Australians have witnessed tight restrictions with respect to travel since the outbreak of COVID-19. The Government is now planning to gradually lift restrictions on travel as the number of infections continues to fall and citizens adapt to the new normal. In its Framework for National Reopening, the government has laid out a clear plan for ease of restrictions on travel in 3 steps.
In Step 1 the government talks about free movement between areas with no transmission. In Step 2, it will allow for removal of domestic borders, and in the final step, interstate travel will be open with no domestic border restrictions in place and allowance of quarantine free international travel between New Zealand and other low-risk international partners. In a recent announcement, the government has agreed to increase quarantine facilities through agreements with hotels to bring Australians back to their homeland. This initiative is expected to provide a boost to both the travel and hotel industry as the demand for flights and accommodation increased with more people moving in.
Plans to Increase Quarantine Facilities: In an effort to bring more Australians and Tasmanians back home, the Australian and Tasmanian Government have agreed to increase the number of quarantine facilities by 450 through additional spaces in Hobart hotels. This was over the top of 6,315 weekly quarantine facilities agreed by states and territories. The government further hinted to increase the quarantine capacity if it can rope more hotel contracts. The travel requirements of the stranded Australians will be facilitated through a pact with Qantas Airways. The state had imposed a mandatory 10-day quarantine for inbound passengers.
The announcement signals an optimistic scenario for the hotel industry which underwent distress on account of the pandemic. As a result of this initiative by the Government, hotel bookings may witness an increase and Qantas Airways to see an uptick in passenger growth. This will also support the demand for airport services. It should be noted that about 411,000 citizens have returned since March 13th and ~30,600 were directly assisted by the government with 66 flights.
Month on Month Improvement in Overseas Arrivals: According to the Australian Bureau of Statistics, overseas arrivals to Australia in October 2020 increased by 47.8% in comparison to September 2020 but decreased by 98.8% in comparison to October 2019. Notably, 9.9% of all arrivals were from New Zealand. Out of the 24,700 estimated trips, 12,300 were taken by Australian citizens. Departure trips for October 2020 were ~47,000, representing a 5.6% decrease on the previous month and a fall of 97.2% on October 2019. 19.7% of all departures during October 2020 were by Chinese citizens.
Overseas Arrivals (Source: Australian Bureau of Statistics)
Key Risks: While the government’s decision to bring Australians back home is expected to positively impact the demand for travel and hotels, there remains a risk of disruption due to COVID-19 challenges in other countries. The number of infections in Australia may also increase in the absence of proper measures to maintain social distancing as citizens arrive in the country. Moreover, the initiative to increase the quarantine facilities through an agreement with hotels and plans to boost flight availability in partnership with Qantas may just be a temporary fix to the damage done by the pandemic.
Nonetheless, Australia has witnessed a significant fall in the number of COVID-19 infections which is a positive sign for the economy. If the current progress continues, Australia is not far from achieving a state of new normal with minimal travel/movement restrictions in place. As stated in the Framework for National Reopening, the Government expects the COVID-19 Normal state by Christmas 2020. In addition to the health and safety measures, the government’s financial support is backing the industry in the time of crisis. The recent announcement to increase quarantine facilities is not only helping Australians return home but is also providing room for the travel and hotel industry to grow. In light of the above factors, let us have a look at few stocks on ASX which are expected to benefit from the government’s decision.
(1) Qantas Airways Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 9.63 Billion, Annual Dividend Yield: 5.18%)
Domestic Business Remained Profitable in FY20: Qantas Airways Limited (ASX: QAN) is engaged in the operation of international and domestic air transportation services. The group posted a decline of 21% in total revenue to $14,257 million in FY20 over last year. Border closures and air travel restrictions severally impacted passenger revenue. Airlines were kept virtually grounded and domestic flying was restricted to government-sponsored Minimum Viable Network to provide vital links to regional Australia and between capital cities. The domestic business remained profitable with an underlying EBIT of $285 million. The group is deploying A320 aircraft to Western Australia to support resources sector growth. The international segment posted an EBIT loss of $82 million despite strong traction in the air freight business. Jetstar Group posted small losses while Qantas Loyalty continued to provide diversification with an EBIT of $341 million. The group posted an underlying PBT of $124 million in FY20 supported by a steep reduction in airline variable costs and manpower expenses. The group posted a statutory loss before tax of $2,708 million in FY20.
Outlook: Qantas initiated a $1.36 billion fully underwritten institutional placement plan as part of the group’s three-year recovery plan. The group is targeting to achieve savings of $15 billion over the next three years under the plan. The management is expecting the group’s domestic capacity to reach upto 50% by Christmas as Queensland opens to New South Wales in the coming weeks. Domestic market share is likely to grow organically from 60% to 70%. The increased adaption of online shopping may significantly uplift the freight volumes.
In an effort to bring more Australians back home, the government is increasing quarantine facilities and is eyeing hotel contracts to execute its plans. The Tasmanian Government stated that the quarantine capacity can be increased if it is able to confirm further contracts with hotels. This will allow the Department of Foreign Affairs and Trade to arrange commercial flights for Australians coming home, in partnership with Qantas.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales 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 QAN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company gave positive returns of 23.27% in the last one month. The company has identified $15 billion in cost savings over the next three years, mostly through reduced flying activity and is targeting ongoing cost improvement of $1 billion from FY23. The company’s three-year recovery plan is on track because of the rapid cost reduction. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the long-term plans, valuation, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.190, up 1.565% on 16th November 2020.
