Fair value of $16. ECG is initiating research coverage on shares of Universal Travel Group (UTG) with a Buy rating and target price of $16, which assumes a potential ROI of 40%. On the heels of a 50% rally following the effectiveness of a 3 for 1 reverse stock split (as of March 31, 2009), our target price assumes that the shares can continue to trade up to a P/E of12x and10x conservatively projected 2009/2010 EPS of $1.22 and $1.53, respectively, though the recent run up suggests that the opportunity may be more suitable for investors with a 12-month time horizon and thus a tolerance for speculative risk. Our positive view remains reasonable based on our firm conviction that UTG’s business can sustainably operate at a 3-year revenue and earnings CAGR of 25% - versus its uninterrupted historical CAGR north of 40% - which would imply the shares are currently trading at a compelling valuation level based on PEG (0.4x), relative (30-40% discount to U.S.-listed peers on all metrics), and DCF valuation bases.
Near-term projections (2Q09, 3Q09, 4Q09) are based on positive macro/industry and micro trends, but minimally on new brand building and business initiatives such as the rollout of the company’s capex-intensive TRIPEASY kiosk concept, which has the makings of serving as a significant top and bottom-line growth accelerator and catalyst for the stock over a 6 to 12-month period. Recently, the company also received approval for a NYSE/Amex listing, which we anticipate will continue to create a wider secondary market for the shares.
In addition, business and leisure travel within China appears to be stabilizing, with the government stimuli and 50%+ run ups in the mainland composites clearly aiding sentiment. To its credit, we believe UTG, over the past twelve months, has endured extensive discounting by airlines and hotels as a result of its well-diversified and improving revenue mix as reflected by gross margin improvements into the mid to high 30% range. Looking forward, profitability levels should be supported by potential for upside pricing surprises, further government initiatives to promote domestic consumption either through subsidies or tax incentives, the likelihood of steady commission rates on air and hotel bookings, and the ability for the company to offset declines in revenue per air ticket or hotel room with volume growth and cost controls.