Apollo Tourism & Leisure Limited (ATL)

Transcription

1 Apollo Tourism & Leisure Limited (ATL) 7 November 2017 Hold Initiating Coverage: Fully priced for now $1.735 Jason Palmer jpalmer@taylorcollison.com.au Summary (AUD) Market Capitalisation $312.2 Share Price $ week low $ week high $1.79 Ave Monthly Vol (year rolling) 4.858M Key Financials (AUD) Year End ($m) FY17 ProForma FY18 Est. FY19 Est. Revenue EBIT NPAT Adj EPS (c) PE Ratio (x) DPS (c) Div Yield 1.5% 3.2% 3.5% Franking 100.0% 100.0% 100.0% EV EV/EBITDA (x) EV/EBIT (x) ROE 59.9% 18.3% 18.7% EBIT Margin 14.6% 10.6% 11.0% Payout Ratio. 33.0% 50.7% 49.3% Share Price Graph (AUD) Our View Initiate with a HOLD While ATL operates in mature markets with strong competitors, we believe it has sufficient levers in place to achieve 12.3% Adj. NPAT growth during FY19, slowing to 6-8% NPAT growth from FY20 (excl. further acquisitions). We like that management still has plenty of skin in the game, are young, remain enthusiastic about growing the business, and have already demonstrated that they will not be rushed into short-term transactions at the expense of longer term shareholder value. ATL has great visibility over the forward rentals business with days booked ahead of this time last year. However, current operating margins are based on a buoyant ex-rental reseller market (approx. 35% of the rental fleet is replaced every year). We believe ATL s valuation should reflect its higher risk profile and thus should trade at 13-14x EPS, a 15-20% discount to listed Australian peers to reflect earnings quality and a narrower economic moat. While acknowledging ATL is trading ahead of our fair value we believe future earnings will grow into the current market capitalisation. Therefore, we initiate coverage with a HOLD recommendation. Key Points Mature growth rates can offer reasonable earnings conversion - FY17 s earnings growth was underpinned by a year of buoyant rental and sales conditions across all geographical market. This was well-above previous years and is not reflective of the highly competitive environment ATL faces in all regions. Growth across the rental business is largely reliant upon the delicate balance of utilisation and price. With the exception of the USA which is yet to reach peak rental outlet saturation, investors should be expecting modest sales growth from the current rental fleet in Australia, New Zealand and Canada which if priced correctly can offer strong conversion to the EBIT line. The dynamic fleet strategy is another growth lever for Aus and NZ Operating for <2 years in Australia and New Zealand, the dynamic fleet strategy represents ~4% of the total rental fleet in these regions. Over the next few years we believe this fleet could be extended by ~50 vehicles p.a. adding ~15,000 p.a. of rental days to the group. Dealership acquisitions provide the distribution needed to grow new RV sales In Australia the RV manufacturing and dealership channels remain highly fragmented. As a consequence, ATL had found it difficult to add meaningful dealership distribution. To this end, we agree that the quickest way to accelerate new RV sales is to acquire dealerships. We are realistic about the challenges ATL will encounter at a dealership level as it looks to change the pre-acquisition brand mix. We believe over a 2-4 year period it is reasonable to assume that ATL can supply 10-15% of all RVs sold through the current acquired dealerships ( RVs p.a.). Assuming an average sales price of $75,000/RV, we estimate that the EBIT benefit could be from $0.7m-$5m p.a. (depending on whether ATL cannibalises existing dealership volumes). Valuation inline with peers but with more visibility of earnings A 25% increase in the share price over the past few weeks without any news has eroded much of the short-term value gap we originally identified before commencing this report. Trading on 16x our FY18e EPS, ATL now trades inline with listed Australian and New Zealand tourism and leisure exposed peers before considering quality of earnings deficiencies and a narrower economic moat.

