For many people, just opening up their Facebook feed tells them this – but there definitely is a travel boom at the moment. According to the Australian Bureau of Statistics (ABS), there were 850,800 short-term departures from Australia in May, and 734,900 short-term arrivals. Incoming tourists are up 7.9% on a year ago, with departures up 7.6%.
In particular, Chinese tourists are still flocking down under. Over the past year, a record 1,519,100 tourists came to Australia from Greater China (China and Hong Kong), up 11.3% over the year, and ahead of tourists from New Zealand, on 1,355,600 visitors over the past year, up 3%. The 12 months to May saw a record 1,256,300 tourists from China come to Australia, up 9.1% over the year: Savanth Sebastian, senior economist at CommSec, estimates that the number of tourists from mainland China should pass those from NZ in their own right in the next few months.
And Australia’s third-largest tourist market is also back in business. Tourist numbers from the United States have surged by 15% in the past year to 750,200 visitors.
CommSec says the travel sector is buoyant, with more people coming to Australia and more Australians travelling abroad.
Let’s look at possible ways to play this – but be warned, it’s not as if the share market has not noticed this strength.
Sydney Airport (SYD, $6.96)
Market capitalisation: $15.6 billion
Consensus estimated FY18 yield: 5.3%, unfranked
Five-year total return: 24.8% a year
Analysts’ consensus price target: $6.87 (FN Arena), $7.02 (Thomson Reuters)
One of the most obvious ways to tap into a growing travel market is to buy Australia’s main international gateway: Sydney Airport (SYD) serves 44 international airlines, nine domestic and regional carriers and 10 dedicated freight carriers, which fly to a network of 97 destinations (46 international, 23 domestic/interstate and 28 regional destinations).
Aeronautical services generate 51% of SYD’s revenue, with retail contributing 22%, property/car rental 15% and parking/ground transport 11% (Sydney Airport makes almost $100 million a year from parking). Aeronautical services revenue rose by 15.6% in FY16.
In 2016 (SYD is a calendar-year reporter), Sydney Airport lifted total passengers by 5.6%, to 41.9 million, with international numbers rising 9% – the strongest passenger growth in 12 years – and domestic by 3.8%. SYD’s net operating income rose by 20.5% to $696 million; EBITDA (earnings before interest, tax, depreciation and amortisation) lifted by 10.3%, to $1.1 billion; and the FY16 distribution of 31 cents was a 21.6% rise. FY17 guidance is for the distribution to rise by 8.1%, to 33.5 cents, fully funded by operational cash flow.
SYD is a China growth story: it now connects to 14 mainland Chinese cities, served by 6 mainland airlines and Qantas. This compares to just 3 cities, from 3 airlines, 7 years ago. But it is also an Asian growth story: while Chinese passengers grew by 17.6% in 2016, Japanese numbers surged 30%, Korean passengers were up 19.4%, Indonesian visitors rose by 15% and Indian numbers were up by 14%. US visitors increased by almost 17%, while Europe/Middle East numbers were up by 11%.
Sydney Airport’s share price has been hurt over the past 12 months by ongoing speculation about whether it would take up its first option to build Sydney’s second airport: in May, the company declined the option, saying it would be too great a financial risk for its investors. The federal government will build Sydney’s second airport at Badgerys Creek, in Sydney’s west. The company has now lost its monopoly on airports in Sydney, but this could actually be a positive: SYD stands to benefit from domestic airlines using the second airport, and freeing-up capacity at its Kingsford Smith site to sell into the more valuable international market. SYD is spending $500 million to extend the international terminal.
SYD is a great exposure to international travel, but on consensus, analysts see it as fairly fully priced. Morgan Stanley is the most optimistic, with a target price of $7.32. SYD is a strong yield generator, but its yield is unfranked.
Qantas Airways (QAN, $5.44)
Market capitalisation: $9.8 billion
Consensus estimated FY18 yield: 2.6%, 75% franked
Five-year total return: 41.5% a year
Analysts’ consensus price target: $5.54 (FN Arena), $5.20 (Thomson Reuters)
What about the nation’s flag carrier? Qantas has certainly been on the up lately, since the awful days of its $2.8 billion loss in 2014. The repair job conducted by Alan Joyce and his team has been very impressive, to the point where Qantas earned underlying pre-tax profit of $1.53 billion in FY17, the largest in its history, and has put out guidance for a better-than-expected annual underlying pre-tax profit of between $1.35 billion and $1.4 billion in FY18, on the back of the strength of its domestic operations.
Qantas says its international business is actually doing it tough, amid intense competition, but this has been offset by an improving performance from its domestic operations and its frequent flyer program. The shares have been a strong performer on the market, tracking Qantas’ financial recovery: QAN is up 80% in the last 12 months. Unfortunately, that has pushed Qantas beyond value – although at a target price of $7.09, Citi certainly thinks it’s worth buying. However, the consensus sees Qantas marking time from here, and the yield situation is not attractive enough.
