Purchase #13: Experience Co

Purchase #13: Experience Co

I am not a professional investor and this is not a recommendation to buy or sell EXP or other securities. This post reflects my opinion only. Please always do your own research and read the full disclaimer at the bottom. 

I’ve recently purchased shares in Experience Co Ltd (ASX: EXP), formerly Skydive The Beach. 

Experience Co owns and operates tourist businesses including skydiving, white water rafting, hot air ballooning, helicopter tours, reef cruises. The company has been growing both organically and by acquiring businesses in a fragmented industry.

Quick metrics:

Shares on issue:	566.1m   (incl 7m shares escrow & 10.3m 2025 options ex @ $0.25)
Market capitalisation:	$215m at $0.38/share
Debt:	$28.4m net debt    (~1x EBITDA)
Enterprise Value:	$243.4m
FY18 EBITDAI*:	$27.4m
FY18 NPAT:	$6.8m
FY18 NPAT normalised:	$14.5m
EV/EBITDA:	9x
P/E:	32x

*”I” for “Impairment”

Earnings figures include less than a full year of contributions from several recent acquisitions as well as operating deleverage due to heavy storms interrupting operations last year.

Management is forecasting $165-$175m revenue and $37-$41m in EBITDA in FY19. Consensus forecasts are for $20m+ in FY19 NPAT.

NPAT growth is likely to occur due to operating leverage as skydiving recovers from bad weather, synergies from consolidating multiple offices + businesses, improved volumes due to confidential agreements (more on this below), full-year results from several acquisitions, offset by reinvestments in the business.

The thesis:

EXP is building regional clusters of businesses that will likely be able to establish local competitive advantages and claim market share from competitors via both increased control over the customer, and the ability to outspend competitors on advertising. Over time it is my view that EXP will start influencing its customers earlier in the travel chain, and potentially bypassing some of competitors’ ability to source customers.  EXP is a cheap company with a decent core business, strong demographic tailwinds and highly aligned management, as well as an industry structure (oligopoly) and customer base (price insensitive adventure travellers) that is likely conducive to long-term returns above the cost of capital.

I expect that most of the value will be created by growing revenue and acquiring new businesses rather than cutting costs or lifting prices, although there is some room for margins to improve. Experience Co may also be able to reduce the commissions payable for acquiring customers, or bring these in-house. Booking agents are a low cost business with low ongoing capital requirements and I think a partnership with or acquisition of some agents may make sense in time.

EXP has a large number of opportunities within its current business, and I think over the next five to ten years it could be worth significantly more than its current share price of 38 cents.

What is Experience Co?

As of late 2017, Experience Co owns the following main businesses:

• Aircraft Maintenance Centre (Illawarra airport)
• Performance Aviation (Wanaka airport, NZ)
• 14 skydiving businesses (incl 3 in NZ)
• Whitewater rafting (Tully, Barron River)
• Fitzroy island ferries/ snorkelling  (Cairns)
• Tropical Journeys (boat tour,  Port Douglas)
• Big Cat Green Island Tours (Cairns)
• Reef Magic barrier reef cruises (Cairns)
• Hot air ballooning (Cairns, Byron Bay)
• Daintree forest tours (Cairns)
• Great Barrier Reef helicopter tours (Cairns)
• Rescue training business (Victoria)

 

Many of these businesses currently have limited competition, a strong niche, and are complementary – note the concentration of businesses in Cairns, where Experience Co now offers skydiving, reef tours, helicopter tours, rainforest tours, semi-submersible/glass bottom boat tours and white water rafting among others.

This creates concentration and weather risk, but it is also a demonstration of the way that the company can build clusters of strong businesses in known tourist areas. It is likely that Experience Co will look to replicate this cluster elsewhere in Australia and New Zealand.

