M Partners Shuttleworth Upgrades Guestlogix from Sell to Hold

Guestlogix founders Tom Douramakos and Brett Proud. The company recentlly unveiled a strategy to re-focus its resources on acquiring market share for its core “cashless cabin” retail platform and putting the OnTouch program on the back burner.

The definition of insanity, Albert Einstein famously quipped, “is doing the same thing over and over again and expecting different results”. For Toronto’s Guestlogix, the idea of moving their business up the value chain seemed like a no-brainer. After all, the company has successfully delivered ancillary revenue to airlines for a decade.

In actual practice, Guestlogix’s OnTouch Merchandising program, launched in 2010 to capitalize on an Asian trend of higher value, non-physical items such as theatre tickets being purchased on planes, may have been ill-timed.

On January 31st, Guestlogix held an investor day. There, the company unveiled a strategy to refocus its resources on acquiring market share for its core “cashless cabin” retail platform known for its now ubiquitous handheld point-of-sale devices, and putting the OnTouch program on the back burner.

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M Partner’s Ron Shuttleworth attended the one day conference and says he likes the company’s back to basics approach. Shuttleworth isn’t ready to bet the farm on a Guestlogix resurgence, but thinks the company is returning its focus on a market in which it has a proven track record, and a bit of a moat.

Guestlogix, he points out, has 90% market penetration rate in North America, with a nearly flawless rate of renewal. Management will now set its sites on the approximately 1.3 billion passenger trips they do not service in Asia Pacific, the EMEA, and Latin America. While maintaining his price target of $.50 cents on Guestlogix, Shuttleworth, in a note to clients today, upgraded the company from Sell to Hold.

For Guestlogix, the move back to its core-competency was likely triggered by a report it commissioned called The 2011 Onboard Retail Benchmark. Released in December, the study examined inflight sales trends in North America and showed the primary drivers of onboard ancillary revenue are still alcohol, fresh food and comfort items. While selling theme park passes, theatre tickets and catalogue merchandise would represent more revenue for Guestlogix, uptake on those items has not yet materialized in the way the company envisioned.

Guestlogix was formed in 2002 and has since become the dominant player in the business of delivering ancillary revenue to airlines, with contracts to service more than a billion trips annually. The company’s revenue has grown from just $5.43 million in fiscal 2007 to $25.72 million in FY2010. On February 27th, the company will report its fiscal 2011 numbers.

Shares of Guestlogix closed today up 1.2% to $.42 cents.