I. Sector Landscape
In FY20, tourism accounted for 2.5% of Australia’s GDP, clocking $50.4 billion. The tourism industry employed 621,000 people (1 in 21 jobs in Australia) and contributed 6.6% of Australia’s total exports. In June 2019 (pre-COVID period), there were 312,000 travel and tourism-related businesses (1 in 8 firms). During the COVID-19 scenario, the industry dealt a tough blow with strict containment measures and closed borders. However, passing by the COVID-19 headwinds, the initiative seeks high opportunities as the economy gradually phases out from COVID-19 restrictions and unlock boundaries.
COVID-19 Impact on Leisure & Travel Sector
Quarterly Fall in June 2021 Relative to Pre-COVID Scenario: The pandemic has considerably impacted international travel to Australia during the past year. In June 2021, global visitor spending declined to $1.3 billion, down by 97.1% and international visitors bottomed to 138,438, down by 98.4%.
Australia’s Top International Visitor Markets Incurred Significant Losses –
- Chinese visitors dropped by 99.8%, a loss of 1.3 million visitors.
- New Zealand visitor count plunged by 93.9%, a loss of 1.2 million visitors. The downfall was translated to an 86.8% decline in expenditure or a $2.2 billion loss. New Zealand witnessed the smallest losses across all markets due to a trans-Tasman bubble opening between Australia and New Zealand in June 2021.
- The US visitors dropped by 98.8%, a loss of 755,000 visitors and spending fell by 96.3% or $3.8 billion.
- The UK visitors dropped by 98.9%, a loss of 666,000 visitors and spending fell by 96.5% or $3.3 billion.
- Japanese visitors dropped by 99.7%, a loss of 444,000 visitors, and spend fell by 99.3% or a $2.0 billion loss.
Figure 1: Purpose for International Travel
Source: Based on Tourism Research Australia Data, Analysis by Kalkine Group
Aggregate Losses from COVID-19 Impact: Total international and domestic tourism losses clocked $101.7 billion in June 2021, since the beginning of the pandemic in March 2021. In addition, international tourism warranted $51.3 billion in losses (March 2020 – June 2021) due to global border closure. Over the same period, domestic overnight travel witnessed $38.3 billion losses, and domestic day travel saw $12.1 billion losses.
Improving Arrivals Trend as Restrictions Ease Out
Arrivals Manifesting Positive Trajectory: Total number of appearances for July 2021 stood at 74,860, a decrease of 27,620 trips from the prior month as concerns over Delta virus surges. Despite rising concerns, arrivals improved by 57,600 trips on PcP basis. Total overseas departures were recorded at 87,020 in July 2021 relative to 55,740 in July 2020.
Short-term Visitor Arrivals Inclined: For short-term visitor arrivals to Australia in July 2021, an accumulated 18,750 trips were recorded, an uptick of 15,230 relative to the prior year. However, compared to pre-COVID levels, the July 2021 trips decreased considerably by 97.6% amidst locked international borders. The three primary sources of visitors’ countries are New Zealand, the US, and the UK.
Figure 2: Movement of Permanent Arrivals is Slowly Catching Up:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Government Support for the Leisure and Travel Sector
Improved Vaccination Rates: Amidst the first dose vaccination rate surpassing 78% and second dose rates clocking 55% nationwide, the Australian government finalizes plans to reunite Australian families and ease international movement for work.
Australia Focused on Reopening Plans: Within few weeks, considerable parts of Australia will move to Phase B and later to Phase C, as disclosed in the National Plan, to safely reopen Australia. Under Phase C, international travel is expected to reopen to fully vaccinated Australian travelers.
Government Aiming for Quarantine-free Travel for Specific Countries: The government is working towards quarantine-free travel for New Zealand and other undisclosed countries for smooth travel while testing is expected to be continued.
Index Performance:
The ASX 200 Hotels Restaurants & Leisure (Industry Group) Index posted 10-year returns of ~+222.83% compared to ~+72.61 by the ASX 200 Index. Increased infrastructure spend by the government, well-connected rail network and roadways, prestigious institutes and research academies, improving affordability and per capita spending, positive trajectory in arrivals, government support to aviation and tourism industry, reopening of borders are some of the factors that led to the sector gains.
Figure 3: The ASX 200 Hotels Restaurants & Leisure (Industry Group) outperformed the ASX 200 Index in the past ten years by whopping ~150.22%:
Source: REFINITIV as of 7 October 2021
Key Risks and Challenges
Concerns over travel and tourism looms on the potential resurgence of COVID-19 through the Delta Virus, which may call for reinstating containment measures. With the significant shift towards online platforms for overseas studies, movement in students may decline. Hotels, restaurants & the leisure industry may require holding significant liquidity to operate at low occupancy and retention rates. Recent unrest in the sector has disrupted the targeted labour market, and therefore, businesses like hotels and restaurants might have to amplify expenditures on building and educating their human resources. Finally, potential changes in consumer behaviour from social distancing and work from home norms may delay movement growth.