Experience Co appears to generate around an 8% underlying return on invested capital currently, and reinvestment opportunities in the business (upgraded plane engines, photography) can generate substantially higher returns. It is also likely that new products, and an ability to increasingly control the customer flow, will result in growing customer numbers and market share. I expect the ROIC will improve over time as clusters mature and think EXP may be capable of a sustainable 9-10% ROIC. I have published an additional note here with some alternative measures of EXP’s ROIC, that show substantially higher returns on cash reinvested in the business.

EXP currently appears to have some excess capacity, and if the company is able to improve control of its customer flow, it is likely that capacity utilisation and possibly revenue per customer will improve.

Using the FY17 presentation, Skydive “processing rates” are around 80% historically (page 4 of prezzo). Given recent aircraft engine upgrade benefits (page 12) it is likely that EXP has some extra capacity in its skydiving business. Processing rates of 78% in 2018 should recover in FY19 and I think something like 82-85% may be plausible in the future, weather permitting.

The Skydive The Beach prospectus (p49) also shows the benefits to EXP from larger aircraft in terms of lower fuel costs, maintenance time, and higher capacity.

Non-skydiving businesses such as the reef tours are likely more capacity constrained, and harder to grow capacity, but I would be surprised if they ran at capacity year-round. As Experience Co grows, I think its overall ability to sell capacity  will improve, with corresponding benefits to business performance.

I conceptualise of EXP as essentially a manufacturer, with a fairly capital intensive business, and found that several “manufacturer” mental models were informative to employ here. One thing in particular I think investors should watch closely is company and industry investment in new capacity within the clusters.

A fragmented industry

The tourism industry is fragmented, with most attractions being run by local owner-operators. These businesses often lack an ability to direct the customer funnel or cross-promote products. So far, Experience Co has mostly acquired businesses at ~5x EBITDA, with vendors taking >90% of the sale price in cash.

There appears to be a large pool of acquisition opportunities, although competition for acquisitions will likely increase in the coming years. Sealink and Flight Centre both operate in parallel niches, with Sealink running Captain Cook cruises, while Flight Centre owns (mostly foreign) businesses like Buffalo Tours. There are local Australian businesses such as Quicksilver Cruises (Cairns) also pursuing a similar strategy, although these appear to lack the national scale of EXP.

Those businesses are more tour oriented, but given that Sealink and Flight Centre already control the customer funnel to some extent, it is not a stretch to see them looking to acquire or partner with adventure businesses. For example, when you control your customer for 7 days on a boat cruise or tour, an obvious opportunity is to acquire tourist businesses at locations where the tour stops, so you can funnel customers into your own business. Because you already control the customer, your conversion rate will be substantially higher and your cost of acquiring the customer for that new sale will be lower than a standalone business – i.e., you now have a competitive advantage.  Experience Co will be stronger if it can harness this dynamic, and avoid being forced to compete with it.

There appears to be minimal benefit for a cashed up P/E firm (or FLT & co) to start competing with EXP in Cairns, given how fragmented the overall industry is and the opportunities elsewhere. Aggressive competition will almost certainly destroy value for the industry and would not be the decision of a rational capital allocator. However, overall acquisition interest in adventure activities is likely to increase, and EXP management’s acquisition discipline will be important.

In a way, Flight Centre (ASX:FLT) is the direct opposite of EXP. Flight Centre controls the customer funnel (via travel agents) and is just starting to funnel customers into company-owned “in-destination experiences” (tourist attractions, managed hotels, tours, etc).

Experience Co works in reverse – EXP controls the attractions, and currently has only modest ability to influence the customer funnel. It is my view that Experience Co and Flight Centre would be highly complementary, and a partnership between the two is a possibility in the future.

Barriers to entry in the tourism industry are low, permits notwithstanding. Skydiving has low barriers, while boat tour barriers are probably slightly higher due to the cost and availability of vessels and marine park permit requirements. Either way, the risk of direct competition at a local level (not just competition for acquisitions) can’t be overlooked. Overall, Experience Co doesn’t have insurmountable barriers to entry, but if it can start to control the customer funnel a little more, it could begin to build something resembling a competitive advantage.