2 Apollo Tourism & Leisure Limited Page 2 of 13 Apollo Tourism & L - Summary of Forecasts Price $ PROFIT & LOSS SUMMARY (A$m) BALANCE SHEET SUMMARY P e riod FY 17 P FA FY 17 A FY 18 E FY 19 E P e riod FY 17 A FY 18 E FY 19 E Sales of Services Cash Sales of Goods Receivables Other Revenue Inventory Total Revenue Other EBITDA Adj Total Current Assets Dep'n (21.4) (20.9) (28.5) (30.0) Property Plant & Equipment Amort'n 0.0 (0.1) (0.2) (0.2) Investment under equity accounting EBIT Adj Intangibles Net Interest (8.2) (7.8) (11.2) (11.9) Related Party Loans Pre- Tax Profit Adj Other Tax Expense (5.9) 0.6 (8.4) (9.4) Total Non- Current Assets Minorities TOTAL ASSETS NPAT Adj Payables Abnormals (net of tax) (0.8) (0.8) Unearned income - rental Reported Profit Borrowings Provisions Change on pcp Other Total Revenue 23.1% n/a 107.2% 6.7% Total Current Liab EBITDA Adj. 24.2% n/a 84.0% 8.3% Unearned income - rental EBIT Adj. 63.0% n/a 147.8% 10.6% Borrowings NPAT Adj % n/a 125.7% 12.3% Provisions Other OPERATING SEGMENTS Total Non- Current Liab Period FY17PFA FY17A FY18E FY19E TOTAL LIABILITIES Revenue TOTAL EQUITY AU NZ CASH FLOW SUMMARY US P e riod FY 17 A FY 18 E FY 19 E Canada EBIT (excl Abs/Extr) Others and eliminations (1.1) (0.1) (1.0) (1.0) Add: Depreciation TOTAL Add: Amortisation Change in Working Capital (3.5) 9.4 (0.7) EBIT Other non c ash/unusual items 0.0 (0.8) (0.8) AU Less: Tax expense 0.6 (8.4) (9.4) NZ Net Interest (7.6) (11.2) (11.9) US 4.6 (2.2) Gross Cashflows Canada Net Capex (1.0) (1.5) (3.0) Others and eliminations 0.8 (1.4) Fleet Purchased 0.0 (133.8) (142.5) TOTAL Closing WDV Fleet Sold (Acquisitions) / Divestments (10.0) (31.1) 0.0 EBIT Margin Other investments AU 13.5% 10.6% 9.0% 9.5% Free Cashflows 61.3 (3.3) 19.9 NZ 26.8% 26.8% 26.5% 27.1% Dividends Paid (0.7) (8.2) (10.8) US 8.6% - 5.4% 8.4% 8.5% Debt Issued / (Repaid) (69.3) 11.5 (9.1) Canada n/a n/a 11.0% 11.6% Equity issued / (Buyback) TOTAL 14.6 % 8.9 % 10.6 % 11.0 % Net Cash Flow (0.0 ) (0.0 ) PER SHARE DATA VALUATION MULTIPLES P e riod FY 17 P FA FY 17 A FY 18 E FY 19 E P e riod FY 17 A FY 18 E FY 19 E EPS Adj. (c ) n/a PER Adj. (x) Growth (pcp) n/a 15.4% 21.9% 12.3% Dividend Yield (%) 1.5 % 3.2 % 3.5 % Ordinary Dividend (c) n/a Free CF Yield 36.3% - 1.1% 6.4% Special Dividend (c) n/a EV/EBITDA (x) Franking n/a 100% 100% 100% EV/EBIT (x) Gross CF per Share (c) n/a KEY RATIOS P e riod FY 17 P FA FY 17 A FY 18 E FY 19 E Net Debt / EBITDA Adj. (x) n/a Net Debt : Equity (%) n/a 118.4% 117.5% 100.1% EBIT Interest cover (x) n/a Free CF / NPAT Adj. (5 yr avg) n/a n/a n/a n/a Current ratio (x) n/a ROE Adj. (%) n/a 17.1% 18.3% 18.7% ROIC Adj. (%) n/a 6.4% 6.7% 7.2% Dividend Payout Ratio (%) n/a 28.6% 50.7% 49.3% Notes: George Day and CanaDream acquisitions are shown on the balance sheet on a net basis under investments under equity accounting (net of cash acquired). We await full acquisition accounting before integrating both of these. Abnormal items (net of tax) refers to amortisation from acquisitions made. Forecast cash flow has been balanced to debt.

