Forsyth Barr has initiated coverage on Tourism Holdings Ltd (THL) with an outperform rating and a $3.25 a share target price.
Broker Suzanne Kinnaird said the earnings outlook for THL implied double digit earnings per share growth in each of the next three years.
Return on capital was a key driver of THL's management decision-making.
During the past four years, returns had increased consistently and were now above the weighted average cost of capital (wacc).
"We expect them to continue to climb given scale benefits and competitive advantage.''
Historic return volatility had been shaped by high capital intensity with limited flexibility in tourism downturns, she said.
The shift to a less capital-intense business model would create a more nimble business and less volatile returns in future.
Tourism was a thriving industry globally, Ms Kinnaird said.
Underlying structural growth would continue to persist, driven by increasing affordability and growing air connectivity.
THL was well positioned to benefit from the industry growth.
However, tourism was also cyclical and susceptible to external shocks, including the uncertainty events such as Brexit might provide.
Historic downturns had inflicted multi-year damage on THL in the past but its business model was now better suited to manage them, she said.
Motorhome rentals was a niche but growing part of the global tourism industry.
THL was the only listed participant. While barriers to entry were low, scale benefits created competitive advantage in the low-cost procurement of new vehicles, offshore customer acquisition, multi-site operations and accessing capital.
"We expect THL to generate double digit earnings per share growth in each of the next three years. Earnings growth stems principally from improving vehicle utilisation, fleet increases and higher yields.''