Management recently announced in the FY18 presentation that they had signed “some commercial in confidence agreements that are expected to see passenger numbers increase for all EXP products in 2H19, in particular Far North Queensland;” (i.e., Cairns).

I suspect this is one of the first partnerships with a booking agent of some sort, and if so, that shows that management is aware of the opportunities here. I expect further agreements to be signed in time.

Business opportunities in the clusters

The opportunities from building local clusters of businesses are significant. First, there should simply be greater operational effectiveness from having a local team overseeing the businesses, especially when that team now controls almost every aspect of the customer experience (call centre, food, boats, buses, etc). Operational quality should be higher, customers should be happier, and all else being equal, costs should probably be lower.

Second is the ability to cross sell – depending on the business case of various products, you could for example structure a day tour that goes out to an island for snorkelling, provides lunch, sails back to Cairns and puts the customers onto a EXP-owned bus that goes to Barron Gorge for rafting. Suddenly instead of a single discrete event (skydiving/ boat tour) you potentially have control of the customer for an entire day and can channel them into multiple businesses and photo/souvenir opportunities. There is potential to divide customers by demographic (e.g. young vs old, foreign vs domestic) and create new products tailored to each group, taking into account different spending habits and relative wealth levels.

EXP also generates some of its revenue from non-tourism activities such as commercial helicopter charters and its rescue training business. This is not important to the business case presently, but could be over time as these are also niches where the market appears fragmented. (I think it is more likely that EXP chooses to exit these businesses entirely.)

Beyond that, there are strong tourist tailwinds with rapid growth in tourist numbers both here and in NZ. This is also a key risk which I’ll get to below.

The tourism industry

Tourist numbers are growing rapidly for several reasons – in short, middle class economies are emerging and it is getting easier and cheaper to travel. From a big picture perspective – over the next twenty to fifty years – in my opinion tourist numbers are only going to go up. Australia is fortunately quite unique as a destination thanks to its location and unique flora & fauna.

However, despite recent experience, tourist numbers are not guaranteed to rise politely year on year.

A glance at Flight Centre’s earnings during the GFC years shows the cyclicality and sensitivity of tourist businesses to external shocks. There are also myriad tail risks that are perhaps not as remote as they might sound – war with China, a China collapse, or other economic shocks (e.g. EM currency crisis/ Eurozone/US crash following rates normalising) that would all have an impact on tourism. The impact of these in a downturn is conceivably severe.

A key question for prospective investors is the degree to which EXP businesses are dependent on foreign vs local tourists, and the nationalities of the foreign tourists. Here is some data from 2016 for the Cairns region, via Tourism Research Australia:

According to this data, Chinese tourists accounted for approximately 11% of international tourist nights in Cairns, and around 6% of total tourist nights. This is an important, but not critical, demographic albeit likely a significant contributor to growth in tourist numbers in recent years. It is not clear if this percentage accurately reflects the demographics of EXP’s tours and skydives, however.

Recently the FY18 presentation shows that 40% of Australian skydives are from domestic customers.

Here’s some older info from Experience Co’s Nzone business in New Zealand in 2015:

Here approximately 20% of revenue is attributable to Chinese tourists and some other hard-to-identify percentage belongs to those from Hong Kong (one suspects they could have used green or red instead of four shades of grey…).

ANZ fortunately attracts a fairly diverse range of tourists . Still, tourist numbers won’t rise inexorably every year, and it is my view that EXP should be built to survive a severe downturn scenario.

While the last five years paints a very optimistic picture of inbound and local tourist numbers (using outbound tourist #s as a rough proxy for domestic tourism demand), the last 20 years looks more uneven, although the data is imperfect.