3 Apollo Tourism & Leisure Limited Page 3 of 13 Peer Comparison and Valuation Thoughts The younger brother of Tourism Holdings Limited In our view Tourism Holdings Limited ( THL ) offers the best like-for-like comparable listed peer to ATL s RV rental business. Both manage RV rental and sales businesses across similar geographical markets. Noticeable operational differences include ATL s larger footprint of Australian dealerships; ATL controls entirely its manufacturing process while THL remains in a JV with Kea Manufacturing; and THL continues to run a non-rv related New Zealand caving operation. THL s 3-year earnings outlook remains far more bullish than ATL s, a thought we share. Despite this, as shown in the table below, excluding Mantra Group which is subject to a takeover offer and market darling Experience Co, Australian and New Zealand listed companies exposed to the tourism/leisure sector generally trade on 15-16x NTM EPS. In our view ATL should trade at a 15-20% discount to peer average because the model requires a buoyant ex-rental market and the economic moat remains narrower. AUS & NZ TOURISM & LEISURE EXPOSED PEERS Mkt Cap PE EV/EBITDA EV/EBIT (AU$m) Yr 1 Yr 2 Yr 1 Yr 2 Yr 1 Yr 2 Tourism Holdingds Limited SeaLink Travel Group Experience Event Hospitality & Entertainment 2, Mantra Group 1, Apollo Tourism & Leisure Peer Average (excl. ATL) (Discount)/Premium -14% -15% -32% -32% -17% -17% How does tourism valuations compare to international RV manufactures and parts suppliers? Winnebago and Thor offer the best like-for-like competitor to ATL s new RV manufacturing business, both trade on ~16-17x NTM EPS. Camping World is more diversified, and its exposure to RV manufacturing is limited to parts and supplies. INTERNATIONAL RV MANUFACTURERS & PARTS SUPPLIERS Mkt Cap PE EV/EBITDA EV/EBIT (AU$m) Yr 1 Yr 2 Yr 1 Yr 2 Yr 1 Yr 2 Winnebago Industries 2, Thor Industries 9, Camping World Holdings A 5, Apollo Tourism & Leisure Peer Average (excl. ATL) (Discount)/Premium -10% -10% -40% -38% -5% -4% While we have highlighted that ATL operates in mature and competitive markets, the current management team has proven over many years a willingness to evolve and expand its services to achieve sustainable earnings growth. Recent initiatives include the RV sales centre acquisitions in Australia along with the dynamic fleet strategy roll-out in Australia and New Zealand. Strong macro tourism and reseller environments in most markets provide tailwinds to earnings growth. ATL has great visibility over the forward rentals business with days booked ahead of this time last year. However, current operating margins are based on a buoyant ex-rental reseller market (approx. 35% of the rental fleet is replaced every year). We believe ATL s valuation should reflect its higher risk profile and thus should trade at 13-14x EPS, a 15-20% discount to listed Australian peers to reflect earnings quality and a narrower economic moat. While acknowledging ATL is trading ahead of our fair value we believe future earnings will grow into the current market capitalisation. Therefore, we initiate coverage with a HOLD recommendation.

4 Apollo Tourism & Leisure Limited Page 4 of 13 Business Operations Build/Buy, Rent and Sell Over the past 32 years the group has transitioned from RV rental provider to a vertically integrated business. ATL operates across four competitive and relatively mature geographical markets which include Australia, NZ, USA and Canada. While strategies in each market can differ, its business model is broadly the same. build/buy, rent and sell. The below diagram shows the brands that ATL uses in each of its divisions. (Source: FY17 Company Investor Presentation) Build/Buy Brands ATL sources its new RVs for rental and retail sales from the following suppliers: Talvor Manufactured and distributed exclusively by ATL. Available in Australia and New Zealand. Winnebago Exclusive agreement to either import or domestically manufacture and distribute Winnebago product in Australia and New Zealand. Licence agreement effective through June 2019, with option to extend a further 5 years. ATL s US rental fleet supplied directly by Winnebago with smaller campervans purchased from RoadTrek. Adria - Exclusive agreement to import and distribute Adria product in Australia and New Zealand. Agreement effective through February 2022, with option to extend a further 4 years. Rental Brands ATL s adopts a tiered brand strategy in most markets, these include: Star RV Premium. Campervans and Motorhomes. Available in Aus, NZ and USA. Apollo Reputable vehicle at competitive price. Campervans and Motorhomes. Available in Australia, NZ and USA. Cheapa Campa Price sensitive customers. Campervans and Motorhomes. Available in Aus and NZ. Hippie Camper Fun, low-cost transport. Campervans. Available in Australia and New Zealand. CanaDream Full range exclusive to Canada market. Campervans and Motorhomes. Supplied by Forest River from the USA, and Pleasure-way Industries & Northern Lite Campers from Canada. Camplify Peer to peer RV rental. Caravans and Motorhomes. Started in Aus, recently expanded into the UK.

