I. Sector Landscape and Outlook

Travel and Tourism sector is one of the biggest GDP contributors with $49.61 billion in 2019-20 (based on chain volume measure), about 2.5% of GDP. The sector directly employed about 621,000 Australians making up 4.8% of Australian’s workforce in 2019-20 as per the data from Australian Bureau of Statistics. Travel and tourism sector showcased sustained growth over the past decade as international visitors grew by 69% from 2010 to 2019 and spend increased by 79% as reflected by Tourism Research Australia. 

Figure 1. Tourism GVA break-up by sub-industries (by chain volume measure) in 2019-20:

Travel and Tourism sector housed several sub-industries and roughly make-up about 13% of Australia’s 2.4 million businesses in 2019-20 worth $32 billion as per The Australian Trade and Investment Commission.

*Note: Automotive fuel retailing, other retail trade and education and training are connected industries

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

Growth Drivers and Key Trends:

1) Uptick in Arrivals

Overseas arrivals into Australia showed revival trend in the last two months to November 2020 as per data release by Australian Bureau of Statistics. Travel and tourism sector faced headwinds from drop in arrivals in May 2020 following boarder closures and travel restrictions imposed in June 2020 quarter. The lockdown of Victoria due to wide spread of COVID-19 affected international flyers with record low arrivals in August 2020. New Zealand, UK, China, India, and USA were the top five countries for arrivals to Australia in November 2020. By State, Victoria showed significant increase in arrivals (on M-o-M basis) followed by Australian Capital Territory and Queensland.

Figure 2. Arrivals in Australia Picked-up by 20.5% in November 2020 (M-o-M basis) to 29,800 People:

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

2) Improvement in Travel Spend

According to Tourism Research Australia, Australia is one of the highest yielding tour destinations in the world with spending of $44.6 billion by international visitors in 2018-19. Increase in interstate travel and marked improvements in overnight domestic trips resulted in higher spend in September 2020 as per the data by Tourism Research Australia. Australians traditionally are net exporters of travel. As per the official data, they spent about $65 billion on international travel in 2019. Due to border closures, sizeable amount was spent on domestic travel. Further, travellers increasingly prefer to drive to regional areas over visits to capital cities during holiday and weekends which helped to maintain room rates.

Figure 3. Domestic Overnight Spend Increased by 9% in September 2020 (M-o-M basis):

Source: Data from Tourism Research Australia, Analysis by Kalkine Group

Holiday trips were most affected by the pandemic in June 2020. However, gradual easing of restrictions resulted in increase in domestic overnight travel visitors by 4% in September 2020 over preceding month.

Figure 4. State-wise Domestic Overnight Visitors as of September 2020:

Share of Victoria declined from 28% in March 2020 to 6% in September 2020 owing to state-wide shutdown.

Source: Data from Tourism Research Australia, Analysis by Kalkine Group

3) Tourism Investment Pipeline

According to the Tourism Research Australia, there were about 255 pipeline projects with a value of $43.6 billion. Major portion of these projects are under planning and construction phase. For instance, out of the total pipeline of $18.2 billion, aviation had $10 billion under construction. And accommodation had about $6.9 billion under planning phase. In addition, mixed-use accommodation projects gained popularity in recent times. These projects had interest in hotels and non-tourism activity like residential, commercial and leisure space. These projects are expected to add 29,800 rooms with pipeline investment of $57.9 billion.  The COVID uncertainty altered tourism preferences and many investors have placed projects on hold. During the year 2019-20 as much as 23 projects were delayed.

Figure 5. Tourism Project Pipeline in 2019-20:  

Source: Data from Tourism Research Australia, Chart Created by Kalkine Group

Some of the large-scale projects include Western Sydney Airport (Badgerys Creek), Brisbane Live Entertainment Precinct, Fairmont Port Douglas Resort in Queensland, Queens Wharf Brisbane. New South Wales had one-third of all tourism investment, with 66 projects valued at $14billion. Investments were mostly in the aviation and arts, recreation, and business services. This is followed by Victoria with 55 projects valued at $10.8 billion. The proposed Koo Wee Rup privately-owned airport alone is worth $7.0 billion.

