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Minoan Group – Interim results. Cavo Sidero Fast Track submission imminent. Buy and build strategy on track. Speculative buy at 14p with a target price of 19p.

On 28th June Minoan Group released its Interim results for the six months ended 31st March 2011.This has been an active period for the Group which following the unanimous approval of its shareholders at the AGM in December, wasted little time in embarking upon the implementation of its Travel and Leisure Strategy. Following the acquisition of King World Travel (KWT) in March Minoan recorded its first revenues since inception, £0.6 million for the period (total transaction value). Given that KWT contributed to less than one full month during the period, this is not representative of the annual revenue run rate going forward. At the operating level the company made a loss of £0.5 million (£0.6 million) including a non cash share based payment of £162,000. The adjusted loss per share was 0.44p (0.43p).

Despite the continuing operating losses the company benefitted from a positive working capital inflow resulting in £0.8million of cash being generated from operations. The company spent £0.4 million on investment, largely relating to the purchase of KWT and received £710,000 during the period from share issuance. This left the company with net cash of £1.1 million.

The balance sheet showed net assets of £36.7 million. The largest item within this is the £35.2 million of inventories which relate largely to historical costs capitalised in progressing the Cavo Sidero project. For accounting purposes this asset value assumes the fruition of the project in which the Board still has confidence. However a recent independent surveyor’s report estimated an approximate value of €100 million for the leasehold asset, subject to full approvals. Stripping out the inventories the company had net current liabilities of £3 million although this will have been ameliorated by the post year end fundraising of £425,000. Within the current liabilities are a number of historical obligations pertaining to the Group, which are payable to the directors. Given the cash generative nature of the new Travel & Leisure business, we therefore anticipate no working capital funding requirement for the current business of Minoan Group whilst it remains in the pre-development stage for Cavo Sidero, assuming the historical liabilities are not called in. We would expect any future acquisitions to either be paid for in shares or funded by further capital raisings.

Travel and leisure

In March Minoan embarked on a buy and build strategy commencing with the acquisition of King World Travel (KWT) on 10 th March for a total consideration of £410,000. KWT is an independent travel business based in Scotland. KWT has six branches and an online capability including the domain name ‘theholidaysearch.com’. The board estimate that for the year ending 31st October 2010 KWT made a normalised pre-tax profit of circa £100,000. We estimate this to represent an attractive margin of circa 10% of commissions, a percentage which we expect Minoan to drive forward over time. Assuming the standard 26% corporation tax rate this puts the acquisition on an attractive net earnings multiple of 5.5 times.

Minoan has wasted no time in winning new business for KWT having signed an agreement to become the exclusive franchisee of Cruise118 within the Scottish travel market. Cruise118 is an award winning web-based cruise travel company which is part owned by World Travel Holdings, the world’s largest cruise distributor, based in the USA. Its unique cutting edge technology and CRM tools have enabled Cruise118 to achieve 400% compound revenue growth in the last two years. The company estimates the Scottish cruise market to have an annualised transaction value of circa £200 million. We see the Cruise 118 deal as an opportunity to grab significant margin share and to improve margins as it migrates cruise customers across from its existing businesses.

On 6th May it was announced that KWT had signed a General Sales Agency Agreement with Sunwing Travel Group Inc to become the General Sales Agent in the UK for Sunwing’s UK-Canada flying programme. Subsequently on 1st June Minoan continued its expansion into the Scottish travel market via the acquisition of a 19.9% stake in Stewart Travel Centre and a management agreement with the owners for the future operation of Stewart.

Stewart, which also trades as Scotlands Cruise Centre, was formed in 1972 by Willie and Ina Stewart and employs 80 people. In addition to its cruise division it also includes Stewart Corporate Travel together with a golf section and an affinity division. In its financial accounts to 30 April 2010 Stewart had a net trading profit (before exceptional items) of £149,000 on sales (being total transaction value) of £21.3 million. With approximately a third of its business in cruises we see significant cross selling opportunities between KWT and Stewart.

Duncan Wilson, the managing director, has the experience to execute Minoan’s pipeline of acquisitions and partnership agreements. He has been in the travel industry for nearly 30 years and has held a number of senior positions including a four year stint as Group Operations Director for MyTravel Group. Recently one of the Travel majors, Thomas Cook Group described UK consumer sentiment as fragile and we would concur with that. However this is giving Minoan the opportunity to buy cash generative businesses on very low earnings multiples.

KWT has a lean branch network and a growing internet presence, hence not mirroring the cumbersome inflexible cost bases of the larger travel companies. We expect Minoan to adhere to these principles going forward, choosing to locate or buy branches in strategic clusters rather than through mass proliferation. The current Travel and Leisure business has no travel assets (hotels, planes etc) and is as such a distribution platform with no inventory risk.

Cavo Sidero

Since 1998 the company has been seeking to develop a trophy asset in Eastern Crete but has come up against a labyrinth of bureaucracy in the Greek courts and thus far has been unable to gain final approvals to begin to break ground. However the company intends to have an updated masterplan submitted to Invest in Greece, the government agency handling Fast Track applications, by 8th July. Once approval has been granted and the contract with the lessor (the Public Welfare Ecclesiastical Foundation Panagia Akrotiriani) has been activated £3.9 million will be payable. The full funding requirement of the project has not as yet been disclosed but we believe that the location and unique nature of the site will be highly attractive to investors in the tourism sector.