5 Apollo Tourism & Leisure Limited Page 5 of 13 Geographical markets and growth prospects Characteristic Australia New Zealand USA Canada Rental Business Fleet ~1700 ~700 ~700 ~1000 Vehicle turnover 4-5 years 4-5 years <1 year 2-3 years Customer Demographics Aus 27%, Western Europe 58%, China 2%, NZ 2%, Other 11%. Aus 15%, NZ 6%, Western Europe 63%, Other 16%. USA 16%, Aus 4%, Western Europe 68%, Other 12%. Not disclosed. TC estimates at least 50% USA. ATL Fleet utilisation +90% during peak season (70-80% over the entire year). +90% during peak season (65-70% over the entire year) % during peak season 75-85% during peak season Market share by fleet numbers ATL - 37% THL (NZ Listed) 31% Traveller s Autobarn (private) 11% Jucy (private) 8% Others 13% (all under 200 vehicles) THL 45% ATL 15% Jucy 14% Others 26% (all under 200 vehicles) Cruise (private) 53% El Monte/Road Bear (THL) 31% ATL 9% Jucy 4% Others - 3% Cruise 28% CanaDream (ATL) 28% Fraserway RV (private) 28% Other 16% Competitor Comments ATL and THL are very strong in motorhomes. Traveller s Autobarn and Jucy dominate the backpacker and entry level campervan market. Similar comments to Australia. Cruise America is largely a budget provider. Not in significant expansion phase. THL recently acquired El Monte with plans to rationalise this fleet. Fraserway RV offers tourism and replacement parts/r&m services to existing owners. This offers protection against cyclical tourism market. Ability to consolidate Largely consolidated with no meaningful willing sellers. Largely consolidated with no meaningful willing sellers Largely consolidated with no meaningful willing sellers Largely consolidated with no meaningful willing sellers Market growth prospects Flattish market outside peak season. Growth is limited to improved fleet utilisation during shoulder seasons and adopting a dynamic fleet model over peak periods across selected campervans and 4WD. Market remains very hot at the moment but still no need for additional capacity. Focused on growing shoulder and low season utilisation along with price increases where possible. US market continues to grow particularly in the experienced seeker part of the market. ATL s growth is largely expected from further retail branches locations along with improved utilisation from newer centres. Tourism fundamentals remain very strong at present. Growth is likely to come from yield and utilisation improvements because retail branch network is mature. ATL Rental outlets Ten rental outlet covering all important markets in Australia including Adelaide, Alice Springs, Brisbane, Broome, Cairns, Darwin, Hobart, Melb, Perth and Syd. Two rental outlet including Auckland and Christchurch. Seven rental across USA including Denver, New York (May 17), Orlando (May 17), Seattle, Las Vegas, Los Angeles and San Francisco. Seven rental across Canada including Calgary, Edmonton, Halifax, Montreal, Toronto, Vancouver and Whitehorse. Seasonality of business Peak season Sep-Mar. ~50% 1H / 50% 2H. Peak season from Nov-Feb. Low season during May-Sep. ~40% 1H / 60% 2H. Peak season summer months of Jul-Sep. ~75% 1H / 25% 2H Vast majority of revenue May-Oct. ~70% 1H / 30% 2H.

