Tourism Holdings – Motoring Through the Capital Cycle?

We do not own Tourism Holdings but did once. We inherited a position in Tourism Holdings when the new Tower investment team was established in Auckland in 2010 and we came together as a team. Tourism Holdings at that time was deeply out-of-favour and its price was regularly hitting new lows as profitability suffered from an oversupplied campervan rental market.

The decision to keep the investment in Tourism Holdings was nevertheless simple. While it was making losses, it had assets that it could sell, namely campervans. An orderly sell down of those assets would have allowed Tourism Holdings to generate enough positive cash flow to service and pay down its debt. The share price was so low that it was more than twice backed by those assets. We were effectively buying two campervans for the price of one.

Also, capital was leaving the industry as competitors failed or consolidated. To us, it looked like a perfect time to play the capital cycle.

The diagram below summaries the capital cycle. Industries with limited barriers to entry and products that are relatively undifferentiated often suffer from the effects of a capital cycle. When times are good and returns are high, capital flows into the industry, chasing those returns, but ultimately oversupplying it and subduing prices and returns. Low returns force capital out of the industry until supply and demand are balanced and pricing improves. New supply lags investment, which lags prices. Any further increase in demand results in a period of tight supply, high prices and super-returns, encouraging capital into the industry again.