Australia is the eighth-largest international tourist market with the amount spent by international visitors touched US $46 billion in 2019, according to The Australian Trade and Investment Commission. Increasing overseas students seeking quality education in Australia contributed to the sector attractiveness. Tourism and international education together accounted for 60% of total services exports in 2019, as per the data by The Department of Foreign Affairs and Trade. Closure of international borders crippled hoteliers, travel agents, and tour operators, with exports of tourism-related services plunged by 56.7% to reach $7.87 billion in the December 2020 quarter (on a YoY basis), according to the data by The Australian Bureau of Statistics. In a separate release, gross profit of companies in the accommodation and food services industry fell by 35.2%, on a seasonally adjusted basis, in December 2020 quarter (on a YoY basis) before it peaked during the preceding quarter.
In a move to revive growth, the Morrison government has announced a $1.2 billion stimulus package to the tourism and aviation sector. The government’s half pricing for airline tickets, cheap business loans, support to keep planes in the air, and job security of airline workers will help the travel and tourism sector to make a turnaround. In the recent update, the ban on international travel extended until June 2021. The discounted airfare will run from the start of this April to July 31, 2021, with an aim to increase travel to priority tourist destinations. While the two-week mandatory hotel quarantine still applies.
Figure 1. $1.2 Billion Tourism and Travel Revival Plan:
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Data Source: Prime Minister of Australia, Reuters, Chart Created by Kalkine Group
In the latest data by The Australian Bureau of Statistics, international travel movements of persons departing Australia have shown a steady decline since September 2020. Departures fell 14.1% in January 2021 over the preceding month. Chinese citizens showed the largest decline by ~17.9%. The majority of those leaving Australia was on temporary student visas. Short-term visitor arrivals and resident returns showed an increase during November and December 2020 periods. Nevertheless, arrivals fell 9.7% in January 2021 over the preceding month. New Zealand showed the largest decline in the number of arrivals. As mentioned by the ACT Government, only 2.8 million Australians were returned home after a short trip abroad in the calendar year 2020. In the recent announcement, Qantas Airways plans to resume international flights to neighbouring New Zealand by July 2021. Australia has begun the vaccination drive in February 2021. To coincide with it, Qantas Airways’ budget carrier, Jetstar, will also begin operations to its routes, including Bangkok, Seoul, and Tokyo. This may lift-up passenger traffic and benefit travel operators and airlines.
Figure 2. International Border Closures Halted Arrivals and Departures:
Data Source: The Australian Bureau of Statistics, Chart Created by Kalkine Group
Australia’s travel industry output is driven by domestic travel spend. As mentioned by The Australian Trade and Investment Commission, the amount spent by international visitors in 2019 was just half-way to the amount spent by Australians on domestic overnight travel. The pandemic drove visitation to regional Australia. Overnight trips in December 2020 reported the largest increase since the beginning of COVID-19. The majority of states and territories have reported an increase in visitation and spend in December 2020 (on M-o-M basis). Due to border closures, Australians took roads to travel interstate overnight, which had contributed to the overall growth in domestic overnight trips in December 2020 as shown by Tourism Research Australia. Western Australia, Queensland, and New South Wales reported the lowest losses in spending over the preceding month. For the year-to-date ending December 2020, regional Australia reported a loss of $11.8 billion in spending, and this was just half of the $23.3 billion loss reported by capital cities. Regional places that reported an uptick in overnight spend includes regional Queensland, South Australia, and Western Australia.
Figure 3. Month-Wise Trend of Domestic Overnight Visitors and Spend:
Data Source: Tourism Research Australia, Chart Created by Kalkine Group
As shown by the Australian Accommodation Monitor Report by STR, Australia reported a decline in hotel occupancy rate to 60.2% in 2019-20 from 73.8% in pcp. Lockdown restrictions and border closure affected the revenue of hotel operators. Revenue per available rooms declined by 21% to $108.97 in 2019-20. An increase in room supply exceeded demand growth which had led to a drop in average daily room rates. The government stimulus and mandatory hotel quarantine rules will provide impetus to the sector.