Flight Centre (FLT, $44.17)
Market capitalisation: $4.4 billion
Consensus estimated FY18 yield: 3.3%, fully franked
Five-year total return: 21% a year
Analysts’ consensus price target: $38.16 (FN Arena), $40 (Thomson Reuters)
Global travel agency business Flight Centre hasn’t had a great time lately on the stock market, with its shares having been heavily shorted, and a string of earnings downgrades disappointing the market. The flipside of a growing travel market is intense competition, with Flight Centre saying average international airfare prices locally dropped 7% during the first half of the year, as a result of widespread discounting in 2016.
Flight Centre provides a complete travel service for leisure and business travellers in Australia, New Zealand, the United States, Canada, the United Kingdom, Africa, Middle East, Asia, New Zealand, and Europe. While the flagship brand is the Flight Centre leisure brand, FLT operates more than 30 brands, in four business categories: leisure, corporate, wholesale and other (various travel-related businesses).
But earlier this month, Flight Centre surprised the market with a bullish profit forecast for the year ended June 30, 2017. Flight Centre now expects to achieve an underlying profit before tax (PBT) between $325 million and $330 million for the year to 30 June, with second-half profit expected to beat that of the prior corresponding period by up to 4.9%. The company attributes the upgrade to a solid performance in North America, as well as Europe, the Middle East and Africa (EMEA).
The upgrade was all the more satisfying for shareholders because the first half of FY17 was disappointing, with pre-tax profit slipping 23% to $113 million.
Analysts are in the process of updating their target prices, but they still appear to regard Flight Centre as fairly fully valued – Ord Minnett is most optimistic, with a target price of $48.17 (post-upgrade). On consensus forecasts Flight Centre is not a buy, and nor is the prospective fully franked yield inspiring enough.
Webjet (WEB, $12.22)
Market capitalisation: $1.2 billion
Consensus estimated FY18 yield: 2%, fully franked
Five-year total return: 34.3% a year
Analysts’ consensus price target: $12.12 (FN Arena), $12 (Thomson Reuters)
Online travel agency Webjet has picked up on the improving travel market, with the shares surging by 70% in the past 12 months. Webjet’s main business is the travel booking website of the same name, which offers flights, hotels, holiday packages, cruises, car hire, travel insurance and travel deals: it also runs the Online Republic brand, and has a business-to-business division comprising the Lots of Hotels and Sunhotels brands. The company operates in Australia, New Zealand, North America, Singapore and Hong Kong.
An impressive half-year result and upgraded guidance has driven WEB’s strong share price performance. In February, the company reported strong bookings growth and market share gains from all its key businesses: this flowed through to an 87% jump in half-year net profit. On the back of the buoyant first half, management upgraded its full-year FY17 EBITDA guidance to $80 million – more than double the $36.9 million in EBITDA delivered in FY16.
However, trading at 33 times expected earnings, Webjet now appears to be due a share price pause. And in a common refrain in this sector, the 2% fully franked yield is not going to keep a yield-oriented investor in the stock.
Helloworld Travel (HLO, $4.40)
Market capitalisation: $528 million
Consensus estimated FY18 yield: 3.3%, fully franked
Five-year total return: 12.4% a year
Analysts’ consensus price target: $4.69 (FN Arena), $4.59 (Thomson Reuters)
The smallest in this group of stocks, Helloworld, actually looks to be the best value right now. Helloworld is an integrated travel business operating wholesale travel business (holiday packaging), franchise-based and affiliate retail agency networks, air ticket consolidation, airline representation and travel management services. It operates in Australia, New Zealand, the US, Asia, the United Kingdom and South Africa.
The main business is a franchisor of Australia’s largest retail travel agency network, with about 2,000 independent agents, under brands including Helloworld Travel, Jetset, Travelworld, Travelscene American Express, Harvey World Travel and the Concorde Agency Network in Australia. In New Zealand, the group also operates as the franchisor for United Travel and The Travel Brokers. Helloworld also owns Best Flights, a web and call centre based retail travel agent.
Helloworld also operates the wholesale brands Qantas Holidays, Viva Holidays, Harvey’s Choice Holidays, Ready Rooms, Rail Tickets, Travel Indochina, GO Holidays and Qantas Vacations. It also owns the Cruise Factory, Seven Oceans Cruising, Cruise Abroad and Worldwide Cruise Centre cruising businesses, which tap into the growing cruising market.
For the December 2016 half-year, Helloworld lifted revenue by 23%, to $171.2 million, and surged back into profitability, with net profit of $12.9 million (compared to a loss of $1.6 million at the previous stage in FY16). EBITDA increased more than three times, to $30.1 million.
In April, Helloworld upgraded its guidance, lifting expected EBITDA for FY17 to a range of $52 million–$55 million, from a previously announced range of $47 million–$51 million. Most importantly, Helloworld is about the only travel-related stock where analysts see clear – albeit limited – room on the upside for the share price. With the projection of a 3.2% fully franked yield, that starts to offer some inducement.
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