the website are out of date but it's not the kind of thing that bothers me that much; if I saw the same degree of shoddyness in their operational performance I'd be more concerned. I think this is the kind of thing that will worry some investors a lot and others not much, so each to their own in this regard.

3 - Indeed this business does seem to be the 'brainchild' of Roger Allard to a large degree and if he were to unfortunately pass away this could create some issues although given his age this doesn't seem that high a risk yet. I'd imagine the same could be said of a large number of companies with key personnel though so it's not put me off that much.

4 - Agree that the Hebridean Princess is likely a small contributor based on the size but the other , larger vessels also have very good percentage rates of repeat customers - all in the 90's - so I wouldn't write them off either as being poor vessels. Discover Egypt is in fact broken out in the financial notes as it is them acting as a 'Tour Operator' rather than pure cruising. Here's the figures for reference (badly formatted! sorry):

Year / Cruising / Tour Operating
2010-Sales / £74,490k / £8,116k
2010-Profit / £-1,324k / £313k
2009-Sales / £64,979k / £8,615k
2009-Profit / £4,130k / £-280k
2008-Sales / £58,524k / £8,988k
2008-Profit / £8,154k / £666k
2007-Sales / £36,597k / £8,487k
2007-Profit / £4,606k / £474k

As you can see the cruising side of things is the big growth area and the main profit centre in good times. Discover Egypt has been largely flat.

As for your comments around the trading statement I've interpreted it differently, as I don't think they have any plans to stop Discover Egypt at all. For reference, here's the relevant part of the statement:

"Understandably, in view of the situation in MENA, sales are down to Egypt; prior to the end of January this year, sales to Egypt were strong. We are operating a limited programme this Winter and are pleased that for our committed aviation load factors for Luxor, sales to the end of 30 April 2012 are over 80%.

As in the past, we have no financial commitment on the ground and have not contracted any aviation capacity for Summer 2012.

Bearing in mind all the upheavals in Egypt, we are satisfied with current trading and are doing considerably better than our competitors."

This implies to me that the business may suffer in the short term from the unrest but not in long term, which is what I'm more focused on.


Thanks again for all the comments so far everyone, very useful input.

Mark

Prelim results just out

All Leisure group plc

Preliminary results for the year ended 31 October 2011



Financial Highlights

· Operating profits before gains and losses on certain derivative financial instruments for the financial year increased by £0.3 million to £3.4 million (2010: £3.1 million) after one-off items, as highlighted in the pre-close statement published on 28 November 2011

· Full year pre-tax profit of £5.7 million (2010: full year loss of £2.1 million)

· Underlying operating profit of £2.6 million (2010: underlying operating loss of £2.0 million)

· Final dividend of 1.31p per share (2010: 1.31p)

· Business backed by net assets of £32.5 million (2010: £28.0 million)

Reassuring, rather than exciting, I think, but fine by me.

Jon

I've posted my comments on the Value Board

http://boards.fool.co.uk/somewhat-better-than-i-was-anticipa...

My thoughts on the update:

Like Stemis, I was initially disappointed actually with the results as the reported profit figures are flattered by a few exceptionals and the derivative movements but after further reflection I think things aren't too bad, although there's some points of worry.

Firstly, the adjusted operating figure looks quite bad - once you take out all the exceptionals and derivatives it's only £666k. However, it's worth considering how fair it is to completely exclude these factors in determining overall profitability. For example, the payment for the legal agreement covers costs of providing cruise services to customers in 2010 so can be considered as 'late revenue' rather than just money for nothing so should be assigned some value. Also, it's not really fair to exclude the derivative entirely from calculating earnings power as the point is to hedge currency & fuel costs - both of which are significant reasons as to why adjusted profit was down so much.

Having said that, what is the best way then to determine 'real' earnings power? One way would be to average the profit over the last two years to smooth out the fluctuations. Doing this gives an average profit of 2.9p, which still places the business on a single digit P/E (N.B. Doing the same for the last three years, the 'low margin' years, gives 3.4p). It's also worth bearing in mind that under good economic conditions in 2008 the company was doing 14.4p of profit on less revenue than is currently being achieved.