Figure 4. Victoria and South Australia Boast the Highest Occupancy Rate:
Data Source: STR, Chart Created by Kalkine Group
Key Risks: As vaccine rollout has just begun and a ban on international travel continues to exist in Australia, tourism and travel sector may take time to show recovery. The sector is exposed to the risk of terrorism affecting foreign tourism. As international travel receipts are denominated in foreign currencies, volatility in home currencies may invariably affect earnings. High unemployment rate and weak wage growth may affect travel economics and influence spend. The rising aging population in Australia may affect outbound travelling. Geopolitical risks such as the ongoing UK Brexit may cut international arrivals and departures. Change in visa approvals by foreign regulatory authorities may play a significant role in travel. Arrivals to Australia are dominated by international students. Arrivals with temporary student visas showed a ~107.4% increase in January 2021 over the preceding month. Any regulation changes in the education or research sector or changes in admission or placement policies may significantly influence travel and tourism in Australia.
Figure 5: Key Risks Affecting Tourism and Travel:
Source: Analysis by Kalkine Group
Outlook:
In the 2020-21 federal budget, the government has earmarked $231.6 million to the tourism sector to ramp-up domestic marketing activities. An additional $51 million has been allotted to spur regional tourism. The recovery plan also puts more Australians into a job. From June 2020 to September 2020, employment growth in the tourism sector grew by 4.0%, driven by sports and recreation services, rail transport, and cafes & takeaway food services. The whole Australian economy has added 1.5% growth, according to the release by The Australian Bureau of Statistics. The government has significant infrastructure pipeline projects valued at $43.6 billion, covering accommodation, arts, recreation & business services, and aviation. It has over 255 projects in various stages of development. Spend on accommodation is likely to add 27,200 room capacity. There were 91 projects valued at $18.2 billion under construction. Queensland alone has 5 projects with a value of $2.2 billion. Some of the iconic projects include Western Sydney Airport, Perth Airport terminal, Fairmont Port Douglass in Queensland, Brisbane Live entertainment project, and several others. As the economy gradually recovers, the completion of these projects will spur passenger traffic and benefit travel and tourism in Australia. Considering the developments in travel and tourism in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) Kathmandu Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 854.34 Million, Annual Dividend Yield: 0%)
Online Sales Channel Provided an Uplift: Kathmandu Holdings Limited (ASX: KMD) operates as an outdoor retailer providing clothing and equipment for travel and adventure. The pandemic affected KMD FY20 revenues to the extent of NZD 135 million. Its Rip Curl wholesale sales saw a significant impact. It had operated company-owned stores of 325 in FY20. Online channel posted a 63% uptick in sales in FY20 to NZD 106.4 million. The online penetration for the Kathmandu brand reached the highest at 18.5% in FY20 (vs. 10.1% in pcp). FY20 results include nine months results of the acquired entity, Rip Curl. KMD realized costs synergies of NZD 15 million from cost-savings measures. Its underlying EBITDA fell 15.3% to NZD 83.4 million in FY20 owing to unfavourable forex movement, promotional activity at the Kathmandu brand, and mix of clearances sales. Rip Curl contributed an EBITDA of NZD of 11.7 million in FY20. KMD posted adjusted operating cash flows of NZD 93.1 million in FY20, up from NZD 61.7 million in pcp. Freeze in non-essential spends, well-managed inventory leads to growth in operating cash flows. Through the capital raising of $207 million, KMD had reduced net debt to NZD 9.4 million as of July 2020 (vs. NZD 73.2 reported in pcp). KMD plans to reinstate dividend distribution in FY21. The company has adequate headroom to borrow up to NZD 380 million.
In the H1 FY21 trading update, KMD posted a 12% growth in group-wide sales over last year. Its Sydney store Christmas sales were affected by the Northern Beaches outbreak. Airport stores in Australia and Rip Curl stores in Hawaii, Bali, and Europe continue to be affected by the pandemic. However, the renewed interest from local travel and adventure activities within Australia and New Zealand lifted the company’s performance. The Board has initiated a search process for the replacement of Xavier Simonet, who resigned as CEO from the company recently.