Here’s the last five years:

And the 10 years to 2016:

The growth rate in the early 2000’s was substantially slower (black bars = rate of change YoY):

 

Over the very long term it is my view that tourist numbers continue to grow, with the market conceivably doubling in size. There are a few drivers of this including emerging markets, lower cost of travel, greater availability of credit, internet, and payment services, as well as generational changes in spending habits.

What is important is not that tourist numbers will go up, or that they sometimes go down – what’s important is what happens when they go down. Experience Co’s business will potentially have a very poor year in a downturn – if you thought FY18’s results were bad, a tourist market shock is likely to be substantially worse.

This is a major risk, especially if the company takes on too much debt (and especially in context of the focus on EBITDAI, not FCF or NPAT, as management’s preferred measure of core earnings).

The worst case scenario for EXP in my view is a China collapse and potentially the Australian recession that follows. Something like ~10%+ of Experience Co’s customers are from China/Hong Kong, and a further 20%-50% of demand for EXP’s products is domestic.

A comment on distribution risk

Almost all customer-centric businesses are strongly reliant on distribution. In this case, the dynamics of business power are tricky. The value proposition of a distributor is such that I question whether EXP will actually be able to sustainably reduce the commissions payable to booking agents for acquiring customers. What happens if the distributor is less incentivised to sell EXP product and instead focuses on selling the products with the highest commissions?

If a distributor attains more market power than Experience Co, this dynamic could actually work against the company, especially if competition increases, squeezing margins at the service provider (EXP). However, the booking market currently appears more fragmented than the adventure market and I think it is plausible that as Experience Co becomes more powerful in local clusters, it may be able to achieve some benefit here – if not lower commissions, perhaps higher volumes or some kind of preferred provider status.

Still, with the combination of this dynamic and the risks posed by Flight Centre & co mentioned above, I think ultimately that Experience Co will have to own or otherwise “lock-in” a distribution capability over the next ~5 years.

Price elasticity for international tourists

Off-topic, this is a meta analysis of demand elasticity for international tourists I was sent recently. It suggests that there is around a ~1% shift in tourism demand (varies somewhat by home country) for every 1% shift in currency values.

A weaker Australian dollar is likely favourable for EXP, but given the diversity of tourist sources and the significant contribution from domestic customers, currency movements do not play a large part in my thesis.

Overseas expansion

I think that EXP will expand overseas to emerging markets in the coming years, and will face significant challenges in doing so. It will be harder to replicate the cluster strategy overseas. Additionally, if EXP doesn’t control its customer funnel, it will be harder to channel customers to this new business and grow it. Recall my comments about tour business competition earlier, and note that many existing tourist businesses in foreign countries already have partnerships with hotels and cruise lines.

If/when EXP starts expanding overseas, I expect it to acquire either an iconic attraction with a degree of customer pull, or acquire a business with a ready stream of customers (e.g. in an area serviced by cruise ships) and build a cluster around it.

A partnership with a company like Flight Centre would make a lot of sense here given that Flight Centre has foreign destination expertise, is happy to play second fiddle (minority owner) or invest in partnerships and would benefit from EXP’s operational expertise. EXP CEO Boucaut and FLT CEO Turner are both self-made businessmen that started out as tour operators.

Several investors have disagreed with this element of my thesis, saying that adventure tourism is outside the circle of competence of companies like Sealink and Flight Centre. I sort-of agree, however if the goal is to extract more dollars from the travel value chain (it is) then these are the types of companies and leaders that are best positioned to enter this market. If private equity can figure it out (I’m assuming they will), Flight Centre certainly can.

I am not sure of the exact form of competition yet but I am certain there will be more players entering this space over time, and EXP currently lacks distribution capabilities, so it will remain vulnerable to competitors with better or alternative methods of acquiring customers.

That said, assuming semi-rational competition, the first mover to aggregate these markets may actually have the ability to build and hold a competitive advantage (at least on a local level) with clusters, due to the advantages from scale & acquiring customers. There also typically appears to be room for only 1-3 local operators in many markets.

