Transmetro Corporation Ltd (ASX: TCO): A Strong Long-Term Buy Backed by Real Assets, Earnings Momentum, and Industry Recovery

Key Takeaways: Transmetro Corporation (ASX: TCO) presents itself as a standout long-term buy to us. With nearly 50 years in the game, this Australian-owned hotel group owns key properties in Sydney, Perth, and Darwin—offering solid asset backing with an NTA of $2.07 per share. After exiting underperforming leases and tightening operations, the company’s turnaround is clear: first-half FY25 net profit jumped 57%, and EBITDA margins hit nearly 37%. Backed by a low net gearing of just 8.5% and $8.4 million in cash, TCO now has the firepower to reinvest, grow, or return more to shareholders. It’s also riding the wave of a strong tourism rebound, with growing demand from both domestic travellers and returning Asian markets. With a conservative valuation target of $2.55 per share, we see plenty of upside ahead in this undervalued, asset-backed hospitality play. --- We view Transmetro Corporation Ltd (ASX: TCO) as an excellent long-term buy. With a combination of tangible asset backing, a return to earnings growth, and a favourable macro backdrop in the Australian hospitality sector, TCO is well-positioned to generate long-term value for shareholders. In our view, it represents a rare opportunity to invest in a stable, asset-rich, and well-managed business at a time when industry fundamentals are turning decisively positive. A Proudly Australian Hotel Operator with a Proven Track Record Transmetro is a 100% Australian-owned hospitality company with nearly five decades of operational experience. It owns and operates hotels and serviced apartments under the Metro Hotels and Metro Apartments brands. The group’s properties are strategically located in Sydney, Perth, and Darwin, and cater to both business and leisure travellers. Most properties fall in the 3.5 to 4.5-star range, appealing to value-conscious travellers looking for reliable, quality accommodation. The company’s apartment-style offerings are particularly attractive to families and long-stay guests, reflecting consumer preferences that have strengthened in the post-pandemic era. Tangible Asset Backing Offers Downside Protection and Value Support What sets TCO apart is its solid asset base. The company owns a few of its hotels outright, with an NTA per share that continues to increase. This provides a fundamental floor to valuation and gives investors a level of security that’s rare in small-cap hospitality stocks. These assets are in high-demand urban markets, and we see this as an important buffer against market volatility. TCO also continues to refine its portfolio, having exited non-core and underperforming leased properties. This active management strategy has reduced lease liabilities and improved the quality of recurring earnings. Strong Earnings Recovery and Margin Expansion Are Now Underway The first half of FY25 showed a clear turnaround in operational performance. Revenue rose modestly, but EBITDA and NPAT grew at double-digit rates, underpinned by cost efficiencies and a tighter portfolio focus. Margins expanded meaningfully, confirming that much of the company’s post-pandemic restructuring is now delivering results. This trend, if sustained, should support continued earnings growth through FY25 and beyond. We’re particularly encouraged by the company’s ability to generate higher profitability without overextending its balance sheet. A Strengthened Balance Sheet Enables Strategic Optionality TCO now has one of the cleanest balance sheets in its peer group, with very low net gearing and a healthy cash position. This provides room to invest in property upgrades, pursue growth opportunities, or simply maintain resilience through potential economic cycles. It also increases the likelihood of continued and growing dividend payments, something that resumed in FY24 after a multi-year hiatus. Australia’s Hospitality Sector Is Rebounding, and TCO Is Well Positioned The Australian tourism and hotel industry is rebounding, with key metrics such as occupancy, RevPAR, and international arrivals all trending upward. Sydney and Perth, where TCO has significant exposure, are among the top-performing city markets. Demand from Asia, especially China and India, is strengthening, and TCO’s historical alliance with the Argyle Hotel Group positions it to capture a share of this returning travel segment. In addition, its mid-market positioning makes it attractive to a wide customer base, including cost-conscious domestic travellers and long-stay international guests. Experienced Management with Long-Term Vision and Strategic Alignment Leadership is a key strength. Founder and Managing Director John McEvoy remains actively involved and owns a large equity stake, ensuring that management decisions are closely aligned with shareholder interests. The board has deep operational experience, and while succession planning is a consideration, the current leadership has demonstrated discipline and focus throughout challenging periods. Compelling Long-Term Upside from a Stable, Undervalued Platform When we consider the combination of real asset backing, expanding margins, renewed dividend payments, and exposure to a growing sector, we see TCO as significantly undervalued relative to its long-term potential. For investors with a multi-year horizon, this is the kind of stock that can deliver consistent returns through both income and capital growth. We remain confident in our long-term buy recommendation and believe TCO is well placed to outperform over time.