Secondly, I was a bit worried by the sharp drop in the 'deferred revenue' liability. Part of my investment thesis was predicated on this growing to generate cash flow as the business grows but this decreased for two reasons: The Minerva has been taken out of business for renovations and so isn't generating sales and, worryingly, sales are down 7% compared to the previous year.

Whilst we can't see exactly how deferred revenue has changed the 'Trade and over payables' is down £8.1m and is a large part of the reason operating cash flow is down so much. Whilst the Minerva part of this decrease is temporary, if sales continue to contract then it's bad news for a negative working capital business. The management put this down to a 'trend for later bookings' which if genuinely true makes this less worrying however it's hard to tell whether these purchases are being made later or just not at all; the higher purchase prices for bookings so far does offer some comfort though.

All in all, the results are about where I expected - no real improvement in operating performance but not a complete collapse either. I'm now more convinced that this share probably isn't going to do the business for the share competition given the outlook but I still like potential long-term value given margins are at cyclical lows and management have every interest to run things with a long-term perspective (So I like the investment in ship upgrades) so I think my original investment case still stands. Given the 7%+ yield at the moment at least I'm being paid to wait!

Summary of things I noted from reading through the report:

Positives:
Profit up sharply to £5.3m
Occupancy rates up to 83% from 81.5%
Selling prices raised 4% and 11% respectively for Voyages of Discovery & Swan Hellenic respectively, indicating some improvement in the consumer confidence.
Alexander Von Humboldt upgraded, effective increase of market value of €10m.
Minerva upgrade promising for 2013 results and onwards.


Negatives:
Adjusted profit down sharply to £666k
Negative operating cash flow, -£0.7m
Sales down 7% compared to this time last year.
Further turnover of senior staff, with the COO leaving now after the CFO last year and two other board members leaving.
Expect mv Discovery revenues to be down this year compared to last, despite 4% improvement in prices.
Expected bad debts of £0.8m arising from Alexander von Humboldt tour operator.
Revenues from the Egyptian tour operating business down 32.8%

The management put this down to a 'trend for later bookings' which if genuinely true makes this less worrying however it's hard to tell whether these purchases are being made later or just not at all; the higher purchase prices for bookings so far does offer some comfort though.

In the travel industry it is a happy day when you can increase sales at full price.

You are describing the typical Mexican standoff whereby if the co. is not discounting fewer customers buy. Margins look better, but volumes look worrying. I am confident the directors will be hunched over sales projection spreadsheets planning a discounting programme to ensure that every last cabin gets sold, at the highest possible price. Unfortunately the presence of a cruise ship on its side on nightly news bulletins has ruined their model for January, which is a very important booking month.

So it's wait and see, I think.

Jon

Not a favourite, although I admit to holding a few shares for a while now!

The longer time passes and the more I see of the market in which it operates, the less I like it as a long term investment.
It might present a modest recovery story, but that is seemingly all!

As you have pointed out, the business is effectively running on customer's deposits.
If things slow down they could have real problems

The whole model is prone to big moves up and down - oil price shocks (hedged, but at a cost), interest rate risks, currency risk, natural disasters, ship refurbishment, hijacking, etc. There are so many negatives and relatively few positives

What really concerns is the risk that this is a small business with a small balance sheet competing in a capital intensive and risky market.
Imagine if the Costa Concordia had belonged to ALLG - end of story!

Given the huge differences from one year to the next (each year seems to serve up another problem) it's also almost impossible to value.

I can think of many better places to put my money!

investorschamp

Mark Slater likes All Leisure, having raised his stake to 3.1% after adding 250,000 @31p last month !

http://www.investegate.co.uk/Article.aspx?id=201202141653424...

The Offer price is currently 37p today.

forward p/e of 22 seems a tad steep to say the least.....

one to forget for a year, 2 years out p/e is 4.66 FWIW.