Outlook: KMD is expecting EBITDA to be in the range of NZD 47-49 million for H1 FY21. Net debt is expected to reach NZD 7 million.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs KMD (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-3.28% and ~+10.28%, respectively. It is currently trading below the average of the 52-week high price of $1.521 and the 52-week low price of $0.450. The stock outperformed the market volatility index driven by the easing of domestic travel restrictions. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer median EV/EBITDA (NTM trading multiple) as the closure of international borders has kept its Hawaii business and stores in airport locations severely affected. The inherent risk of high discretionary spending and its sensitiveness to macro swings are the downside factors. For this purpose, we have taken peers such as Eagers Automotive Ltd. (ASX: APE), City Chic Collective Ltd. (ASX: CCX), JB Hi-Fi Ltd. (ASX: JBH) to name a few. Considering the synergies from the Rip Curl acquisition, strong H1 FY21 sales, funding availability, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.180, down by 2.075% on 15th March 2021.
(2) Helloworld Travel Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 359.66 Million, Annual Dividend Yield: 3.87%)
Closure of Borders Impacted Performance: Helloworld Travel Limited (ASX: HLO) provides travel management services to corporate and government, covering booking flights, cruises, and accommodation services. Global travel restrictions severely impacted the H2 FY20 revenues of HLO. While, its H1 FY20 revenue outgrew the previous comparable period driven by the acquisition of Show Group, Williment Travel, and TravelEdge. Its total transaction value deteriorated 23.1%, resulting in a revenue decline of 21.1% in FY20. The company’s underlying EBITDA de-grew by 40.1% to reach $73.5 million. A drop in revenues of the high-margin wholesale segment of New Zealand and trading losses at the US Wholesale division are some of the factors.
In the H1 FY21 trading update, HLO reported an 87.8% decline in total transaction value. The company witnessed traction in December 2020 quarter with an increase in booking activity due to the easing of domestic travel restrictions. It had expanded its cruise business in Australia and New Zealand through the acquisition of CruiseCo in November 2020. HLO disposed-off its US wholesale operations in June 2020. Overall revenues dropped by 85.2% to $29.6 million in H1 FY21. One-off restructuring costs impacted underlying EBITDA reporting to a loss of $6.5 million (vs. profit of $48.6 million in pcp). Its Australian business showed a steep drop in performance. The company able to extend its borrowing facility with Westpac. As of December 2020, it had an unused facility of $30.2 million. The earliest schedule is expiring in April 2022. The company raised $50.0 million through equity fundraising. It had closed the period with net cash of $61.7 million as of December 2020.
Outlook: HLO has been downsizing its businesses to withstand the COVID-19 impact. It will continue to work on cost restructuring with network agencies and exit from the non-core business. As leisure travel is slowly coming back, HLO is expecting strong pent-up demand to drive revenue growth in 2022, 2023, and 2024. Vaccine rollout and faster testing to see a resumption in international travel. The company is expecting a cash loss of $1.0-$1.5 million per month for the next six months and to show improvement in H2 FY22.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs HLO (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~-8.43% and ~+32.04%, respectively. It is currently trading above the average of the 52-week high price of $3.360 and the 52-week low price of $0.659. The stock slightly outperformed the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer median EV/EBITDA (NTM trading multiple) as the management is optimistic in growth projections with vaccine roll-out and lifting of international border closures to significantly boost revenues given the strong pent-up demand. For this purpose, we have taken peers such as Jumbo Interactive Ltd. (ASX: JIN), Aristocrat Leisure Ltd. (ASX: ALL), Tabcorp Holdings Ltd. (ASX: TAH), to name a few. Considering the restructuring efforts, fundraising, acquisitions supporting new businesses, valuation, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.390, up by 3.017% on 15th March 2021.
(3) Ardent Leisure Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 400.55 Million, Annual Dividend Yield: 0%)
Theme Parks Business Was Severally Impacted: Ardent Leisure Group Limited (ASX: ALG) operates theme parks and provides leisure and entertainment services to customers in Australia. Closure of theme parks saw an $85 million reduction in revenue in FY20. Its Pro Forma EBITDA plunged to a loss of $22.8 million in FY20 as compared to a profit of $11.7 million. Its theme parks business was severally impacted, while main event centres showed soft revenue growth post reopening of 38 centres in June 2020. It had reaped $8.0 million from cost-savings measures. The company raised US$80 million from RedBird Capital for a 24.2% stake in preference shares in the Main Event Entertainment business.
