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Travel boom, or kaboom?



Company Ticker  March high March low Fall %  Current $ %
Flight Centre FLT  $        32.15  $       9.91 -69.18%  $     11.70 15.30%
Corporate Travel CTD  $        14.12  $       4.35 -69.19%  $     10.41 58.21%
Webjet WEB  $        10.00  $       3.76 -62.40%  $       3.42 -9.94%
Hello World HLO  $          3.28  $       0.85 -74.09%  $       1.89 55.03%
Average -68.71% 29.65%

It has been a tough year for the travel sector. Hit by ravaging bushfires and then decimated by a global pandemic, there was little chance it could have prepared for something of this magnitude. With aircraft grounded, borders shut and global travel restricted, the travel industry came to complete standstill with virtually no demand. Airline and travel companies were left to fend for themselves. Some survived, some have already fallen. On a global scale, roughly 75 million jobs and $2.1 trillion in revenue is tipped to have been lost from the pandemic. Few industries have fallen as fast. On average, ASX-listed travel stocks fell by 68.71% from their top to bottom share price during March 2020.

But there is light at the end of the tunnel.

  • The deeply sold-off sector received a much-needed boost after Treasurer Josh Frydenberg raised the possibility that more stimulus could be on the way for it. There is also hope that within five weeks Victorians, together with the rest of the country, will able to move freely within Australia’s borders. This could provide some relief for the sector until international tourists are allowed to visit again – which could be years away.

    Stockbroker Morgans has released a data pack with key themes investors should expect this reporting season and has issued its recommendations on four key stocks in the sector.

    Current state of play:

    • With Victoria the exception, domestic travel is slowly improving, and borders are on the verge of reopening. It is a breath of fresh air and has driven the recent rally in the sector. Short-term, fly-in, fly-out-type corporate travel is back in action but its recovery won’t be as dramatic as leisure, due to the ‘Zoom conferencing’ effect.
    • International travel is largely non-existent and not expected to return in any significant form until 1Q or 2Q of FY22. In fact the International Air Travel Association (IATA) is suggesting a full recovery to pre-COVID levels won’t occur until 2024 or later.
    • Domestic recovery is well underway in China and New Zealand.
    • The USA has started to see a rising in numbers of COVID-19 cases and so travel demand has stalled once again.
    • Travel within Europe is underway, with short-haul international flights within the region on the rise, however, recent bans by the UK on travel to Spain may slow this again.

    Morgans says the travel industry won’t return to FY19 levels until FY23 and effectively it will require a vaccine to restore confidence. This was further confirmed by Warren Buffett’s recent comments, suggesting that a vaccine is the only hope for the sector after selling all of his airline stocks. Domestic travel will recover first with international travel taking much longer to return. Most leveraged to a domestic travel recovery are:

    1. Corporate Travel (ASX:CTD)
    2. Flight Centre (ASX:FLT)
    3. Hello World (ASX:HLO)
    4. Webjet (ASX:WEB)

    Morgans says all companies are well positioned to win market share from this domestic recovery.

    Company Ticker FY20F FY21F FY22F FY23F FY20F FY21F FY22F FY23F
    Flight Centre FLT N/A N/A 10.5x 9.1x -49.4x 60.8x 3.7x 3.4x
    Corporate Travel CTD 37.9x 71.4x 14.5x 10.8x 17.5x 24.3x 8.2x 6.0x
    Webjet WEB 50.0x N/A 24.2x 11.7x 18.4x -41.0x 10.8x 6.0x
    Helloworld HLO 22.0x N/A 17.6x 6.8x 5.9x 19.4x 5.6x 3.9x

    The broker’s profit forecast going forward isas follows:

    • 1H21 will be loss-making followed by modest profits in 2H21.
    • FY22 is somewhere between FY21 and FY23.
    • FY23 is back to 12 months to December 2019 run rate

    Morgans has picked Corporate Travel (CTD) as its preferred domestic recovery exposure stock, as 60% of company revenue comes from domestic travel.

    The broker even goes on to say “CTD is capable of generating EBITDA of +A$100 million” if domestic travel fully recovers. CTD’s FY20 result could surprise on the upside (19 August).

    Following that, Morgans has selected Helloworld (HLO) as its second choice. The stock is cheap (FY23 PE of 6.8x) and 33% of the company’s revenue is generated from Corporate Travel and 70% of this in Australia and New Zealand is domestic. Its last two stock preferences are Webjet and Fight Centre, both of which have a higher exposure to International and Leisure travel.

    Both companies are attractively priced but investors will need to be patient. Morgans has BUY recommendations on all four travel stocks. All in all, it’s a deeply discounted sector with some solid recovery opportunities – especially if a vaccine is found and international borders re-open.

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