Regards

Hi,

I rather like All Leisure, and hold a few in a family portfolio. They run a niche cruise line business, using smaller ships.

It's 60% owned by the Chairman, which will put off quite a few people, but that doesn't seem to have worked against shareholders to date.

The divi yield is about 5%, and they have recently refurbed one or more of their ships (it's a while since I looked at it, so can't remember the specifics), which together with a number of negative one-offs that affected previous year(s), means that profitability should bounce back and by my calcs the PER should look pretty low on current & future earnings.

Also, in my opinion we're at the beginning of a new economic cycle (i.e. an upturn) hence as investors we should be looking back at what profits companies achieved before 2008, and see that as the ballpark that could be achieved again in a few years' time.

On this basis, ALLG looks pretty good - it used to churn out £4-8m profit p.a. pre-credit crunch, so with refurbed ships that looks achievable again in my view.

So a £22m mkt cap looks appealing.

Horrible quoted market spread between Bid & Offer prices, but that's rarely a problem if you use a proper telephone broker for dealing in such shares (internet discount brokers are a false economy for microcaps in my experience, as you still pay a ridiculous spread (even with RSP price improvements), in return for a cheap dealing fee - whereas you can recoup several times the additional commission by using a proper broker to get well inside the spread, and usually also buy in greater quantity).

It wouldn't surprise me to see ALLG shares back up over a quid each in a couple of years' time, so at the 33p I paid they look good value. DYOR as usual, sorry this is a bit vague!

Cheers, Paul.

Hi all,

It has been a while since I've done an update here and there's been a few big events so thought it deserved an update. I'm currently in the process of starting my own business so am pretty busy right now but will try and do updates when I can. In tribute to Vailima I shall copy their style (http://boards.fool.co.uk/premier-foods-interims-what-took-yo...) as I quite like having an internal dialogue with myself...

So, a tumbling share price, dividend dropped and profits for the year expected to be below expectations. Not going well then?

Let's start on the negatives then, shall we? Indeed I doubt I'm going to be winning the competition this year but I'm a patient person - I'm more concerned about the intrinsic value of the business and how that has changed versus my previous assessment rather than what's happening to the share price in the short term. Trading has been weak, definitely not helped by the Costa Concordia disaster and a still sluggish economic climate, although I still think this is largely cyclical rather than structural. The lovely huge yield had indeed disappeared, although I'm actually pleased in a sense - it eases my concerns that the company will not have enough capital to make it through the current economic climate, especially now they've decided to make a significant acquisition...

Acquisition? In these conditions? Are the directors barking bad?

Well, I hope not. The directors own 74% of the company so if it's going to destroy shareholder value then the people who'll lose most are themselves! Actually, I'm quite excited by the acquisition as I think it increases the potential upside of the share and the method in which it was acquired pleases me - the directors could have sold themselves more equity at a bargain basement price and diluted my ownership but decided to raise debt to do so instead, predominantly from themselves!

It's quite an interesting acquisition as it's also clearly quite a distressed purchase - they paid £4.2m for a company that was bought by a private equity firm, HgCapital, for £180m back in the boom days of 2006. Not such a shrewd purchase by the PE firm but hopefully All Leisure will fare better at these prices. The sellers were largely two banks, HSBC & Credit Agricole, so they are probably not ultra-concerned about price and would rather just take it off their books as the company made an operating loss of £5.6m last year!

Oh great, a loss-making acquisition, isn't the company finding it tough enough as it is?

Well, the directors clearly think they can turn the ship around (sorry, will really try stop with these puns...) and see value in the long-term future of the business. It does look as though considerable synergies are possible and the directors make a good case for this in the acquisition RNS. This article on the acquisition here (http://www.travelweekly.co.uk/Articles/2012/05/16/40496/page...) seems to think that the company is "expected" to make a profit of £2m this year - an amount that would put the purchase price on a P/E of just over 2 if correct (as pointed out to me on the other place by SteMiS, 'expected by who?'. A good point! I assume this is someone associated with the transaction talking to the press as the article contains a lot of detail not in the RNS).