Key Risks and Challenges

The pandemic had enormous impact on the sector with domestic tourism loss of $21.7 billion in January 2020 to June 2020. Boarder closures and social distancing norms resulted in decline in average overnight trip spend to $385 per person in June 2020 quarter as compared to $648 pcp. Domestic overnight spend declined by 45% or $17.7 billion in January 2020 to June 2020 period. Holiday trips were the most affected with spend dropping by 43% or $8.1 billion according to data by Tourism Research Australia. Travellers preferred to drive to regional areas over visits to capital cities. Interstate travel which made up 33% of all domestic overnight trips during pre-COVID fell 88% in June 2020 quarter. Accommodation sector saw the most decline with visitor nights fell from 20.9 million in June 2019 quarter to just 4.4 million in June 2020. Although the recent months witnessed slight recovery in travel spend and uptick in arrival data, recovering from the lows during March-June 2020.

Besides, both local and international political environment, also have a sound impact on the consumption decision of the tourists as well the economic performance of the destinations. Moreover, state regulations also play a critical role in survival and growth of tourism activities related to travel, hospitality, and entertainment industry.

Figure 6. Key Risks in Travel and Tourism Sector:

Source: Analysis by Kalkine Group

Outlook

The sector was severely impacted by the pandemic. But gradual re-opening of the economy and easing norms saw increase in international travel with overseas arrivals to Australia reached highest level since April 2020 as per the November 2020 data by Australian Bureau of Statistics. Opening-up of one-way travel arrangement saw increase in arrivals from New Zealand (up by 51.2% over prior month).

Regional tourism witnessed strong visitor demand as mentioned by Tourism Research Australia. And many tourist areas within 3 hours of driving to capital cities have experienced high winter occupancies. The quarantine mandates lifted the occupancies for small number of hoteliers in the capital cities.

II. Investment theme and stocks under discussion (FLT, WEB, HLO, SLK)

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 ‘EV/EBITDA’ method.

1. ASX: FLT (Flight Centre Travel Group Limited)

 (Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$3.34 Billion)

FLT operates as a travel agency catering to leisure and corporate travel with network in Australia, New Zealand, the US, Canada, Mexico, EMEA and Asia.

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 40.4% on 17 December 2020. For the said purposes, we have taken peers such as Skycity Entertainment Group Ltd. (ASX: SKC), Helloworld Travel Ltd. (ASX: HLO). The stock delivered annualized yield of 8.20%.

2. ASX: HLO (Helloworld Travel Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$423.22 Million)

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 29.9% on 17 December 2020. For the said purposes, we have taken peers such as Sealink Travel Group Ltd. (ASX: SLK), Aristocrat Leisure Ltd. (ASX: ALL), Event Hospitality and Entertainment Ltd. (ASX: EVT). The stock delivered annualized yield of 7.87%.

3. ASX: WEB (Webjet Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$1.78 Billion)

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 22.9% on 17 December 2020. For the said purposes, we have taken peers such as Flight Centre Travel Group Ltd. (ASX: FLT), Ardent Leisure Group Ltd. (ASX: ALG), Sealink Travel Group Ltd. (ASX: SLK). The stock delivered annualized yield of 4.26%.

4. ASX: SLK (Sealink Travel Group Limited)

(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$1.45 Billion)

Valuation

Our illustrative valuation model suggest that stock has a potential upside of 19.20% on 17 December 2020. For the said purposes, we have taken peers such as Event Hospitality and Entertainment Ltd. (ASX: EVT), Flight Centre Travel Group Ltd. (ASX: FLT), Ardent Leisure Group Ltd. (ASX: ALG). The stock delivered annualized yield of 1.64%.

Note: All the recommendations and the calculations are based on the closing price of 17^th December 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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