Cox & Kings Ltd - Initiating Coverage - UBS Securities

UBS Securities have initiated coverage on Cox & Kings Ltd. with a Buy recommendation on the stock with a target price of Rs 200.

UBS has said in its report that Cox & Kings is a global holiday, education travel specialist and operates in niche, high growth and resilient travel segments.

UBS expects Cox & Kings (C&K), a global India-based holiday and education travel specialist, to benefit from the high-growth Indian travel market (C&K India accounts for 24% of FY13E EBITDA) and its niche international business (16% FY13E EBITDA). C&K's £312m buy-out of European business, Holidaybreak (HBR, 60% FY13E EBITDA), could provide a resilient earnings stream.

HBR acquisition EPS-accretive; leverage to ease; superior business model

After debt-funding costs, HBR accounts for 45%/41% of our FY12/FY13 EPS estimates. We expect strong cash flow to help C&K's deleveraging, from 2.9x D/E in FY12 to 1.6x in FY14. We expect revenue and cost synergies from replicating HBR products in other markets, higher purchasing power, and asset sweat of HBR's bed capacity (we assume only some of these benefits). We believe C&K's business model is superior to that of traditional tour operators due to its asset-light sales channel, which has low hotel and airline inventory risk.

We forecast a 39% FY11-14 EPS CAGR; attractive valuation in our view

We forecast a 39% EPS CAGR over FY11-14. Other positives are negative working capital and low capex. We think the derating over the past few months is due to the European debt crisis, high leverage, and an equity infusion overhang. We expect strong cash flow to support a re-rating from the current lows of 7.7x FY13E PE and 6.6x EV/EBITDA.

Valuation: initiate coverage with a Buy rating and price target of Rs200.00 Our sum-of-the-parts-based price target of Rs200.00 implies 10.1x FY13E PE.

Source : Equity Bulls

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