Event Core

On 17 February 2022, the Australian Bureau of Statistics released data on overseas arrivals and departures statistics, representing international travel in Australia. In January 2022, the total arrivals leapt at 265,450 (provisional), increasing from 195,760 in December 2021. Total departures edged down from 227,230 in December 2021 to 190,500 (provisional) in January 2022. These statistics were reported based on the count of international border crossings rather than the number of people.

Figure 1: An Uptick in Overseas Arrival in Australia:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Improved Visitation from New Zealand (NZ)

New Zealand Visitors: In 2021, travellers from NZ were the biggest group of international arrivals, making up almost 40% of all visitors on short-term trips. The highest proportion from NZ is primarily attributed to the trans-Tesman travel bubble from April 2021 to July 2021, enabling visitors to arrive quarantine-free in Australia.

Global Pandemic Impact: Although NZ travellers were the biggest group of visitors in 2021, clocking ~97,000, the count was considerably lower than the 2019 traveller count of 1.4 million, the year before the impact of COVID-19.

Key Statistics on International Travel

Figure 2: Arrivals and Departures by the Category of Travel

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Visitor Arrivals for Short-Term: In December 2021, the total arrival to Australia stood at 73,050 for short-term trips, witnessing an increase of 64,230 visitors relative to the corresponding prior period. December 2021 trips crunched by 93.2% relative to pre-COVID levels in December 2019. The UK was the most significant source country accounting for 17% of total visitor arrivals.

Resident Returns for Short-Term: In December 2021, a total of 52,720 trips were recorded, an incline of 38,450 visitors relative to the corresponding prior month. December 2021 trips slipped by 93.0% relative to pre-COVID levels in December 2019. Fiji was considered the most popular destination, clocking for 15% of all resident returns.

Key Macros Statistics on Tourism: In FY21, the tourism Gross Domestic Product (GDP) slipped by 37.9% in chain volume terms. Tourism’s contribution to Australia’s GDP dropped from 2.6% to 1.6%. Domestic tourism consumption crunched by 12.1%, with international tourism falling by 94.9% in chain volume terms. The 12.1% decline in domestic tourism consumption comprises household consumption, which crunched 9.8% to $66.9 billion, and business consumption which crunched by 21.8% to $13.8 billion.

Key Risks and Challenges

In FY21, the tourism labour productivity measured by Gross Value Added (GVA) per hours worked slipped by 24.6%, the lowest level witnessed in the past seven years published time series. The recent onset of the delta variant and prospective restrictions from the omicron variant has derailed the gradual tourism growth. The industry may seek potential challenges in reinvesting employee training as the pandemic phase out due to a full-time employment decay of 26.1% part-time employment decay of 13.7% in FY21. The recent monthly arrivals and departures stand substantially lower than the pre-COVID levels.

Figure 3: Key Drivers v/s Key Constraints

Source: Analysis by Kalkine Group

Outlook

Recent Update on Travel Restrictions: From 21 February 2022, all fully vaccinated visa holders will be allowed to travel Australia  without any exemptions. All the travellers will be required to deliver a negative Rapid Antigen test to access quarantine-free trips in Australian territories and states.

Improved Disposable Income: In September 2021 quarter, household gross disposable income surged by 4.6%, the fastest recorded since December quarter 2008. The improved disposable income levels may turn around the domestic travel industry.

Improved Private New Total Capex: In September 2021 quarter, the total new private capital expenditure in the Accommodation and Food Services industry expanded by 26.8% PcP, favouring positive business sentiments.

The trend of Substantial Travel Incline: Since November 2021, the statistics on total overseas arrivals have witnessed substantial sequential growth as travel restrictions have been lifted since October 2021.

Government Budgetary Support to Tourism Industry: The government has extended support by committing to a $1.2 billion package for the tourism and aviation sectors to safeguard jobs, keep planes in the air, and encourage domestic travel.

Considering the improvement in tourism arrivals, we have figured out three stocks on ASX that are set to see the momentum.

(1) ­­­Qube Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 5.33 billion, Annual Dividend Yield: 2.15%)

Continued Investment in Equipment, Acquisitions, Technology, and Facilities: Qube Holdings Limited (ASX: QUB) provides comprehensive logistics solutions across multiple aspects of the import-export supply chain. Further, QUB is engaged in managing, developing, and operating strategic properties. In FY21, statutory revenue surged to $2,177.4 million, up by 14.5%. QUB reported record earnings statutory NPATA of $108.7 million, up by 4% YoY, predominantly driven by a $22.2 million contribution from AAT and Quattro operating divisions, $16.3 million from QUB’s share in Patrick and $10.0 million impact of favourable net interest costs. During the period, QUB fully repaid FY21 JobKeeper payments net receipts. Continued investment in equipment, acquisitions, technology, and facilities shall support future earnings growth.