6 Apollo Tourism & Leisure Limited Page 6 of 13 Characteristic Australia New Zealand USA Canada Sales Business Market RV dealerships are generally not aligned with one manufacturer. Approx. 200 different manufacturers, many of which are privately owned family businesses. Jayco controls approximately 40-50% market share. ATL have less <1% of the 21,000 units p.a. towables market and is one of the key participants in the motorised products market which produces ~ 2,000 units p.a. Mixture of small and medium manufacturers. There are over 60 RV manufacturers and 200 component parts suppliers in the United States. Forest River, Winnebago and Thor Industries control the US RV manufacturing market with multiple brands under their ownership that distribute through vast dealer networks. Flexible capacity being added. 90% of all RVs exports from the USA are sent to Canada. Mixture of small and medium manufacturers. Sales Strategy Ex-rental sold through own sales centres. The dealership acquisition strategy is targeting accelerated growth of ATL branded new RV sales. Historically only ex-rental RVs sold through a network of dealers. Beginning to expand new RV sales partners and range exported from Aus. Wholesale ex-rental RV s all sold through an expanded network of dealers in the USA. CanaDream has a network of wholesale dealers in Canada and the USA that assist with selling its ex-rental RV fleet and has an associate dealer franchisee in Edmonton. Approx. 50% sold in each of these markets. Sales Centres Apollo branded sales centres in Brisbane, Melbourne and Adelaide. Sydney RV, George Day Caravans, Kratzmann Caravans and Clint s Caravan Warehouse sales centres covering Sydney, Perth, Burpengary, Loganholme and Caboolture. Each non-apollo branded sales centre stocks a wide variety of brands not owned by ATL. Over time we expect internal weightings to improve across each site enhancing group margins. Not applicable. Unlikely to pursue a vertically integrated strategy in this market as the Group currently has a small factory for the sole purpose of supplying its current rental fleet. Not applicable. Unlikely to pursue a vertically integrated strategy in this market. Highly competitive, stiff competition with strong relationships and deep pockets. Some larger consolidators in this space and even some of the smaller groups are too big. Not applicable. Unlikely to pursue a vertically integrated strategy in this market as the company does not manufacturer its fleet supplied by Forest River (USA), Pleasure-way Industries (Canada) and Northern Lite Campers (Canada). Market growth prospects Reseller and new RV market remains strong. Further dealer expansions could include population centres such as Newcastle, Central Coast, Adelaide, Regional Victoria and Northern Queensland. The size of the market limits growth to ex-rentals. Thus, growth in this market is likely to be limited to expansion of new vehicle sales partners. Reseller market remains extremely strong. ATL operates a pure ex-rental model in this market so growth should remain broadly inline with fleet ramp. Winnebago and Adria distribution agreements do not cover the USA. Buoyant ex-rental market in USA and Canada driving good margins. Given ATL is unlikely to materially grow the Canadian rental fleet we believe RV sales growth is limited to increasing the average fleet turnover periods.

7 Apollo Tourism & Leisure Limited Page 7 of 13 Key Risks Cyclical business benefiting from strong tourism and RV sales fundamentals in all markets In recent years, ATL has benefited from strong macro operating conditions across all geographical markets. Inbound tourism growth continues to be strong, access to credit is readily available and (with the exception of the USA) financing costs across the business are low (to name a few). Over the same period, consolidation has assisted the removal of some overcapacity from key markets. This has assisted both rental utilisation and ex-rental margins. To this end, it is possible that the Group is currently experiencing close to peak operating conditions. Margins could compress on renewal of Winnebago and Adria agreements Winnebago or Adria could request a higher rate of royalties payable to maintain exclusive distribution of their products in Australia and New Zealand at the time ATL strikes option extensions in June 2019 and February 2022 respectively. In saying this, we believe this is unlikely to eventuate due to: (1) the percentage of market share ATL holds in Australia and New Zealand, and (2) the distribution challenges that a fragmented dealership market presents. Business model is entirely reliant on access to credit Like much of its competition, ATL s rental, reseller and new RV sales business is heavily reliant on access to credit. The Group s Balance Sheet remains highly leveraged (net debt 1.2x net asset) utilising predominately asset financing facilities from core suppliers. Tightening of credit and/or costs of debt increases could limit ATL s ability to replenish its rental fleet and become a drag on profitability. With the exception of the USA, ATL is already benefiting from historical low interest rates, while access to credit is not constraining. Earnings growth in Australia, New Zealand and Canada is a delicate balancing act between utilisation and price Approximately 75% of the current rental business is servicing mature markets where fleet growth will be limited. Competition remains fierce, fixed fleet numbers have largely remained unchanged and utilisation can often be heavily price sensitive. Success in the USA is not a formality The USA market is already well serviced by Cruise America and THL owned El Monte and Road Bear. Combined, these businesses hold 85% market share. THL has flagged an intention to rationalise El Monte s fleet from 1,600 to 1,100 while improving upon current fleet utilisation of 40%. We believe this initiative highlights that the USA has pockets of rental oversupply. Therefore, ATL will need to win market share if it wants to add ~100 RVs p.a. to its existing rental fleet of 750 RVs. We believe this is achievable in areas where the Group remains underweight, in particular the East Coast and Central. However, this will likely come at the expense of margin in the near term. Owning dealerships is new to current management To some extent, the new RV sales strategy in Australia is a reaction to a maturing rental business in the same market. It was only during 2016 that ATL expanded its Apollo branded retail stores across selected Australian cities. The existing ATL management team have little experience in running a multi-branded externally sourced RV and caravanning dealerships, and therefore remain highly reliant on pre-acquisition personnel that hold little amounts of ATL script. Other risks include: Limited barriers to entry in establishing a RV rental business outside access to capital; THL remains in significant growth phases in Australia, New Zealand and the USA. THL also adopts a dynamic fleet strategy in NZ and therefore this strategy is not unique to ATL. Plenty of acquisitions to integrate into the business; Stronger AUD, NZD and USD against other foreign currencies; Seasonal business and therefore forecasting demand highly critical for profitability; Reliance on key suppliers and personnel; Increases to key input costs including employment, cost of goods and RV running costs; Change in customer preferences; and Brand and reputational risk