In the H1 FY21 trading update, ALG witnessed a $109.4 million reduction in revenues due to lower visitation. Its main event business saw 38 out of 44 centres opened. While its Dreamworld and Whitewater World theme parks remain closed until September 2020. Consumer demand showed a strong rebound in January 2021 for main event centres. ALG posted an EBITDA loss of $4.9 million in H1 FY21 as compared to a profit of $38.4 million in pcp. There were one-off costs, such as impairment and restructuring costs totalling $8.5 million. Net borrowing costs increased due to the inclusion of preferred stock dividends to RedBird Capital. ALG posted net cash of $117.2 million as of December 2020, up from $78.4 million in June 2020. It has $58.2 million available under the Queensland Treasury Corporation facility. The company has immediate debt maturity starting in October 2023.
Outlook: The company expects H2FY21 to be challenging, specifically due to the withdrawal of Jobskeeper program. Vaccine roll-out provides an optimistic outlook, but uncertainty is likely to continue for the next 12 months. ALG has four new centres to be opened in FY22.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs ALG (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month positive returns of ~18.84% and ~90.70%, respectively. It is currently trading above the average of the 52-week high price of $0.935 and the 52-week low price of $0.105. The stock outperformed the market volatility index as the easing of restrictions saw the opening of main event entertainment centres. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/EBITDA (NTM trading multiple) citing infusion from RedBird Capital supporting its main event entertainment business. The company is expecting to open four such centres in FY22. For this purpose, we have taken peers such as Sealink Travel Group Ltd. (ASX: SLK), Experience Co Ltd. (ASX: EXP), Helloworld Travel Ltd. (ASX: HLO) to name a few. Considering the rebound in the main event entertainment business, liquidity, favourable debt maturity, valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $0.820, down by 1.797% on 15th March 2021.
(4) Jumbo Interactive Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 839.93 Million, Annual Dividend Yield: 2.60%)
Online Lottery Retailing Contributed to Resilient Performance: Jumbo Interactive Limited (ASX: JIN) operates as a charity-based lottery business and provides online retailing in Australia. Charity lotteries business was affected by restrictions on dinners, fundraising events, etc. But online charity businesses showed strong performance, with a number of active customers went up 9% to 827,411 in FY20. The company experienced an 8.7% increase in total transaction value. Out of the total, 65+ aged demographics led to a 24% growth in sales. Overall revenues increased by 9.1% in FY20 over pcp. The company runs 39 large jackpots vs. 49 in pcp, of these, 11 jackpots were above $50 million. It had signed a 15-year reseller agreement with TabCorp that provides continued sales opportunities in Australia. EBITDA improved by 6.1%, driven by lower marketing spend. The acquisition of Gatherwell, a UK-based lottery manager, boosted profitability.
In the H1 FY21 update, JIN posted a 9% growth in revenues with a lesser number in large Jackpots deals. The company established a new segment – managed lottery services. It had sold 32.1% of tickets through the online channel (FY20: 28.0%). Its underlying EBITDA improved by 3.7% in H1 FY21. The company’s government partnered portal, LotteryWest becomes operational. It had signed St Helena Hospice, the first UK partner to go live by July 2021 for its SaaS business. Its managed lottery services in the UK saw 194,000 registered charities. Incentive paid to Tabcorp and integration costs associated with the Gatherwell acquisition weighed on profitability. It had closed the period with a cash balance of $62.0 million as of December 2020.
Outlook: The growing partnership in Australia will provide support to SaaS services. Gatherwell UK partners will boost managed services revenues. It also expects a promising start for its lottery retailing business. The company has kept a dividend payout policy of 85% of the net profit after tax under review.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs JIN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock posted 3-month and 6-month returns of ~+0.28% and ~-5.20%, respectively. It is currently trading above the average of the 52-week high price of $15.820 and the 52-week low price of $6.990. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/EBITDA (NTM trading multiple) as the company carved-out a new vertical, managed services. And the newly acquired Gatherwell to boost the managed services business in the UK. For this purpose, we have taken peers such as Viva Leisure Ltd. (ASX: VVA), Ardent Leisure Group Ltd. (ASX: ALG), Sealink Travel Group Ltd. (ASX: SLK), to name a few. Considering the robust growth in the online lottery retailing business, high ROE over the industry median, valuation, and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $13.50, up by 0.371% on 15th March 2021.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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