Figure 4: Key Risks and Challenges in the Leisure & Travel Sector:
Source: Analysis by Kalkine Group
Outlook
Determining Recognized Vaccines: In addition to the four approved COVID-19 vaccines for use by the Therapeutic Goods Administration (TGA), TGA is reviewing other vaccines in widespread to determine “recognized vaccines”.
International Tourism Engagement: Department of Foreign Affairs and Trade seeks to boost Australia’s tourism priorities by leveraging economic ties in Asia-Pacific Economic Cooperation (APEC), the Organization for Economic Co-operation and Development (OECD), and G20 Tourism Working Group.
Support Package for Tourism and Aviation Sector: On 11 March 2021, the government announced a $1.2 billion relief package for the aviation and tourism industry. The new international aviation support is expected to assist international passenger airlines in maintaining above 8,000 core international jobs.
Tourism and Aviation Network Support (TANS) Program: TANS is part of the government’s support package to encourage Australian travel in key regions significantly affected by plunged international tourism.
II. Investment theme and stocks under discussion (TPW, CWN, QAN, WEB)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Cash Flow’ multiple method.
1. ASX: Temple & Webster Group Limited (TPW)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.39 billion)
TPW is engaged in retailing of furniture and homewares in Australia.
Valuation
The illustrative valuation model suggests that stock has a potential upside of 18.72% on 07 October 2021. The stock might trade at some premium compared to its peers’ average Price/Cash Flow (NTM trading multiple) given improving unit economics and significant operations on resilient digital platforms. For valuation, peers such as Redbubble Ltd (ASX: RBL), Kogan.com Ltd (ASX: KGN), Adore Beauty Group Ltd (ASX: ABY), have been considered. Considering the prudent online presence, increased website traffic, exponential uptick in top-line, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $11.570, as on 07 October 2021, at 10:30 AM (GMT+10), Sydney, Eastern Australia.
2. ASX: Crown Resorts Limited (CWN)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$6.11 billion)
CWN is an entertainment company based in Australia with its operations in various integrated resorts.
Valuation
The illustrative valuation model suggests that stock has a potential upside of 18.76% on 07 October 2021. The stock might trade at a slight premium compared to its peers’ average Price/Cash Flow (NTM trading multiple) given improved efficiency potential under Remediation Plan. For valuation, peers such as Helloworld Travel Ltd (ASX: HLO), Ainsworth Game Technology Ltd (ASX: AGI), Experience Co Ltd (ASX: EXP), have been considered. Considering the strong balance sheet, successful implementation of Remediation Plan, the government’s border reopening announcements, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $9.110, as on 07 October 2021, at 10:30 AM (GMT+10), Sydney, Eastern Australia.
3. ASX: Qantas Airways Limited (QAN)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$10.59 billion)
QAN operates in the aviation industry and provides airline services for international and domestic travel, as well as offer freight services.
Valuation
The illustrative valuation model suggests that stock has a potential upside of 7.80% on 07 October 2021. The stock might trade at some premium compared to its peers’ average Price/Cash Flow (NTM trading multiple) given positive signal from demand rebound in Q4FY21 and prudent liquidity position. For valuation, peers such as Alliance Aviation Services Ltd (ASX: AQZ), Silk Logistics Holdings Ltd (ASX: SLH), Austal Ltd (ASX: ASB), have been considered. Considering the profound rebound signals, partnership with Emirates, strong performance in H2FY21, and valuation, we give a “Hold” recommendation on the stock at the current market price of $5.580, down by ~0.712% on 07 October 2021.
4. ASX: Webjet Limited (WEB)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$2.36 billion)
WEB is engaged into digital travel business of travel bookings, including flights and hotels. The company has two business segments namely, WebBeds (B2B), Webjet OTA (B2C), and Online Republic (B2C).
Valuation
The illustrative valuation model suggests that stock has a potential upside of 7.77% on 07 October 2021. The stock might trade at some premium compared to its peers’ average Price/Cash Flow (NTM trading multiple) given WEB’s view on capitalization of travel recovery and considerably lower cost base expectations. For valuation, peers such as Jumbo Interactive Ltd (ASX: JIN), Aristocrat Leisure Ltd (ASX: ALL), Flight Centre Travel Group Ltd (ASX: FLT), have been considered. Considering the prudent financial position, structural shift towards online platforms, and valuation, we give a “Hold” recommendation on the stock at the current market price of $6.33, up by ~1.932% on 07 October 2021.
Note: All the recommendations and the calculations are based on the closing price of 07 October 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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