8 Apollo Tourism & Leisure Limited Page 8 of 13 Peeling back the Profit and Loss We believe the best way to dissect the profit and loss is to split this into the following parts: RV rental business ATL branded RV sales RV retailing expansion RV rental business Rental revenue RV rental revenue is driven by the following factors: Days rented; Yield per day, RV product mix; and Ancillary rental income. The table below shows the rental revenue growth across by region over the past few years. Interestingly until FY17, Australia s growth was relatively flat despite strong inbound tourism dynamics. Total rental income (excluding Canada) under equity accounting grew by 17.3% across Australia, New Zealand and the USA. This was made up of 9.8% growth from rental days and 7.5% growth from yield/product mix. The latter was inline with Prospectus guidance with the former $3.8m ahead. Sale of services ($m) FY17PF FY16PF FY15PF FY14PF FY13PF FY12PF FY11PF Aus (AUD) n/a n/a n/a Growth pcp 11.0% 4.6% -2.5% n/a n/a n/a n/a NZ (AUD) n/a n/a n/a Growth pcp 17.4% 11.1% 8.6% n/a n/a n/a n/a US (AUD) n/a n/a n/a Growth pcp 29.1% 21.2% 7.6% n/a n/a n/a n/a Canada (CAD) 100% Growth pcp 9.2% 17.8% 12.2% (0.0) n/a (Source: Company Reports) Rental Days FY17PF FY16PF Growth pcp Aus 413, , % NZ 166, , % US 75,455 66, % TOTAL 655, , % (Source: Company Reports) Operating expenses The key operating expenses for the rental business include: Motor vehicle running costs This is largely based upon utilisation of the fleet and includes servicing, cleaning, repairs, insurance and registration and therefore remains largely variable. During FY17 this was approximately 30% of rental sales.

9 Apollo Tourism & Leisure Limited Page 9 of 13 Employee benefits Mixture of FTE s, casual staff and contractors. As fleet utilisation improves a component of labour costs do as well but not at the same rates. Across Australia, NZ and USA combined we estimate employee costs are ~17% of rental revenue. This is in contrast to 35% of rental sales in the Canadian business which reflects the peaky nature of this market. Considering our modest RV rental sales increases through FY18 and FY19 we see little margin expansion from improved staff utilisation. Rental costs on land and buildings Generally a product of sights held. From late 1H18 ATL will incur an additional $1m p.a. in rental costs from expansion of the Brisbane manufacturing facility. The capex fit-out is likely to be $0.5m 1H18 weighted. Advertising, promotions and commissions Largely variable and tracks broadly inline with sales growth. Traditionally advertising, promotions and commissions are 3-4% of rental business income. Fleet financing costs Across all geographies ATL utilises finance leases generally between 3-5 years in length. We understand the cost of fleet financing remains competitive across all markets except the USA where the Group is paying approximately 2-3% above the market rate cost of funds (~$0.6m-$0.9m impact to EBIT). ATL believes it will be in a position recoup above-average cost of funds in the USA from FY20. ATL branded RV sales Gross Margins % The table below shows that gross profit margins vary across geographical regions serviced due to, volumes, depreciation policies and average vehicle life. Generally speaking the group aims to sell its ex rental fleet at very close to written down value (including the costs of selling). Wholesale gross margins on new RVs are ~5-10% and retail gross margins on new RVs are 15-20%. Current demand for new and used RVs across Australia, New Zealand, Canada and USA is very strong. This is likely to continue into the foreseeable future driven by an increasing interest in healthy living and outside leisure activities, along with sudden surge in retiring Baby Boomers. However, the RV industry is unlikely to experience these macro tailwinds into perpetuity. Historically, periods of economic decline have seen a slowdown in replacement cycles. Sale of goods ($m) FY17PF FY16PF FY15PF FY14PF Aus (AUD) - Excl. Dealer Acqu Gross Profit GP% 7.2% 11.8% 10.7% 13.0% NZ (AUD) Gross Profit (AUD) (0.1) (0.3) GP% 9.1% 9.1% -3.8% -8.5% US (AUD) Gross Profit (AUD) GP% 4.8% 8.1% 4.5% 1.2% Canada (CAD) - 100% Gross Profit (CAD) GP% 15.5% 17.2% 15.5% 11.6% (Source: TC Estimates & Company Reports)