The Cavo Sidero peninsular is an area of outstanding natural beauty and historical interest. The project promises to deliver a low density luxury development, with a wide range of amenities and already excellent transport links. A paper by Professor Dimitrios Buhalis of the University of Surrey as far back as 2001 highlighted a number of structural problems in the Greek tourism sector including; the Image of Greece as a cheap, simple, unsophisticated sun-sea destination; the gradual deterioration of product due to lack of reinvestment, failure of the private sector to invest in long term projects and the inadequacy of the Greek planning process. We believe that many of these factors have not been addressed over the last decade and that the industry and local economy would benefit massively from such an ambitious project.

The revised plans for the 25 square kilometre site now comprises a smaller, higher quality and fully sustainable development which the directors believe will be positive for the Project.

The sovereign debt and currency crisis continuing in Greece cannot be overlooked. However it is at times like these that the country should be increasingly keen to promote inward investment. One possibility could be Greece’s exit from the Euro and a return to the drachma. However with so much at stake, the EU is likely to do everything in its power to prevent this. However it is not beyond the realms of possibility. Whilst there would be obvious worries over asset prices the resulting weak currency would be likely to increase the influx of tourists looking to take advantage of lower expenditure in resort. We would also anticipate a large reduction in the future development costs of Cavo Sidero.

At the recent interims Minoan reported that it had commissioned the independent surveyor, CB Richard Ellis – Axies (CBRE) to provide an updated letter of opinion of the value of the Group’s interest in the land. CBRE estimated that the value is likely to be in the order of €100 million based on extracts from the Group’s business plan and full consent.

Forecasts

For 2011 we are including a seven month contribution from the existing KWT business. We are expecting total transaction value of some £8 million given that Minoan’s second half includes the busy summer period. Based on industry metrics we anticipate that this will translate into gross revenue (commissions etc) of £800k and an operating profit of £80,000. It is gross revenue that will feature has the top line of our forecasts from this point on. Given that it will be commencing from a standing start we anticipate that the Cruise118 franchise will add just a further £30,000 gross revenue in 2011. We estimate that Minoan’s share of profits from Stewart will be £20,000 in this financial year. In total we are estimating gross revenues of £830k in 2011. We are assuming a break even position for the Sunwing GSA contract in this year. After central costs of £400 brings us to an adjusted pre-tax loss of £320,000, some £0.4 million better than in 2010.

2012 will be Minoan’s first full year of operation as a Travel & Leisure distribution business. Until such point as all approvals are in place we assume no activity on the Cavo Sidero project although hope to have positive news on this as the Fast Track submission progresses.

We estimate total transaction values of £13 million including sales through Cruise 118 for KWT in 2012. This should translate to gross revenue of £1.3 million and we anticipate an uplift in operating margins (through mix and better cost control) to 20% giving an operating profit of £260,000. We anticipate that sales of Sunwing tickets will start to gain momentum as Minoan leverages its network and anticipate an extra £0.4 million of gross revenue and £205,000 of operating profit (after marketing costs of £200,000) from this activity. We estimate that in its first full year the profit share from Stewart combined with a contribution from the management contract will contribute a further £135,000.

In total we anticipate £1.7 million of gross revenues in 2012 and adjusted profit of £300,000 after central costs equating to adjusted earnings per share of 0.33p.

Valuation

We value Minoan on a some of the parts basis. Taking the CBRE land valuation of €100 million to start with we discount this heavily to £13 million due to the Greek government’s history of procrastination. However we would hope that approvals will be in place by the end of this financial year which will allow us to accrete significantly more value for the asset. Once a full development plan is in place we will be able to ascertain a true value for this landmark project but given the size of the task at hand this is likely to be accompanied by a combination of debt and/or equity financing as well as possible partnership agreements.

In 2012 if we look at the travel and leisure business as a standalone entity, it will generate operating profits of £0.6 million (including Stewart’s contribution). Valuing this on a 12x multiple gives us a value of £7.2 million. However in time this valuation could be much higher once Minoan establishes itself as a major player with a significant installed customer base. In 2006 Canadian airline Transat paid £20 million for Canadian Affair which is one of the largest tour operators in the UK-Canada market. We argue that once the Sunwing GSA agreement gains momentum that the Travel & Leisure division of Minoan Group, either in whole or in part, may become an attractive acquisition target for the Sunwing Travel Group or other major operator.

If we strip out the adjusted net current liabilities of £3 million this brings us to a total target valuation of £17.2 million or 19p per share. Part of the company’s stated strategy is a carefully controlled acquisition programme in the Travel & Leisure industry. If Minoan continues to buy well priced cash generative businesses and sign further distribution deals, this should enable us to increase our forecasts and target price in due course.

Any positive news on the approval process for Cavo Sidero will act as a catalyst for the share price. Conversely any further delays could be detrimental but fortunately Minoan now also has steady revenue streams to support its valuation. We are however cautious about the outlook for the UK consumer and highlight any further downturn in consumer confidence as a potential risk to the business. Our stance is speculative buy.

Financial records & forecasts

Year to 30th September	Gross revenues (£million)	Adjusted Pre-Tax Profits (£million) ~	Adjusted Earnings Per Share(p) ~	Price to Earnings Ratio (x)	Dividends Per Share (p)
2009A	0.00	(0.58)	(1.06)	NA	NA
2010A	0.00	(0.73)	(1.02)	NA	NA
2011E	0.83	(0.32)	(0.36)	NA	NA
2012E	1.71	0.30	0.33	41.84	NA

~ before share based payments

Key Data
EPIC	MIN
Share Price	14p
NMS	5,000
Spread	13.5p – 14.5p
Total no of Shares	89.66 million
Market Cap	£12.5 million
12 Month Range	8.375p – 18p
Market	AIM
Website	www.minoangroup.com
Sector	Travel & Leisure
Contact	Christopher Egleton (Chairman) – 01689 897 397