(2) Crown Resorts Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 6.35 Billion, Annual Dividend Yield: 6.39%)
Increase in Crown Digital Revenue and EBITDA in FY20: Crown Resorts Limited (ASX: CWN) is an international casino and gaming entity having businesses and investments in key international markets. FY20 proved to be a challenging period, wherein, reported EBITDA stood at $504.6 million, reflecting a fall of 40.6%. Reported NPAT attributable to the parent amounted to $79.5 million, down by 80.2% over pcp. With respect to Australian resorts, the company recorded actual revenue of $2,214.9 million, indicating a fall of 25.7% over pcp. Crown digital revenue increased by 4.1% to $135.5 million and digital EBITDA grew by 32.9% to $34.7 million, as compared to FY19. For the period 1 July to 16 August 2020, Crown Perth’s main floor gaming revenue (excluding VIP program play revenue) was up ~18% on the pcp.
Outlook: For FY21, the company continues to maintain its focus on the health and wellbeing of its employees and guests. The company is positive about the future of its business in spite of near-term uncertainty created by COVID-19. In addition, the company continues to assess various options for the One Queensbridge development site for longer-term.
The company may witness an increase demand for accommodation as the Government arranges for additional quarantine facilities through agreements with hotels. As part of a new initiative, the government has agreed to provide an additional 450 spaces in quarantine facilities in Hobart hotels to help more Australians return home from abroad, which will help the hotel industry to recover from the pandemic impacts.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
E/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 CWN (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: As on 30th June 2020, the company had liquidity of $639.8 million, which comprised of $238.5 million in cash and $401.3 million in committed undrawn facilities. The stock of CWN has provided a return of 4.80% and 3.64% in the last one and six months, respectively. 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). Hence, we give a “Buy” recommendation on the stock at the current market price of $9.550 per share, up by 1.812% on 16th November 2020.
(3) Helloworld Travel Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: ~A$ 356.56 Million, Annual Dividend Yield: 9.34%)
Decent Liquidity Position: Helloworld Travel Limited (ASX: HLO) is a retail, wholesale & corporate travel company. For the quarter ended September 2020 (Q1 FY21), the company recorded total transaction value (TTV) of $176.8 million, down by 90.6% as compared to Q1 FY20. Revenue for the quarter amounted to $12.4 million and underlying EBITDA loss for the period stood at $4.1 million. However, the underlying losses were well below the forecast of $6 million. The company’s retail networks in Australia and New Zealand have remained largely intact and agents in some states are benefiting from specific or generic business assistance from Governments.
Outlook: The company is expecting revenue of 10 - 15% of previous levels for the December quarter and 15 - 20% in the March quarter 2021. In addition, the company anticipates the re-opening of the east coast domestic travel market by early December 2020. The company has enough liquidity to maintain operations well into 2022 or longer based on current liquidity levels and cash burn rate.
The company expects further safe travel corridors to be established with countries such as Japan, Singapore, South Korea, China and other relatively COVID safe nations throughout 2021. The company will benefit from an increase in the number of flights and rising demand for accommodation as the Government brings in more Australians under its new initiative to increase quarantine facilities.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales 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 company ended Q1 FY21 with total free cash of $105 million and made a repayment of bank debt amounting to $20 million on 23rd October 2020. The stock of HLO has provided returns of 21.43% in the last one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Considering the valuation and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.380 per share, up 3.478% on 16th November 2020.
(4) Auckland International Airport Limited (Recommendation: Expensive)
(M-cap: ~A$ 10.69 Billion, Annual Dividend Yield: 2.89%)
Decent Performance by Investment Property Business: Auckland International Airport Limited (ASX: AIA) is the third busiest international airport in Australasia. The company’s passenger traffic has been impacted due to the pandemic. Total passenger volumes declined by 85.1% in August, with international passenger traffic down by 97%. In September 2020, volumes declined by 76.9% in comparison to pcp. The second half of FY20 proved to be difficult due to the pandemic, in which the company embarked upon a series of ambitious infrastructure projects during the first half. Revenue for FY20 stood at $567 million, down 23.7% on pcp. In April 2020, the company raised $1.2 billion to reinforce its balance sheet for battling the pandemic. During FY20, the company’s investment property business performed strongly. As a result, the investment property annual rent roll increased by 4% to $104 million and the portfolio value rose by 17% to $2.04 billion during the period.
Outlook: The company expects domestic travel to return to normal within the next two years and expects Tasman and Pacific Island travel to resume sometime in 2021, with a full recovery of both these markets occurring before long-haul international travel returns to normal. In 2021, capital expenditure is estimated to be in the range of $250 - $300 million, and will be focused on advancing existing roading infrastructure projects; delivering core airfield renewals such as slab replacement and apron works; upgrades to the baggage system; and completing pre-leased property developments.
The Government has recently announced its intention to increase quarantine facilities to bring back Australians to their home country. In doing so, the government will also work on arranging commercial flights for the people returning home. Henceforth, the demand for air travel and airport services is ought to increase.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
A-VIX vs AIA (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: The stock of the company gave positive returns of 28.24% in the last three months. As the pandemic situation subsides and travel restrictions are eased, the company is expected to benefit from an increase in the number of both domestic and international flights. The government’s decision to increase the quarantine facilities will be one factor driving demand in the near term. We have valued the stock using an EV/EBITDA multiple based relative valuation method and arrived at a price correction of low double-digit (in percentage terms). Considering the valuation and current trading levels, we give an ‘Expensive’ rating on the stock at the current market price of $7.310, up 0.688% on 16th November 2020.
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)
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