Key Points: 

  • Morningstar has initiated coverage on no-moat-rated Kelsian (KLS) with a fair value estimate of $6.50 per share.
  • Kelsian operates public transport bus services throughout Australia and Singapore on behalf of state governments.
  • The business is largely built on long-term, low-risk, government-backed service contracts, albeit with some renewal risks and intense competition in any new tenders.


Jacqueline Moody: So, Kelsian is probably best known for operating within the leisure cruise space. So, they operate a fleet of leisure cruises under the brand name Captain Cook Cruises around Sydney Harbour, but the majority of their earnings actually come from public transport contracts. So, they operate with state governments to provide public transport services, so its buses and ferries in Australia as well as some bus services in Singapore.

So, there are two key reasons why we think Kelsian is an interesting stock at the moment. The first reason is, they've grown a lot in the last couple of years. So, prior to 2020, they purely operated in that leisure and cruise space, and post 2020, they made a big acquisition of a company called Transit Systems Group and that brought on all of the public transport contracts. And the second reason why we think they're an interesting business at the moment is that these contracts that they have with state governments, they have what's called indexation mechanisms built in. So that means that Kelsian's revenue within these contracts goes up with fuel costs, wage costs and CPI. So, they are reasonably well protected against a lot of the inflationary pressures we're seeing in parts of the economy at the moment.

So, firstly, the public transport market is very competitive, and as with any contract-driven business models, there is an element of renewal risk. So, if Kelsian loses a contract or is unable to renew it, that could pose a bit of a threat to earnings. However, Kelsian sort of aims to mitigate this through expansion overseas and they're doing so via acquisition. However, this strategy also comes with some execution risks. I think a good example of that is their most recent acquisition of All Aboard America!, which is a U.S. motor coach company that Kelsian is buying for $500 million. We see a few key risks with this transaction considering Kelsian has no experience operating in the U.S. motor coach market. It's also highly competitive and contracts within these markets are quite short-term and don't offer the same pricing indexation. So, we sort of see this transaction as the litmus test for Kelsian's earnings resilience going forward.