Shares in travel group Dart Group (924p) have rallied following the sad demise of Thomas Cook although they still stand some way below last year’s high of over £10 each. Despite this rally, we believe that the shares could have further to go as investors begin to appreciate the potential at the group.
Dart Group is made up of two segments, Leisure Travel and Distribution & Logistics. The former is by far the more important having expanded rapidly over recent years and the Jet2.com name is now well-known. As well as providing scheduled holiday flights, the company also offers ATOL licenced package holidays. Destinations are primarily in the Mediterranean, the Canary Islands and European cities for leisure breaks. Over 40% of package holidays are sold on an all-inclusive basis and this is a particularly resilient offering for families on a tight budget. The distribution and logistics business, Fowler Welch, is one of the UK’s leading providers of food supply-chain distribution; logistics, serving retailers, processors, growers and importers.
In the year to 31 March 2019, revenue jumped by almost a third to £3.14bn (2018: £2.38bn) with profit before taxation rising by 36% to £177.5m (2018: £130.2m). Earnings per share rose by 36% to 98.0p (2018: 72.2p) and the total dividend for the year was increased to 10.2p (2018: 7.5p). This performance reflects the growing success of Leisure Travel products and, during the year, Jet2.com flew a total of 12.82 million flight-only and package holiday passengers versus 10.38 million in 2018. Net cash, stated after borrowings of £983.1m (2018: £806.6m), was £291.2m (2018: £202.0m).
At the company’s AGM in September, it was noted that the later booking trend in the travel business, as reported at the time of the final results, had continued. However, overall demand for both the flight-only offering and package holidays had continued to strengthen. Progress continues to be made at Fowler Welch, with new commercial wins improving the quality of revenue. Although the company remains optimistic that current market expectations for pre-tax profits for the year to 31 March 2020 will be met, it remains ‘very cautious’ in its outlook beyond that due to general cost pressures in the travel industry, weakness in sterling and the potential impact of Brexit on consumer confidence. Despite this, the shares stand on a very low rating and the collapse of Thomas Cook will reduce capacity in the market. Dart is well-placed to pick up a large proportion of this business and we rate the shares as a BUY.
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