As someone who is genuinely focused on long term investing I think on average I'm happy with this acquisition. It does increase the risk, yes, but the directors have the most to lose from any mistakes so if they were significantly concerned by the viability of the company pre-acquisition I can't believe they'd have done this - they have to be pretty damn confident this is an offer too good to pass up to justify the risk to the existing business. What I was significantly concerned about before with this company I'm much happier about now though...

And what's that then?

Corporate governance. Before I was very concerned that the directors would just push for a delisting as the shares are so cheap, but two things have occurred since that reassure me these guys aren't looking to screw over the smaller shareholders. One, this impressive show of faith from the AGM statement to the small shareholders:

As trading is considerably more challenging this year than envisaged, the Board has unanimously agreed to waive the proposed dividend in relation to shareholdings held by the Board (74.01% of the issued share capital), but have voted to pay a final dividend of 1.31p per share payable on 2 May 2012 to all other shareholders, in recognition of the strong underlying asset-backed balance sheet and brands, resulting in a full year dividend of 1.95p per share.

Wow, what a thing to do! I can't understand why the directors would ever do this if their next plan was to delist - they actively chose to waive money they were entitled to for the benefit of smaller shareholders. I'm still amazed by it now and I place a lot of value in management that are shareholder-orientated.

...and the other thing?

Ah, yes. This is an interesting one. Two very shrewd funds have bought in to the company at higher prices than the share trades at today - Mark Slater's Fund and swiss-based Argos Investment Managers. Both are small cap specialists with good track records who will have done their due diligence before investing and must believe there is good value here, and you can buy at prices significantly below what they paid! Also, these guys will certainly vote against any delisting event were to occur and have probably thought about the risk during due diligence and may have even asked management specifically about it.

So, where do you think the share price should be?

Well I'm rapidly carving out a niche for myself giving dreadful predictions on TMF so you may want to completely ignore my opinion! I'm still of the opinion that the share is woefully undervalued because the market is over-focusing on near term challenges. This is exactly the kind of situation I love investing in as a "time arbitrage", I'm happy to hold for years until the economic climate recovers and the value gets revealed. If anything, my assessment of intrinsic value has increased because I'm far less concerned about delisting outcomes and the potential upside is much higher if the acquisition were to be integrated successfully. The only scenarios I can see where I think I end up coming out behind would be outright bankruptcy through incredibly poor trading but I'd love to hear any bearish opinions & flaws in my analysis people can point out.

As to exactly how much I think the company is worth, it's obviously very difficult to say at the moment due to how uncertain the earnings power of the company is in the long term. Book value was 52.7p in the final 2011 results (and, assuming the company is able to recover the interim losses, should be about the same or higher come the final results) and I think it's fair to say the company should earn their cost of capital in the long run so I see book value as an absolute minimum, some 2.4x the current share price! These aren't intangible assets either, but real tangible assets like cash and ships. The company has traded as high as 4.4x book value historically which would imply a price as high as 232p (assuming no profits in 2012) if the market were ever to get that bullish on the shares again (unlikely, but we're talking about the dream case scenario). That's 10.5x the current share price. Broker forecasts are currently for 8.63p of earnings in 2013 which if true would put the company on a PE of 2.5x. Those are probably optimistic, but I'm hoping to be proved wrong!

All IMO, DYOR of course. Any other opinions, especially negative ones, would be most appreciated to help me fight my confirmation bias, endowment bias, overconfidence bias and of course optimism bias.

Happy investing,

Mark

Mark

Thank you for an excellent and thoughtful post, presented with style :-). Added to my watch list. Have a rec from me; it would be rude not to!

Regards

Vailma

Hi Mark

Travelsphere at that price looked like a great acquisition. They have been around a long time, have a huge and valuable database of past customers, but had become very staid and unenterprising. Ideal candidates for a quick slash and burn turnaround.

Unfortunately, what I hear is that very little has changed as yet. This is is rumour at two removes, as I am a long way from them in the trade, but I talk to people who had a keen interest in what ALLG would do, and they have been surprised at the lack of action so far.

