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Published 15 November 2012 04:49, Updated 21 November 2012 08:12
Someone forgot to tell a number of outstanding travel stocks about supposed problems in Australian tourism. Those relying on outbound tourism and corporate travel have more than paid for their shareholders’ next holidays and travel stocks with greater domestic exposure could follow.
I wrote last year about the need to distinguish between companies that rely on outbound travel and those that depend on local tourism. The logic was simple: cheap international airfares and the high Australian dollar would allow more people to holiday overseas and the currency would weigh on inbound tourism. A slowing local economy would also affect domestic tourism.
The first part of that theory held true: there were a record 8.1 million short-term departures in the year to September 2012, more than double a decade ago. However, there has been too much pessimism on local tourism, with a record 6 million tourist arrivals over that period, up 3 per cent on a year earlier, according to latest Australian Bureau of Statistics data.
That is not to suggest the tourism industry is buoyant, or that another interest rate cut is not needed. Anecdotal reports of tourism operators struggling from the high currency and sluggish demand abound. But strong growth in Chinese tourists to Australia is an excellent trend and the industry is doing a good job targeting north-east Asia.
Finding undervalued travel stocks that can benefit from these trends is hard. An obvious candidate, such as Webjet, has delivered an 82 per cent total shareholder return (including dividends) over 12 months. Flight Centre has returned 51 per cent; Wotif.com Holdings is up 50 per cent after heavy falls last year; and Corporate Travel Management, an impressive 2010 float, has returned 86 per cent. Sydney Airport has delivered strong gains thanks to growth in outbound tourism.
Ardent Leisure Group, formerly Macquarie Leisure Trust Group, is another good performer. It operates theme parks, bowling centres, gyms and leisure attractions in Australia, New Zealand and the US. Last month it reported strong first-quarter trading results and its one-year total shareholder return is 46 per cent. Ardent is worth watching as its post-global crisis recovery continues.
Wotif.com, at $4.71, is on a forecast price-earnings (P/E) multiple of 16 times and is expected to yield 5.6 per cent, fully franked, consensus analyst forecasts show. It has an estimated 36 per cent share of the Australian online accommodation bookings market – about 10 per cent of all bookings – and has strong long-term growth prospects. But it seems fairly valued at current prices.
My pick of the travel stocks is Flight Centre. It rallied from a 52-week low of $16.12 to $27.11 and still looks marginally undervalued. A forecast P/E of 12.1 times 2012-13 earnings is undemanding for a company of its quality and an expected 4.6 per cent fully franked yield is another plus. Five of six brokers rate Flight Centre a buy, according to consensus analyst estimates that Morningstar publishes.
Flight Centre is easily misunderstood. Its stores suggest an old-fashioned bricks and mortar retailer that is a sitting duck for savvy online operators, or those with more exposure to corporate travel and outbound tourism.
But corporate travel accounts for about 35 per cent of Flight Centre’s total transaction value and it is easily Australia’s largest corporate travel manager. It is also relying less on Australia, with earnings from offshore operations topping $60 million and almost doubling in the past two years.
The US business turned around a $60 million loss in 2008-09 to $9.9 million in earnings before interest and tax in 2011-12, double the initial target. The US business is now Flight Centre’s third-largest profit contributor and an important source of growth.
Flight Centre is making good progress online and I like the potential for its “blended travel agency” concept, which combines the best of online and in-store services. It will not be long before more Australians move from booking cheap airfares and hotel rooms online, to dearer international fares and holiday packages, where some travel advice can be delivered online, at lower cost.
Flight Centre, at its recent AGM, said it was on track to achieve its 5 to 8 per cent annual profit growth target: trading was OK in July and August, below expectations in September and better in October. Cheap international airfares are stimulating outbound travel and further growth in the US and UK operations in 2012-13 is expected. It needs stronger growth in offshore earnings and corporate travel to offset potential cyclical weakness in leisure travel.
I like that Flight Centre gives exposure to corporate and leisure travel and offshore travel markets. It is a lot more diversified than other travel stocks that depend solely on corporate travel or the domestic tourism market, and well placed to benefit from being a travel agency that could have two engines firing – demand for inbound and outbound tourism – rather than one.
The author owns Sydney Airport shares.