Companies: HBR   

These are dark times for the global tourism industry. 11 September, the Bali bombing, war in the Gulf — all have taken their toll on airline and holiday companies alike.

Amid the turmoil, however, Holidaybreak — best known as the operator of European camping holidays — has fared surprisingly well. Indeed, the growth it has reported over the past five years has been nothing short of phenomenal. As Dresdner Kleinwort Wasserstein analyst James Amley suggests, the holiday industry has been receiving plenty of criticism of late, 'but [Holidaybreak] is relatively risk averse'.

The results speak for themselves. Since 1998, revenues and profits have increased year-on-year. Latest full year results to September were the company's best ever. Turnover increased by 13.6 per cent to £218.7 million, while pre-tax profits advanced a similar amount to £27.1 million. Debts increased from £25 million to £32.4 million.

Precipitating sustained growth have been a series of astute acquisitions, which — according to Baird analyst Nick Batram — have afforded the company a near 76 per cent stake in the European camping holiday market.

Though by no means Holidaybreak's only business, the camping division — which sells holidays on campsites in France, Spain and Italy to (primarily middle class) British, German, Irish, Dutch and Danish families — is where the company began and still accounts for 50 per cent of all sales.

It is this division that has also witnessed the most significant level of acquisitive expansion. Holidaybreak floated as Eurocamp in 1991, with a market valuation of £59 million. It took a major step forward in 1998 when it acquired leading competitor Keycamp for £35 million. Then, in September of last year, Eurosites — another major rival — was snapped up from beleaguered UK holiday group MyTravel, for £29.9 million.

Despite acquiring these rival brands, Holidaybreak continues to operate each separately. Those who book with Eurocamp will thus have a slightly different experience to Keycamp customers and so on. The one slight variation is Eurosites. Chief executive Richard Atkinson explains that this services a slightly lower end of the market — though still with an emphasis on the middle class family bracket.

Reporting the strongest growth of any of the company's businesses last year, meanwhile, was Holidaybreak's Hotel Breaks division. It saw sales rise 33 per cent to £76.9 million in 2002, while profits rose from £5.4 million to £7.8 million.

The company moved into this area in 1995 — once again through acquisition — and now offers short breaks to more than 1,700 hotels in the UK, across Europe and a number of destinations further afield too.

Holidaybreak's third and final division is Adventure Holidays, contributor of roughly 15 per cent of revenue. This business provides activity-based holidays in more far-flung destinations such as the Andes, Borneo and Nepal and, despite the recent global upheavals, appears to have held up rather well.

Adventure Holidays supplies trips to more than 107 countries, offering activities ranging from trekking and safaris, to diving in the Red Sea. Atkinson notes that, while demand for such trips is 'clearly more uncertain at the moment, more and more people want to experience something on their holidays, not just have a passive trip'.

Management, Culture & Risks

The views that many in the City hold of Holidaybreak's management team are best summed up by Dresdner's Amley who notes that those at the helm are 'very decent, not at all flashy — exactly what you want at the moment'.

Having first started working for the company in 1975, as an onsite courier the summer after he finished university, Atkinson is a powerful figurehead.

By the early 1980s, when Eurocamp's original owners decided to sell out, he was elevated to the position of managing director, leading a successful management buy-out from then owner Next in 1998.

With all of this experience behind him Atkinson is, perhaps more than anyone else, qualified to identify the dangers facing his firm.

Unsurprisingly, he acknowledges that events in the Middle East are making conditions very tough for the travel industry at present and suggests that holidaymakers — not just in the UK but in Germany and Holland as well — seem to be 'reluctant to commit themselves' to summer vacations at present.

Outgoing chairman Angus Crichton-Miller's comments at Holidaybreak's February AGM confirmed as much.

Crichton-Miller, who has since been replaced by former British Airways chief executive Robert Ayling, explained that the camping division's first half performance in particular had thus far 'reflected the general malaise in the overseas summer holiday market'. He also went on to state, however, that 'our research indicates that consumers are, in the main, still intent on booking a summer holiday but are understandably reluctant to make commitments at present.'

More encouraging was the news that the Hotel Breaks business continues to perform strongly and, somewhat surprisingly, that the Adventure Holidays division also enjoyed 'an excellent start to the year', with sales running 14 per cent ahead of 2001/02.

Due to its dependence on long-haul flights to exotic locations, this business — ahead of the others — was expected to prove more susceptible to any downturn.

Growth Prospects

While management and analysts alike believe that Holidaybreak will — like the rest of its sector — be affected by any sustained downturn, they also propound that it possesses several defensive qualities.

For one, as Amley suggests, 'people may be too worried to fly to Florida for two weeks at the moment, but popping over to France is a different matter.' For another, Atkinson argues that 'we display qualities that are now becoming increasingly valued: resilience, the ability to grow at a decent — if not spectacular — rate and to pay a good dividend.'

Moreover, the company is able to improve margins in simple ways. The increasing trend of those booking camping holidays to opt for mobile home accommodation rather than staying in tents, for instance, greatly enhances profitability. It also offers longer-term benefits as it is becoming increasingly common for Holidaybreak to build to a higher initial specification, refurbish after four years and in doing so prolong the life expectancy of each unit beyond the traditional ten years.

Despite the current political climate, analyst perceptions of Holidaybreak are largely positive. Batram, for instance, describes it as 'a very good company with a very good business model', while Amley reckons it 'a nice solid play'.

Their forecasts reflect these views. Most analysts tend to rate the company as an 'outperform', forecasting sales of more than £260 million and pre-tax profits of £32 million before around £6 million of goodwill for the full year.

Having seen its share price fall 24 per cent, with the market, since October's 610p record high, forecast earnings of 48.1p place Holidaybreak on an undemanding forward rating of 9.7 times. Add to this an expected 2003 dividend yield of 4.6 per cent and the shares look well worth buying at present levels.

Obviously, like all travel companies, Holidaybreak's immediate prospects are dependent on events in the Gulf and a prolonged conflict would almost certainly hinder its progress.

But, longer-term, the company should be evaluated for what it is — a well run business in a sector likely to show sustained growth over a prolonged period, which has proved its skill at integrating acquisitions and pays a strong dividend. Boil it all down to this and Holidaybreak appears a solid portfolio stock.