So my view, FWIW is watch this space. They have rolled the dice big-style on this acquisition but the dice haven't settled yet. I think there will be plenty of opportunity for a purchase after a trading statement or two. I hold a few, but happy to sacrifice a few pennies of rise for safety.

It is probably worth restating the general point that ALLG are in the right space in the travel industry. Cruise and escorted travel are the segments with growth, because older people are the ones with cash.

Cheers

Jon

Thanks Mark for flagging this up, and presenting a great case for recovery. I may open a small position on this, but it will be small, for my overriding concern is the acquisition of Page & Moy, which
can go two ways:-

1) If P&M's losses are quickly reversed into a £2M profit, as hoped for by some commentators, it will be seen to be synergistic and the deal of the century, for the paltry purchase price that was paid. The synergies to both companies could easily bring us back to the pre-downturn EPS of 10-15p, (or more) In that scenario, a SP of 60-90p, using a conservative earnings-multiplier of say x6, is not far-fetched.

2)The problem for me might be if P&M's recent difficulties turn out to be more serious, and less transient than anticipated. In this scenario, if instead of a £2M contribution to profits we get a surprise contribution to losses, this would be a disaster for ALLG. I dont think that ALLG would survive more than 2-3 years in the current market with additional consolidated losses.

That said, I do think 1) to be much more likely than 2), and the high reward/risk ratio does justify for me a small position, but only one which will not make me to lose sleep over losing the lot, if things dont turn out as we hope.

Freddie

Given I've picked ALLG a second year in a row for my NFSC entry I figured it makes more sense to continue the last thread given much of the analysis I posted is still relevant. Also, I posted an update only a few months ago that covers my thoughts on all the developments that have happened in that period. My thesis is unchanged and so I won't bother just repeating myself.

The only news since my last update is the trading statement issued here, so I shall give my thoughts:

http://www.investegate.co.uk/all-leisure-group-(allg)/rns/pr...

I'll highlight some of the most interesting quotes. Firstly, my worries about the acquisition are further diminishing and I think there's significant upside possible here if management successfully execute on the integration. To quote:

"Both the "Travelsphere" and "Just You" brands, based at our freehold property in Market Harborough, have performed exceptionally well since acquisition and have made a better than expected contribution to the bottom line."

I like better than expected! They also offer this tantalising nugget at the end of the statement:

"The strategic importance of the acquisition of PMTG cannot be underestimated. Whilst restructuring costs will be incurred in the short term, the board is confident that the synergy benefits that it has identified will deliver a strong contribution to the bottom line in future years."

With the Swan Hellenic and the Voyager now back in service, the company is moving back to full capacity which should eventually demonstrate the earnings power here. I imagine it's highly likely that a lot of these short term costs (acquisition integration, ship upgrades) will fall in to FY2013 so it may take a few years yet before this can happen, however I'm patient and will happily hold so long as I think my thesis is unchanged. Investors focus excessively on the short term but it's the long term potential that really interests me here. Perhaps a silly choice for a competition focused on what happens this year, but I still really like it as an investment so I'm sticking with it!

Best of luck to everyone in this years competition (and in the rest of their investments!)

Mark

So ALLG just released their full year results yesterday - here's my thoughts:

The results at first seem very subdued. Revenue takes a large jump up but full year profits were tiny at £0.8m. What's there to be excited about? Well, 2012 is pretty much a transitional year for ALLG. Due to a weak cruising market (partly due to the Costa Concordia tragedy) and a fleet in need of a revamp the directors took the decision to pull three (out of four) of their ships out of service for a good part of the year for upgrades. Also, for one of their ships a third party charter pulled out and left the vessel out of service (during which they decided to do the upgrades). As a result, their cruising division showed a stonking loss for the year of -£6.9m - they say the loss of the charter 'contributed significantly' to this loss. However, this is in the past and we now have a fleet that's been recently upgraded and ready to operate at full capacity again. This appears to be paying dividends already:

"At the start of the winter 2012, mv Voyager was in the exceptional position of being 82% sold for that season prior to her inaugural sailing. Currently revenues per diem for mv Voyager are forecast to be 20% higher than achieved 2011/12 on mv Discovery. This is driven by the increased number of outside and balcony cabins and less capacity."