Adventure activities as a commodity

Experience Co is interesting from an analytical perspective because many of its businesses, especially skydiving, are essentially commodities. However, they are not interchangeable commodities – for example if you are in Cairns and there is only one skydiving outfit in Cairns, it’s not that commoditised – the supplier likely has meaningful pricing power.

From a customer acquisition perspective, to my mind the question becomes; how do people decide to do adventure tourism, and at what point of the travel decision chain is the customer typically acquired?

It’s important to distinguish between sourcing customers internally (within Experience Co) and externally (via referrals e.g. travel agent), and locally (in-destination/ within a cluster) vs remotely (e.g. online).

Do tourists decide to go to Cairns and then decide to do adventures while they are there (possible), do they go to Cairns specifically because they know adventures are there (possible – it’s similar for Queenstown), or do they research the activity before they travel and choose based on price or location during their trip if another location is cheaper/better? Likely there is some combination of all three approaches.

Many tourists are price insensitive to an extent, but side-by-side competition could still result in sharply lower returns. So what mediates the ability to earn persistent returns above the cost of capital?  It is my view that a combination of oligopoly markets, limited supply (especially in permit-limited businesses), the ability to offer a better service (e.g. visit multiple attractions in a day while the company shuttles you around), and the ability to control the customer funnel/maximise utilisation are key to achieving persistent returns above the cost of capital. Favourable demographic tailwinds (growing tourist numbers) likely also are a benefit. Experience Co ticks several of these boxes at present, with the customer funnel being largely untouched.

It is likely that Experience Co will become very strong at locally sourcing customers within its cluster both internally and via external referrals.

Vertical integration, customer acquisition channels, and aggregation are generally the pressure points I think the industry will hinge on. My view is that Experience Co will become harder to compete with over time, as a result of its cluster strategy and a greater ability to control the important parts of the customer acquisition process, relative to peers.

Skydiving as a Service

I have been frustrated in the past by companies with mediocre social media. I was pleased to see that this doesn’t appear to be the case with Experience Co which has a decent social media presence.

Here is a Facebook review from Skydive Airlie Beach, but positive reviews appear to be in the majority across the EXP stable.

This particular review is worth reading as a reminder that tourism is a people business, and happy & friendly staff (and correspondingly, good management & a good work environment) are more important than otherwise.

Although I noted earlier that the business has high fixed costs, according to its prospectus EXP uses subcontractors paid per unit (e.g. per jump/per parachute packed) for both jump instructors and parachute packers, which provides some flexibility in a downturn.

I would encourage EXP to think hard before implementing further policies that would result in lower staff wages or alignment. For a business so dependent on user-experience, it is potentially an own goal to save wages at the cost of disengaged staff.

Risks from weather and decline of the Great Barrier Reef

Experience Co’s business is highly weather dependent and there are both proximal and tail risks here with the La Niña cycle (higher rainfall) and frequent cyclones in North Queensland (a key risk given the current importance of the Cairns cluster). Over the long term I suppose there is a tail risk of worsening weather due to global warming. There is also the risk that the Great Barrier Reef disappears and damages Experience Co’s business.

There’s no real way to mitigate bad weather, but with the Reef dying I think Experience Co could plausibly redirect its capacity in other ways. Cairns will still be a tropical paradise and there will still be demand for day cruises/diving/island tours and I think these would likely have reasonable demand and margins.

The real concern with the death of the GBR will be the impact on Cairns tourism as a whole – the market may shrink. How many people visit Cairns specifically to see the Great Barrier Reef?

