New Year investment stories are usually full of buy ideas. I’ll start off my first Switzer Report column for 2020 with a sell idea: tourism, a sector I have long favoured.
For clarity, I still like the prospects for listed tourism companies over 3-5 years. As I have explained before in this Report, the coming boom in middle-class consumption in emerging countries is a long-term tailwind for our tourism industry.
But the industry’s short- and medium-term prospects (zero to three years) have become more challenging due to natural disasters, a slowing economy, rising competition and on valuation grounds in some high-flying tourism-related stocks.
As always, seek financial advice or do extra research of your own with sell ideas (and buy ones, for that matter). Selling stocks can have Capital Gains Tax (CGT) and other asset-allocation implications. Every investor is different.
Caveats aside, I’ve become concerned about tourism’s prospects over the next few years. Growth in international arrivals is slowing more than expected, although still remains high.
A record 8.6 million international tourists visited here in the year to June 2019 – 3% more than in the previous year, Tourism Research Australia data shows. A disappointment was 1% growth in Chinese visitors.
Tourism proponents will point to impressive growth from Japanese and US tourists and the record $44.6 billion in total trip spend from international tourists, up 5% year-on-year.
However, caution is needed with the overall figure: higher international airfares and education fees (I’ve never understood why international education is counted in tourism spending) ADDED TO the result. Growth in visitor nights was a modest 1%.
So, the backdrop is slowing growth in tourism off a strong base. These figures do not include the impact of international and domestic tourism from the bushfires in New South Wales and Victoria over the New Year or the fallout if the fires continue over summer.
The bushfires attracted a flurry of international headlines and support from movie stars and other celebrities. Ill-informed infographics in news bulletins wrongly showed most of Australia burning and in some cases disaster photos years out of date were used.
Misinformed offshore news coverage – and the perception it creates – will almost surely deter some international tourists from visiting here this year and next. I’m not suggesting a dramatic downturn, but flatter growth in international arrivals in 2020 is a possibility.
Domestic tourism will also be affected. If our weather continues to become hotter and drier, more people will rethink their summer holidays. There was talk over summer that Australia should delay its peak holiday season from December/January to March/April, to avoid the peak of the bushfire season and make it easier to contain bushfires.
Although that will never happen, I suspect more people will factor in rising temperatures and the bushfire threat when planning their summer holiday next year. Some might shorten their break, preferring to holiday for longer in cooler months, possibly overseas.
Australia’s sluggish economy is another factor. AMP Chief Economist Dr Shane Oliver expects the bushfires to reduce Australia’s economic growth by 0.4% in the March quarter. A period of rebuilding will then boost economic activity, but as Oliver notes, “the hit to consumer spending and tourism is likely to linger longer”.
He wrote this month: “Inbound tourism is likely to be impacted by the heavy coverage of the bushfires globally, with ridiculous maps showing much of Australia on fire likely to adversely affect perceptions of Australia. This may be short-lived (just as the positive boost from the 2000 Olympics was) but it could still last a year or so.”
Against that, rising house and share prices might make Australians feel wealthier and encourage them to travel in 2020. I’m betting that persistent low wages growth, high household debt and waning consumer sentiment will dampen the travel plans of more people this year.
Again, I’m not suggesting Australia’s tourism industry has big problems ahead or that the slowdown will be long-lasting. Rather, that several tourism-related stocks are seemingly priced for perfection, even though the sector faces growing headwinds.
Here are 3 tourism-related stock ripe for profit-taking.
- Sydney Airport (SYD)
The infrastructure monopoly, a favourite stock of mine for years, has a total return (including distributions) over one year of 39%, Morningstar data shows, despite flat passenger growth at its terminals.
Sydney Airport in December reported year-to-date passenger growth of just 0.1% to November 2019. Domestic travel fell slightly, partly because of reduced seat capacity, and international passenger numbers – previously an area of strong growth – were up just 1.2% year-to-date.
Chinese passenger numbers (including Hong Kong) were down 6% in November. Riots in Hong Kong and the US/China trade war have hurt Chinese arrivals at Sydney Airport, as have Brexit uncertainties with United Kingdom arrivals.
Morningstar’s fair value of $7.30 compares to Sydney Airport’s current price of $8.76. Low interest rates are supporting valuations for Sydney Airport and other interest-rate-sensitive stocks, but they won’t be enough to prop up the valuation if passenger growth slows further.
Sydney Airport
Source: ASX
- Qantas Airways (QAN)
I nominated Qantas as a stock to sell in December 2019 for this report and stand by that view. Yes, Qantas is a great company. However, the share price has not sufficiently factored in softening demand for air travel and with that pressure to lower fares and profit margins.
Qantas has fallen from $7.25 to $7.11 since that story in a rising share market. I’ve been too bearish on Qantas before but am wary of overpaying for it given the tourism challenges.
The consensus of eight broking firms has an average share-price target of $7.08 for Qantas, a little below the current price, suggesting the airline is fully valued. After stellar gains over the past few years, some profit taking in Qantas seems prudent.
Qantas
Source: ASX
- SeaLink Travel Group (SLK)
The ferries operator, a stock I have written on favourably for this report on the years, has been a strong performer since it listed on ASX in 2014. The business is superbly leveraged to international tourism growth through its Captain Cook Cruises in Sydney and Perth, and its various island ferry services.
The well-run SeaLink has delivered a total return of 19% over five years – a performance that made it one of the higher-quality small-cap floats in the previous decade.
SeaLink shares soared more than 40% in October 2019 after it announced plans to acquire Transit Systems Group – Australia’s largest private operator of metropolitan bus services and an established bus operator in London and Singapore – for $635 million.
The market loved the acquisition, its potential to create the nation’s leading integrated bus and marine passenger transport services and the synergies between the two.
SeaLink has since fallen from a 52-week high of $5.31 to $4.60, partly as a result of significant damage from bushfires at its Kangaroo Island lodge. The damage will not have a material adverse impact on SeaLink’s earnings, but the broader effect of the natural disaster – and its effect on domestic tourism travel next summer – could weigh on the ferry business.
At $4.60, SeaLink is on a trailing Price Earnings (PE) of almost 20 times. The company deserves to trade on a premium given its performance, management and governance – and the long-term growth potential of its bus acquisition.
That said, large acquisitions often pose integration challenges for small-caps a year or two after the deal when the market’s positivity fades and reality sets in. A softening domestic economy and potential for weaker domestic and international tourism activity in SeaLink’s key markets are other risks.
That justifies some profit taking, with a view to buying back into SeaLink at lower prices later this year for investors who have small-cap exposure in their portfolio.
SeaLink Travel Group
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 14 January 2019.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