"Over the winter 2011/12, mv Minerva was out of service for just over three months, whilst a substantial technical upgrade was carried out. During this time the ship also underwent an extensive upgrade to both public areas and the 197 cabins. 73% of the cabins are outside cabins and clever use of space increased the number of balcony cabins from 12 to 44. A new observation lounge added to Promenade Deck increases the on board facilities. Passenger response to the upgraded vessel has been extremely positive."

So if cruising caused such a big loss, what made up the difference? Here we get on to what I see as being a very exciting development for ALLG - the acquisition of Page and Moy Travel group. They first announced the acquisition here where the headline figures got my attention. They paid £4.2m for a group doing £107.6m in revenues! How did they get it so cheap? The catch - it made an operating loss of £5.6m in 2011. Not great. The previous owners were two banks - HSBC & Credit Agricole - who ended up with it after the previous private equity owners, HgCapital, went bust with it in the 2008 downturn. It's probably worth noting at this point that HgCapital paid £180m for it. Whoa. Clearly they were far too optimistic but it's clear this business has done pretty well before in the past to have warranted such a price. Naturally the banks here just wanted this loss making business off their books so weren't price sensitive allowing ALLG to swoop in and nab it for a relative song.

At the time of the acquisition I was a bit worried as it seemed a big risk to be taking on such a loss making business given the current one wasn't firing on all cylinders either. However the heavy degree of insider ownership re-assured me that if anyone was going to lose big here through hubris it was going to be the directors so I trusted they'd thought this through (I very, very strongly prefer owner-operator shares. Never forget the power of incentives!). The annual results give more detail on the acquisition so we can learn more about what's going on here. Let's take a look at some figures for Page & Moy in 2012:

Full year results:
Revenue: £93.9m, Profit: £4.6m

Contribution to results:
Revenue: £60.9m, Profit: £8.9m

Balance Sheet Pre-Acquisition:
Tangible Assets: -£14.7m

So this tells us another reason why they got the business so cheap - it has negative tangible assets. This has pros and cons: pro, it means the business probably operates on negative working capital (like the cruising business) so expansion is an extra source of cash which can be used in the business. con, it means if things turn south the business is in trouble. That being said, the directors also state the business is a "low-risk model and has no forward financial commitment for hotel costs, transportation costs, or aviation capacity", which it probably needs to be to make negative working capital operation safe and viable.

It also says that the timing of the acquisition flatters the profits by £4.3m, so the combined entities made a loss in this FY. However, the major plus is that management have already turned the £5.6m loss in to a £4.6m profit. It hence means they acquired the business for less than last year's profits! What a wonderfully shrewd move by management. Revenue is down from 2011, yes, but this is due to cutting unprofitable lines of business. To quote the results again:

"Following a detailed strategic review of the Page and Moy Travel Group brands and product portfolio prior to its acquisition, a number of underperforming products and business lines have been discontinued for 2013. Ceasing to operate the ex UK coaching holidays and components of the Christmas programme was part of this strategy, along with the decision to phase out the Page & Moy brand and incorporate the profitable components of the business into Travelsphere's portfolio of tours. The Group then re-launched the Travelsphere brand as a value for money, yet quality product. The end of year results show this has been very successful and going forwards the flexible business model of our Tour Operating Division allows us to align our capacity to fluctuating demand."