EXP is pretty much guaranteed disruption from severe weather in tropical areas. Consider, for example, EXP’s recent Dunk Island spit tender. Dunk Island seems to get flattened by cyclones every five to ten years:

Experience Co has no hotels or major infrastructure to refurbish, but it does own boats and docking equipment that will be at risk. Still, in any given year, the possibility of a 1-3 month disruption to operations, plus the costs of replacing equipment and vessels (and possible insurance premiums) can’t be overlooked. This risk is currently poignant given the concentration of businesses in Queensland, and the fact that the north is probably due for another severe weather event. This may create value dislocations in the near term, but the risk should decline over time as EXP builds out other clusters. Worsening weather due to global warming may be a risk over the very long term.

I have not been able to find information on insurance arrangements for EXP’s vessels to determine if they would be covered in event of a cyclone. I will in time approach Experience Co management for an interview for this blog and will raise this question with them.

Risks from skydiving

Skydiving is dangerous. Four customers and staff have died in the past year or so (the first deaths in EXP’s history) and others have been injured:

Experience Co carries public liability insurance that protects its skydiving business and employees in the event of negligence. I contacted the company for some more information on their liability risks but was informed that the company was unable to answer my questions (which were admittedly quite direct) “due to confidentiality”.

I thought that was a poor response, given that people falling from the sky is a critical business risk. I will look to follow up and see if I can get more information in time.

On a related note, very recently an investigation heard that operator error potentially caused to the mid-air collision that killed three skydivers:

http://www.abc.net.au/news/2018-08-06/fatal-skydive-accident-possibly-caused-by-instructor/10080170

Overall, I am fairly sanguine about the risks of skydiving. A reputation for safety is extremely important from a business perspective. However, skydive operators are maximally incentivised to have good, safe procedures and techniques. If you get it wrong, unlike almost any other business activity – you will die. It is not my intention to sound glib but with instructors taking the same risks as customers I think there is excellent alignment.

Before 2017 I believe Australian skydiving had 1 death in 40-odd years which is not a bad track record.

What does EXP look like in five years? 

Assuming the thesis plays out the way I think it will,  in 5-10 years EXP looks something like the following:

1.  ~3-4 clusters of tourism businesses, 1 in Cairns, 1 in NZ, a third one likely elsewhere in Australia
2.  A number of new products being created by combining existing businesses
3.  A new business or partnership (e.g. with FLT) that gives the company more control over its customer flow. I would expect to see growing customer numbers for several years.
4. The beginnings of an overseas venture – perhaps Pacific Islands or South-east Asia. Acquiring a business, say somewhere like Vanuatu, in combination with a cruise line partner or travel agent could make sense.
5. Middleman capabilities (or a partnership with booking agents) of some sort. I am not sure exactly what these look like but there are several possibilities.

 

If that list is correct much of the value will likely be added by further acquisitions of new adventure businesses, and then growing these businesses organically and reinvesting the cash.

In time, EXP will also likely have to switch from being an “operational” business (focusing on building clusters & customer experience) to being more “strategic” with its capital allocation. By this I mean that when you own, for example, 4 skydiving businesses, what you’re really doing is running a skydiving business and keeping customers happy. When you own 40 of them, you’re evaluating new markets/products/niches to expand into. Some of this is happening at EXP already but the transition towards strategic scale has quite a way to run.

The ability of a CEO to keep track of every nuance would be expected to decline as this transition proceeds, so there will become a need for strong managers lower down the corporate structure.

I think there will be a clear change of gears once EXP gets to a “strategic” scale, and this could indicate a time to sell, if sensible strategic decisions are not made or if the company lacks a clearly defined strategy at this point.

Management incentives and stock holdings

The business is led by founders Anthony Boucaut (CEO) and Anthony Ritter (CFO).  The Two Anthonies™ were on around $500k a year each in FY17, with ~44% of this being at-risk remuneration. Messrs Boucaut, Ritter, and Director John Diddams together own ~187m shares and a few million options, or ~33% of the company.

CEO Boucaut owns 180m shares and with such a large shareholding it is likely that the dividend takes on extra importance for him from an income perspective. On balance I would expect that Experience Co maintains a prudent financial position and a focus on dividends while he has the overwhelming majority of his wealth in the business.

