Tourism Holdings (NZSE:THL): Can a Declining ROCE Be Revived?

Tourism Holdings Limited (THL), New Zealand’s largest RV rental operator and a global player in the campervan and caravan sector, faces a critical juncture. Despite its dominant market position—boasting a 75% revenue share from high-demand regions like New Zealand and Australia—the company’s Return on Capital Employed (ROCE) has slumped to a six-year low of 6.9%, down from 9.8% in 2020. This decline underscores a widening gap between THL’s capital investments and the returns they generate. Can strategic pivots and market shifts reverse this trend?

The ROCE Dilemma: A Tale of Stagnation and Stakes

ROCE, a key metric for evaluating capital efficiency, measures how effectively a company uses its capital to generate profits. For THL, the decline reflects a mismatch between rising capital expenditures (driven by post-pandemic expansion) and weakening profitability, particularly in its U.S. division.

Key drivers of the slump include:
1. U.S. Tariff Fallout: THL’s U.S. bookings from European tourists—representing 15% of global revenue—plummeted by 40–50% in 2025 due to geopolitical tensions and punitive tariffs. This segment, once a growth engine, now drags on margins.
2. Overcapitalized, Underutilized Fleets: THL has invested heavily in expanding its fleet and global footprint since its 2022 merger with Apollo Tourism. However, weak demand in key markets means much of this capital remains unproductive.
3. Margin Pressure: Despite a 2% revenue rise in 1H 2025, net income plunged 36%, with profit margins collapsing to 5.5% from 8.8% in 2024.

Strategic Adjustments: Diversifying, Downsizing, and Diversifying Again

To counter these headwinds, THL has adopted a three-pronged strategy:

1. Geographic Diversification

• Focus on Non-U.S. Markets: CEO Grant Webster highlights year-on-year rental growth across all non-U.S. regions for FY26, with New Zealand and Australia leading the charge. New Zealand’s February 2025 saw record U.S. tourist arrivals (63,700 visitors), a positive sign for regional demand.
• Canada’s Limits: While Canadian demand is rising, peak-season capacity is near maxed out, limiting its ability to offset U.S. losses.

2. Operational Flexibility

• Fleet Management Overhaul: THL is halting new fleet purchases and extending rental periods for existing vehicles. This tactic aims to reduce costs and avoid selling assets at depressed prices.
• Sales-to-Rental Shift: With weak vehicle sales, THL is retaining more inventory in its rental pool. This strategy buffers against margin hits while awaiting recovery.

3. Financial Prudence

• No Equity Raises: Despite a 67% share price drop since 2024 (to a five-year low of NZ$1.43), THL insists it has no need for fresh capital. Its debt-free position (post-pandemic) and equity growth provide a safety net.

The Sustainability Edge: A Long-Term Differentiator

THL’s commitment to the Future-Fit Business Benchmark—a framework aligning operations with planetary boundaries—could offer a competitive edge. By embedding sustainability into everything from fleet electrification to community partnerships, THL aims to attract ESG-focused investors and mitigate regulatory risks. For instance:
- Water Management: THL is reducing water use at high-demand destinations like Queenstown, New Zealand.
- Carbon Neutrality: Goals to offset emissions through reforestation and renewable energy partnerships are enshrined in its 2030 roadmap.

Risks and Realities: Can the U.S. Market Be Salvaged?

The single largest threat remains THL’s U.S. exposure. While domestic U.S. camping demand is growing, geopolitical tensions—such as visa restrictions and anti-China travel advisories—show no sign of easing. Analysts warn that without a rebound in international bookings, THL’s ROCE could remain stuck below 7% for years.

Meanwhile, global macroeconomic risks loom large. A potential recession could further suppress discretionary travel spending, squeezing margins in all markets.

The Bottom Line: A Gamble on Resilience

THL’s path to ROCE recovery hinges on three factors:
1. Market Diversification Success: Can non-U.S. growth offset losses? Analysts project 5.9% annual revenue growth through 2027, but this assumes stabilization in key regions.
2. Operational Efficiency Gains: Fleet adjustments and cost controls must boost EBIT margins. Current projections suggest EBIT could rise to NZ$120 million by FY27, but this depends on U.S. demand turning.
3. Geopolitical Uncertainty: A thaw in U.S.-China relations or tariff removals could reignite international bookings.

Conclusion: A Risky Bet, But Not Without Hope

Tourism Holdings’ ROCE trajectory remains in the red, but its strategic moves—diversification, capital discipline, and sustainability—suggest a path to recovery. The company’s historical resilience (surviving both the GFC and pandemic) offers hope, as does its strong balance sheet. However, investors must weigh the risks: a prolonged U.S. slump could keep ROCE depressed indefinitely.

For now, the numbers are mixed:
- ROCE at 6.9% (vs. 9.8% in 2020)
- Net income down 36% in 1H 2025, but non-U.S. growth at 7%+
- Debt-free balance sheet provides flexibility

While THL is far from a “compounding machine,” its adaptability and geographic spread mean it’s not out of the game. Investors seeking a contrarian play on travel recovery—or ESG-aligned operators—might find value here, provided they’re willing to bet on a U.S. rebound. For others, the risks remain too steep.

In the words of CEO Webster: “We’re not just surviving—we’re reinforcing for the long term.” The question is whether the long term will be kind enough to reward that patience.