This means the 'pro forma' results of the business in 2012 were:

Revenue: £160.4m
Operating profit: -£3.5m

However we now have all ships upgraded and back in action. Given the non-acquired business did £66.5m this year but did £80.4m in 2011 implies at least a boost of £14m in revenues just from ships coming back in. Stockopedia reckons that the brokers are putting them on £202m of revenue for 2013 (although these same brokers reckoned they'd do £192m of revenue this year and make a 5.2p profit - no idea how they thought that was possible!!) which seems high but potentially achievable given the ship upgrades in capacity and quality. For fun, let's imagine a set of 'pro forma' results that take the 2011 ALLG numbers (with no ships out of capacity) and the 2012 Page & Moy numbers and combine them:

Revenue: £174.3m
Operating profit: £8.0m

So this puts this hypothetical year (which is probably closer to an average year) on a P/E of 3 at the current share price! Now in this hypothetical year the directors are still complaining about how poor the results are due to the economic climate (they were in 2011 and in 2012's results,) so clearly they still see the margins here as being poor at ~4.6%. ALLG was doing solid >11% margins pre-2009 so clearly there's scope for improvement there (although I've no idea what P&M's average margins are). So, we have a business on a pro-forma P/E of 3 despite the E being disappointing. This is why I'm so very bullish on these shares and think there's still plenty more upside available when the true earnings power is revealed here in the next few years of results and the business gets re-rated to a more sensible valuation.

What are the risks here? Well, besides all the ones I've mentioned before in my other posts I think the big new one is balance sheet risk. The weak balance sheet of P&M means that the combined business only has £9.3m of net tangible assets and the previous tangibles are now intangibles. I think the benefit of increased earnings power here outweights this though.

Still bullish,

Mark

Thanks for that hard work Mark.

Any thoughts on how hard the price ran up before they were published?

I share your enthusiasm for the company. My only worry is that Travelsphere's great asset is its huge database. So the way to exploit it is to create endless tests of what each segment will buy, at different price points and margins. They can combine any elements of a holiday they like to create offers*. But the guy they have put in charge of marketing has a history of "brand" marketing, which is a very different skill set. We shall see, I guess.

Jon

PS When I visited some years ago they had just launched a week-long holiday to Las Vegas and Palm Springs, including a ticket to see Elton John in Vegas with your seat "guaranteed to be no more than 120 feet from the stage". I believe that particular venue has a huge stage, and no seats are more than 120 feet away, but that's marketing. Taking that as an example, you can test including a Grand Canyon flight, upgrading to a suite / downgrading to a cheaper hotel, poker tuition from a local expert, etc etc etc. The more you offer the market, the more chance of striking gold with the product / price combination that really strikes a chord.

So this week I attended the ALLG AGM (only my second, after LCG!) together with another Mark (longtermreturns). I actually turned up late to the meeting despite arriving at St Pauls with 10 minutes to spare - I couldn't find the Panmure Gordon offices! After a lot of wandering around and a few desperate phone calls to Carmensfella asking for help with my lack of navigational ability ("What do you mean you don't know the location of every London brokerage?!") I eventually stumbled upon it and met up with Mark so we went in. They were just about wrapping up some of the formalities but we were in time to begin grilling Roger Allard (The executive chairman) and Ian Smith (the CEO). There was only one other non-board shareholder there who also had clearly been on quite a few of the company's cruises. So, on to my notes:

I asked about the Page & Moy acquisition and how they'd manage to turn it around from a ~4% operating loss to a ~5% operating profit in the space of a year. Ian Smith said that the company had been previously badly mismanaged and had turned out losses for many years before. He said they'd specifically made changes in two areas - first, marketing spend. The company had been overspending on inefficient marketing channels so they cut this out and haven't seen an impact on sales. Secondly, their pricing strategy was a bit all over the place so they fixed that to make it more consistent. He said they expected to keep margins broadly where they are now (~5%).

We then had a bit of a general discussion around the business. Roger highlighted the high repeat nature of the business and how it's a large source of sales for them (60% for swan hellenic as an example). Partly because of this they see a lot of synergy from cross-selling business between P&M and the existing cruising business and increasing this level of repeat business further. They said they were delighted by the feedback they were getting from customers about the ship upgrades and how positive this was - they said that this kind of thing tends to travel quite well on the grapevine so this should feed back in to improved sales over time (they said per diem rates were up 11-20% on the refitted ships). Ian and Roger both repeatedly emphasised how focused they were on customer feedback and how important they felt it was to the business to be so close to the customer's needs.