There are outstanding loans for $1.5 million to a related entity of CEO Boucaut, due for repayment in FY21 and FY23. The loans were given to Boucaut at the time of prospectus to allow him to acquire airfields which he leases back to Skydive the Beach. CEO Boucaut is also paid a fee of 1.5% of any outstanding debt for which he carries a personal guarantee. Effectively this appears to increase EXP’s effective cost of debt on any debt that CEO Boucaut guarantees.

As a rule I don’t like to see management making money from a company they run in any way that is not a) salary, b) dividends, or c) stock holdings. However, I think this arrangement is acceptable, given CEO Boucaut’s large equity stake and the fact that he is personally on the hook to guarantee (I estimate) $20m of Experience Co’s debt as of FY17. It was not clear from the prospectus but I speculate that the initial loan to Boucaut and his acquisition of the airfields may have been arranged so that he had enough assets to be capable of personally guaranteeing EXP’s debt.

The reason I highlight this risk is because in some businesses (Costa Group is one) if the business fails and management owns the assets and was leasing them to the company – management can use the assets to start a business again after the company collapses. Thus, despite their equity holdings, when push comes to shove, managers that own the assets are not necessarily aligned with the owners of the company.

With Experience Co I don’t think that is a major risk, especially given the value of EXP and Boucaut’s shareholding relative to the value of the assets he owns. Overall I think that management are capable and well aligned with shareholders. Anecdotal reports from professional investors speak highly of Experience Co management.

Forecasting

Management is forecasting $165-$175m revenue and $37-$41m in EBITDA in FY19. Consensus forecasts are for $20m+ in FY19 NPAT. Assuming a 10% NPAT margin, roughly in line with historical experience, I personally estimate around $17 million in underlying NPAT.

From $27.4m in EBITDA in FY18, forecast growth is likely to come from (estimated):

>Full year contribution of GBR Helicopters (~+3months, +$0.6m EBITDA)
>FY contribution of Big Cat Cruises (~+5mths,  +$3m EBITDA)
>FY contribution of Tropical Journeys (~+5mths, +$5m EBITDA)

This gets to around $36m EBITDA before any growth in acquired businesses. Other assumptions (p23) include a 5% decline in Australian tandem skydives, flat NZ tandem skydiving, 6% volume growth and 1% pricing improvement in other adventure tours.

Over the next five years, in my conservative estimate, Experience Co raises another $100m in capital ($50m from stock issuance and an additional $50m from debt). It uses this money to acquire businesses at 1.2-1.4x sales, which works out to around 6x EBITDA using a similar 24% EBITDA margin.

I assume EXP grows existing and acquired business revenue organically at 5% per annum for 3 years and 3% per annum afterwards, and margins recover due to normalisation from bad weather in FY18. Long term I think Gross and EBITDA margins are capable of improving by a couple of percentage points.

Cyclicality notwithstanding, I think that Experience Co is the type of business that can usually be safely averaged down. Skydiving and tourist activities like boat cruises likely have a very long business life with minimal risk of obsolescence. As a result, my opinion is that it is safer to make mistakes on the valuation and earnings forecasts here (especially if debt remains low) than it is with some other businesses.

Summary

While Experience Co is not outstandingly cheap, it is a well run business with a sound strategy and the potential to claim market share and build something of a competitive advantage over time. For the reasons outlined above, I think the business has the ability to generate significant additional value and I initially purchased shares at 58 cents. I purchased more shares at 38 cents recently.

I own shares in Experience Co. I have no financial interest in any other company mentioned. I was not remunerated in any way for this presentation, although I stand to benefit from any increase in the value of my Experience Co shares. I have no relationship whatsoever with the Experience Co board or management. This article reflects my own opinion and readers should always do their own research. This is a disclosure and not a recommendation.