Gross capex stood at $673.8 million, and net capex wandered around $461.4 million, primarily including BlueScope contract win (due to commence in Jan-22), Salt Lake Potash and BHP Nickel West. Net debt as of 30 June 2021 stood at $1,388.4 million, with cash and an undrawn debt facility of $626.2 million. Net debt to the sum of net debt and equity stands at 29.2%. During the period, Qube repaid $200 million of bridge facilities (short-term) via proceeds from the sale of Monto Properties.

Outlook: In FY22, QUB expects a significant contribution from FY21 acquisitions and growth capex. From 1 July 2021, the MLP terminal activities will be reported and managed in the operating division of QUB.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

QUB Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of QUB went down by ~7.309%. The stock made a 52-weeks’ low and high of $2.720 and $3.460, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, given resilient financials at reasonable liquidity. For valuation purposes, peers like Aurizon Holdings Ltd (ASX: AZJ), Kelsian Group Ltd (ASX: KLS), Dalrymple Bay Infrastructure Ltd (ASX: DBI), and others have been considered. Considering the improved topline inflow, prudent liquidity support, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $2.740, as of 21 February 2022, at 11:00 AM (GMT+10), Sydney, Eastern Australia.

(2) ­­­Flight Centre Travel Group (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 4.10 billion, Annual Dividend Yield: 0.00%)

Improving Resilience with Corporate Contract Wins: Flight Centre Travel Group Limited (ASX: FLT) is an Australia-based travel company including corporate and leisure sectors. In FY21, the company clocked an operating revenue of $396 million relative to $1,897 million in FY20. This is primarily attributed to the COVID-19 travel restrictions. The company encouraged some cost reduction strategies, reflected in an overall decline in expenses. Underlying losses before tax stood at $507 million. The revenue uplifted in H2FY21 relative to H1FY21 by $76 million.

The company held a cash and investment balance of $1.4 billion as of 30 June 2021 with $119 million in restricted cash. Less than $5 million in bad debts were written off. The net operating cash run rate stood at -$36 million, and the current net operating cash outflow stood at $32 million after aligning an inflow of $4 million in government subsidy. America’s business is approaching a natural cash burn position post a substantial uplift in trading late in Q4FY21.

Outlook: FLT targets a return to monthly profitability in leisure and corporate during FY22. The company requires approximately 50% of historic TTV in corporate contracts and almost 40% in leisure. The company is well placed in recovery mode amid a robust pipeline of corporate account wins to improve recovery in the Americas & EMEA.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

FLT Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of FLT went down by ~22.606%. The stock made a 52-weeks’ low and high of $13.670 and $25.280, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Considering corporate contract wins and recovery targets, the company can trade at a slight premium compared to its peers. For valuation purposes, peers like Jumbo Interactive Ltd (ASX: JIN), Aristocrat Leisure Ltd (ASX: ALL), Tabcorp Holdings Ltd (ASX: TAH), and others have been considered. Considering the rising focus on corporate contract wins, decent recovery targets, improved investment strategies, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $20.400, as of 21 February 2022, at 11:02 AM (GMT+10), Sydney, Eastern Australia.

(3) ­­­Kelsian Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.50 billion, Annual Dividend Yield: 2.30%)

Strategic Acquisitions and Significant Reinvestment Promoting Growth: Kelsian Group Limited (KLS: ASX) is an integrated marine and land, public and tourism transport service provider. In FY21, the company clocked a revenue of $1.17 billion, substantially up by 88.1% YoY due to the impact of TSG acquisition, new contract wins, and rebounds witnessed in Marine & Tourism. Underlying EBITDA stood at $167.5 million, up by 85.2% with almost consistent margins. The underlying EBITDA excludes the one-off transaction and tender costs of $5.0 million, asset impairment of $3.8 million and insurance recoveries of $2.2 million.

The net operating cash flows for the period stood at $111.6 million, up by a considerable 23.9%, owing to the surged top line. The significant reinvestment in the business has improved the asset quality. The cash balance as of 30 June 2021 stood at $103.5 million, up from $119.9 million in the corresponding previous year. The balance sheet stood resilient by maintaining a leverage position of 1.4x and a liquidity buffer of $186.1 million. The gearing ratio was reduced to 30.4% relative to 31.1% in FY20.

Outlook: The company is pursuing the Kangaroo Island Ferry licence renewal and positioning itself for tender opportunities in international markets. The company seeks to scale up on the back of Position Tower Transit London.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

KLS Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of KLS went down by ~5.532%. The stock made a 52-weeks’ low and high of $6.185 and $10.640, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peers, considering consistent margins and improved topline. For valuation purposes, peers like Lindsay Australia Ltd (ASX: LAU), Countplus Ltd (ASX: CUP), Aurizon Holdings Ltd (ASX: AZJ), and others have been considered. Considering the significant incline in operating cash flows, favourable leverage position, improved efficiency targets, current trading levels, upside indicated by valuation, key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $6.850, as of 21 February 2022, at 11:03 AM (GMT+10), Sydney, Eastern Australia. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.

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