They did say that overall they thought there was overcapacity in the cruising market generally (Neil Morris, the COO, cited an industry source showing number of passengers went up last year but ARPU went down) and that this was hurting them a bit although because their type of cruising is so different from your Royal Carribeans of this world they were partly insulated against this - ALLG's more relaxed, cultural cruises are a far cry from the typical type (booze, dancing & casinos won't be found on their ships!). It does make a difference though as ALLG have to price their cruises very differently to most cruise operators which make their money on the extras like drinks and the casino and hence offer much lower ticket prices. If competitors further compete on price with each other, it does have a knock on effect for ALLG's cruises. However they did note they were in a fast growing demographic that gives them a good long-term tailwind though (Over 55's) and see their competitors as helping bring general awareness to the cruising industry so when they mature they can move on to All Leisure's ships!

Mark asked about their leasing of ships and Roger said it simply to utilise excess capacity they have - a Belgian firm sometimes takes over one of their ships for their own cruises. I asked about long term margins in the cruising business, noting that they have historically fluctuated between around 11% and 4%. Roger simply said that that was pretty much the normal range and they would fluctuate between those extremes depending on the environment. He cited the rise in fuel costs since 2007 (although noted they had come off ~10% recently) and the low interest rate environment giving less income to his target market who typically rely on savings to fund their travel. He said that he'd been in the business for over 40 years and had seen it all before and higher margins would return eventually as they always do with these cyclical fluctuations. I asked if they expected to return to profit for the cruising division this year and he said they hopefully would be (Note: £4.6m operating profit from P&M last year, expected profit in the cruising division as well, market cap at £25m.... see where I'm going with this? :))

Mark then asked about their international sales and whether they were pushing there. They replied that currently UK sales are ~78% of total and they only intend to run English speaking cruises so any market they go for has to be English speaking. They have an office in Fort Lauderdale and felt that, especially with the acquisition of P&M, they have a good opportunity to push to grow sales in the American market. We then had a bit of a comedy moment as the other shareholder piped up:

Other shareholder: "Well, you don't want to be getting too many Yanks on the cruises. We met this American couple on our last cruise and they were just horrible, kept complaining about everything. Typical Americans."

*pause*

Mark: "It's ok, I'm Canadian."

All in all I felt pretty impressed by management and confident they were looking after the company well. The acquisition integration seems to be going great and they are even more bullish on the synergies in the long term (as was mentioned in the AGM statement). I also liked how friendly they were towards us 'unknown' shareholders and were happy to answer our questions in detail. The dynamic between the board was very good too - Roger didn't come across as an overly dominant leader despite his huge shareholding and would frequently defer to Ian on questions.

The price has come off a bit recently as the AGM statement was pretty downbeat on the short term prospects (even if it was more positive on the long term synergy benefits - good old short term market!) but I regard this as a great opportunity for longer-term oriented PIs to buy in. Whilst I think this year's earnings will be negatively impacted still from the acquisition integration and associated costs the long term view looks very positive and if they get to ~5% margins across the whole group (which is hardly an aggressive assumption given the historicals) they'd be looking at ~£8m of profits against a current market cap of ~£25m. I think this £8m figure has far more upside potential from the acquisition synergies and general improvements in the trading environment than downside potential, although there's always the risk of more Costa Concordia/Icelandic volcano type disasters which impair earnings in the short term.

As always, I have no idea where the price could go from here in the short run (although I hope it goes on an absolute blinder so I can win the NFSC!!) but I think the long term potential for ALLG is attractive - but as always DYOR!

Mark

Thanks for the write up Mark.

A new company to me but I see that they have stopped dividends for the time being. Any clue as to when they will restart?

Thanks

They've said 'not for the forseeable future', but also indicated that the cut was to pay for the Page and Moy acquisition. So perhaps in a couple of years when that's paid off they might restart?
As an aside, and something quite unusual, for this year only non-Director shareholders get the divi, and Directors have waived their own.