10 Apollo Tourism & Leisure Limited Page 10 of 13 RV retailing expansion Impact to existing figures The expansion of the RV retailing network throughout late FY17/early FY18 adds further complexity to the Group s Australian results. The table below summarises what we believe this division will contribute to ATL over the next two years without any volume growth or product mix changes. Kratzmanns + Sydney RV Co. Guidance George Day Caravan's FY17A FY18E FY19E TC Est. TC Est. No Growth No Growth Revenue EBITDA EBIT PBT NPAT A launch pad to grow the new RV sales business volumes and margins At the time of acquiring Kratzmanns, Sydney RV and George Day Caravans these dealers sold no volumes of ATL branded products (Winnebago, Talvor and Adria) amongst their combined RVs sales of 1,800 p.a. ATL plans to use those acquired dealers to distribute more ATL branded products without cannibalising the existing product base. Post-acquisition, ATL has slowly been supplying Talvor, Winnebago and Adria RVs to each dealer. While this is not growing rapidly, early trading is meeting internal expectations. Over the next 3-4 years we believe Winnebago, Talvor and Adria RVs sold through these dealers could reach ~ p.a. We are not entirely convinced that this volume increase will not come at the expense of 3 rd party volumes because until now ATL have not added to the pre-acquisition sale staff headcount at a dealership level. Assuming ATL sells a further 200 new RVs $75,000/RV (without cannibalising existing 3 rd partly branded sales), then the likely increase to baseline EBIT would be $3.75m p.a. Outside of the obvious volume benefits, expansion of the Group s geographical footprint will assist its scale at trade shows; a large source of new RV sales (~35%). Highly leveraged but good cash flows conversion appeases our concerns Our main observations regarding ATL s balance sheet include Debt remains high (net debt to equity of ~100%) but strong cash flow conversion ensures serviceability remains okay (EBIT interest coverage of >3.5x from FY18). Depreciation rates are continually managed to ensure recoverable amounts are closely aligned to closing written down values. To this end, the written down value of the rental fleet is a robust indication of current asset values. ATL s cash flow statement is not the easiest to understand with multiple businesses financing RVs at different replacement cycles. In saying this, now that fleet numbers remain relatively steady, cash flow conversion should improve. Management appears comfortable with the existing leverage of 1.2x net debt to net assets (~25% higher than THL s). Into the medium term we would expect leverage to remain high driven by organic and acquisitive growth plans in the USA and Australia, while maintaining a target dividend payout ratio of 45-55%.

11 Apollo Tourism & Leisure Limited Page 11 of 13 Board Members Stephen Lonie, Non-Executive Chair, BCom, MBA, FCA, FAICD, SF Fin, FIMC Chartered Accountant, with more than 38 years industry experience including former Managing Partner of KPMG. Other current directorships include Corporate Travel Management Limited, Retail Food Group Limited and MyState Limited. Sophie Mitchell, Non-Executive Director, BEc, GAICD, SF Fin. Experienced financial services professional and a director of Morgans Financial Limited. Member of the Takeovers Panel, the Queensland Performing Arts Trust, the Queensland advisory board for Australian Super, and a board member of the Australia Council for the Arts. Other current directorships include Silver Chef Limited and Flagship Investments Limited. Luke Trouchet, Managing Director and Chief Executive Officer, LLB 21 years experience within the ATL Group, commencing in sales and marketing and moving to position of CEO in Karl Trouchet, Executive Director and Chief Financial Officer, BBus, MAICD 20 years experience within the ATL Group managing finance and strategic planning as well as new business initiatives.

12 Apollo Tourism & Leisure Limited Page 12 of 13 Top 20 Shareholders As at 11 September, ATL s 20 largest shareholders were: (Source: Company Financials)

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