Kelsian’s (ASX: KLS) boats and buses are roaring back to life

Behzad Golmohammadi Behzad Golmohammadi, April 13, 2022

Increasing petrol prices can send more people on buses

Kelsian Group Limited (ASX: KLS) provides land and marine tourism as well as public transport services in Australia, Singapore and the United Kingdom. It operates through Marine & Tourism, Australian Bus and International Bus segments. The Marine & Tourism segment operations include vehicles and passenger ferry services, coach tours and package holidays.

 

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The Australian Bus segment operates metropolitan public bus services on behalf of state governments in Australia. The International Bus segment operates metropolitan public bus services on behalf of governments in London and Singapore. The company was formerly known as SeaLink Travel Group and changed its name to Kelsian Group in November 2021. Kelsian Group was founded in 1989 and is headquartered in Adelaide, Australia.

We believe Kelsian has a solid business in the face of the current inflationary environment and with expensive petrol prices, more people will opt for bus services, which should considerably increase the company’s profitability, in our view.

 

The story of a successful transformational acquisition

Let’s see how Kelsian’s share price performed since the company’s transformational acquisition of Transit Systems Group in 2019.

 

Kelsian's (ASX: KLS) boats and buses are roaring back to life 1

Kelsian Group, Weekly Chart in Semi-log Scale (Source: Metastock)

 

❶ Kelsian acquires Transit Systems Group, Australia’s largest private operator of metropolitan public bus services and an established international bus operator in London and Singapore.

❷ FY20 results prove the major acquisition of Transit Systems as a success. The company reports a substantial increase in revenues and profits.

❸ 1HY21 records another massive jump in profits on PCP, with renewed long-term bus, ferry and light rail contracts in several major cities in Australia and Singapore.

❹ COVID outbreaks, particularly in Europe and Asia, hammer the sentiment on the stock.

❺ Share price is in the process of breaking out.

 

Acquisition paid off

Kelsian’s stock price gapped up about 20% on the announcement of its transformational acquisition of Transit Systems Group (point 1 on the chart). Statistically, acquirers’ share prices decline by 1% to 3% on average following the announcements of major acquisitions. This makes the few cases where the acquirer’s share price increases on the back of an acquisition announcement very special and it is seen as a strong indication of a possibly successful acquisition.

Kelsian’s pursuant financial reports proved the acquisition was the right  move and the company kept recording substantially increasing revenues and profits, which took the share price from $4.50 in August 2020 to an all-time high of $10.50 in April 2021.

Kelsian’s share price consolidated its gains for the next 6 months until COVID outbreaks started to happen around the globe, which particularly hurt the profitability of the company’s Marine and Tourism segment, while the bus operations remained widely intact. This resulted in the share price correcting to about $6.50, which coincides with the 50% Fibonacci retracement of the uptrend from the pandemic low of $2.50 to the all-time high of $10.50.

Kelsian’s share price traded in a $6.50 to $7.50 range for the last few months and we believe a break out is now taking place (point 5 on the chart).

 

Kelsian Group has a solid business

According to the company’s announcements, the bus segment’s revenue was largely unaffected by COVID lockdowns and the company kept improving margins during the pandemic. An important upside to Kelsian’s bus segment’s operations is that its government service contracts are CPI Indexed. This means that the company can maintain its gross profit margins in the inflationary environment we are experiencing.

However, the marine and tourism segment was affected by COVID restrictions. We expect this segment’s performance to improve soon as all borders are now open and governments have been lowering COVID restrictions.

Kelsian paid a 16-cent fully franked dividend in the last twelve months. We believe the company can maintain its current dividend policy in the future, which gives it a dividend yield of 2.1% at the current share price around $7.58.

 

The bus segments are set to boom

With oil prices at their highest levels since 2014 and petrol prices of around $2.00 per litre, we believe more people now will opt for public transport before thinking about driving their private cars. The bus segments’ costs are largely fixed and more passengers getting on buses will directly contribute to Kelsian’s bottom line.

 

How to play Kelsian’s stock

We believe the share price consolidation in the last few months has formed a reversal triangle pattern. A break-out is taking place by breaking the resistance level at $7.50 (the green line on the chart). Using the depth of the triangle pattern (the red lines on the chart) and the Fibonacci retracement levels depicted on the chart, we see $9.00 as the target for the share price to be reached within the next few months.

A break of the blue ascending short-term trendline on the chart around $7.00 can be used as a stop-loss level, although we would suggest a slightly higher stop-loss of $7.30.

From a technical analysis perspective, a downward break of the rising trendline will be an indication of bearish sentiment on the stock and can be the beginning of another correction in the share price.

 

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