A Rebounding Tourism Sector Creates a Positive Backdrop for Growth We see the broader environment as highly supportive of Transmetro Corporation’s outlook. Australia’s hotel and tourism sector is well into recovery mode, with national occupancy levels climbing, average daily rates holding steady, and revenue per available room (RevPAR) improving across major cities. In fact, key markets like Sydney and Perth, where Transmetro has a strong presence, are already performing ahead of pre-pandemic benchmarks. The return of international travel, especially from Asia, is gaining momentum thanks to increased flight connectivity and strong visitor demand. At the same time, business and conference travel (MICE) is picking up, which bodes well for urban hotel operators. Transmetro’s properties, strategically located in central business districts and high-demand metro areas, are positioned to capture this wave of returning activity. What we like about TCO’s niche is that it operates in the mid-range segment (3.5–4.5 star), appealing to a broad base of travellers seeking comfort and affordability. This part of the market has proven resilient, especially among cost-conscious domestic and international tourists. Earnings Are Accelerating as Strategy and Market Recovery Align TCO’s most recent results show clear evidence of operational momentum. In the first half of FY25, revenue increased by 9.4%, but more importantly, EBITDA jumped 21.8% and net profit rose 57.3%. That tells us this isn’t just a top-line recovery, there’s real margin expansion happening. The company is benefiting from both the rebound in hotel demand and the disciplined cost control measures it implemented after exiting underperforming leases. This translated into an EBITDA margin of nearly 37%, a strong result in the hospitality space. When we annualise the HY25 earnings, we estimate a forward EPS of around 26 cents, which represents a material improvement over FY24. We believe the market hasn’t fully priced in this turnaround. Not only has TCO shown it can grow profits, but it’s doing so while keeping capital spending tight and maintaining a lean operating model. That’s a great combination for long-term value creation. A Low-Gearing, Asset-Backed Balance Sheet Adds Strength One of the things that gives us confidence in TCO’s investment case is its conservative balance sheet. As of December 2024, the company had $8.37 million in cash and just $2.4 million in net debt, resulting in a low net gearing ratio of 8.5%. This provides strategic flexibility, whether to reinvest in existing properties, pursue acquisitions, or simply stay well-capitalised in a cyclical sector. Even more importantly, the company’s Net Tangible Asset (NTA) per share is now $2.07, underpinned by a portfolio of owned properties in strong locations. This provides investors with a clear margin of safety. We see this tangible asset base as a fundamental support for valuation, especially in a market where real estate-backed companies are in favour. Valuation Suggests Meaningful Upside with Conservative Assumptions We approached TCO’s valuation using three core methods, asset-based, earnings-based, and operating cash flow-based, and all support a price target above current trading levels. NTA-Based Approach: Applying a modest 1.23x multiple to the company’s $2.07 NTA results in a valuation of $2.55 per share. For a profitable, asset-rich hospitality group, this premium is justified. Earnings-Based Valuation: Using the annualised HY25 EPS of 26.1 cents and applying a forward P/E of 10x (still conservative for a recovering sector), we arrive at a valuation of $2.61. EV/EBITDA Approach: Annualised EBITDA for FY25 sits around $9.5 million. Using a forward EV/EBITDA multiple of 5.0x, a level well below larger peers—we estimate an enterprise value of $47.5 million. Adjusting for net debt gives us a target equity value of $45.1 million, or $3.37 per share. To remain conservative, we set our long-term target price at $2.55 per share, reflecting a balance between upside potential and measured valuation assumptions. We are convinced that Transmetro Corporation checks all the right boxes for a long-term portfolio addition. It operates in a recovering industry with strong tailwinds, has delivered a genuine earnings turnaround, maintains a low-risk balance sheet, and is backed by valuable real assets. On top of that, it has resumed dividend payments, reflecting confidence in ongoing cash flow generation. For investors seeking a stable, under-the-radar hospitality stock with a solid asset base and visible earnings growth, TCO represents a clear long-term buy. We think the market is undervaluing the turnaround, and as industry conditions continue to improve, there is significant upside ahead.