Who wants to own ASX-listed travel stocks as consumers cut back on discretionary spending during the cost-of-living crisis? Across the market, travel stocks are mostly out of favour as investors bet on waning travel demand as higher interest rates and living costs bite.
Flight Centre Travel Group, for example, is a quarter below its 52-week high. Webjet is about 20% off its 52-week high and Helloworld is almost a third below its annual high achieved in September. The beleaguered Qantas Airways is about a third below its 52-week after its corporate reputation was trashed this year. Across the Tasman, Auckland International Airport had a tough few months and Air New Zealand continues to drift lower, disappointing shareholders.
However, it’s not all bad news. Corporate Travel Management and SiteMinder rallied in November, as investors reappraised their prospects.
Nobody doubts travel stocks have a tough 12 months ahead as consumers struggling to pay the mortgage or the rent ditch that international holiday, downgrade to a domestic one, or cancel their holiday.
I expect Australian interest rates to rise again in February as the Reserve Bank battles stubbornly high ‘homegrown’ inflation, although the odds are lengthening after this week’s better-than-expected inflation data.
I don’t expect a recession, but Australia risks a period of ‘stagflation’ – sluggish growth and higher inflation. The nation has a tough year ahead economically.
That’s hardly the backdrop for a booming travel sector. As consumers cut back, so, too, will businesses that cut costs to respond to slower revenue growth. That will affect travel agents that book holidays in the cyclical travel industry.
It could be a two-speed travel market: younger consumers cutting back on holidays due to rising mortgage or rental costs; and older self-funded retirees who have greater disposable income due to higher savings rates.
Amid the economic gloom, it’s easy to forget that many older Australians who earned barely anything on their cash for years can now earn 5% or more (depending on their cash-management account), thanks to interest-rate hikes.
This is a prime market for travel agents who work with retirees seeking expert travel advice (rather than self-book holidays to get the cheapest deals).
The other issue is valuation. The market is pricing a lot of bad news into Flight Centre, Auckland International Airport and Air New Zealand.
Travel demand will soften in 2024 as higher interest rates bite, but domestic travel in particular has a lot of momentum and a positive medium-term outlook, judging by Federal Government forecasts for travel demand to 2027.
Here are two travel stocks to consider at current prices:
- Flight Centre Travel Group (ASX: FLT)
The former market star has had a tough five years. The market was concerned that Flight Centre had gone ‘ex growth’ as it battled online-only travel providers (and was weighed down by its bricks-and-mortar business model). Flight Centre crashed during the Covid-19 market sell-off in March 2020. At $18.25, it is still more than half below its pre-pandemic level.
The selling looks overdone. Flight Centre’s earnings recovery this year has outpaced the expectations of some analysts.
At its Annual General Meeting in November, Flight Centre reported $6 billion of total transaction value (TTV) for the first quarter of FY24. That was Flight Centre’s second-strongest start to a year. Record corporate TTV was a highlight.
Revenue growth was 38% and the revenue margin improved 160 basis points to 11.2%. Flight Centre’s strategic initiatives on pricing and the promotion of higher-margin products are working. A flat underlying cost margin led to an increased profit margin and profit growth in the first quarter of fiscal 2024.
There was a lot to like about Flight Centre’s update. It’s winning more corporate accounts, expanding in luxury travel and selling more leisure travel online (about 15% of leisure travel in the first quarter was booked online).
Flight Centre is guiding for profit before tax of $270 million to $310 million for FY24. The midpoint of that range – $290 million – represents 175% growth on FY23 and is broadly in line with current market consensus forecasts.
Flight Centre said it was “comfortable with the market’s earnings expectations” for the business and that “travel demand remains fairly healthy”, despite interest-rate hikes in some countries. It added that macroeconomic conditions historically have not deterred a large number of people from travelling overseas for their annual holiday. That seems to still be the case.
Company management has excelled in navigating Flight Centre through and out of the pandemic and positioning the company for a recovery that is yet to fully play out. With outbound departures still about 9% below 2019 levels, there is scope for more growth yet as economic conditions eventually improve.
Flight Centre’s current price of $18.25 compared to an average target of $22.73, based on the consensus of 14 analysts.
After sharp falls this year in a weak market, Flight Centre looks undervalued. Not excessively so, but it looks like a reasonable time to consider adding a high-quality travel provider to portfolios and capitalise on price weakness.
The market seems reluctant to recognise Flight Centre’s recovery and is more concerned about macro conditions than micro performance and valuation. That is an opportunity for long-term contrarian investors.
Chart 1: Flight Centre Travel Group
Source: Google Finance
- Serko (ASX: SKO)
Serko is a travel-management and expense-technology company that listed on the NZX in 2014 and dual-listed on the ASX in 2018.
Serko was popular for a time, drawing comparisons with Xero, another star NZ-founded tech company. Millions of people book corporate travel using Serko software. I wrote about the company in this Report in June 2023 at $2.91 a share. It currently trades at $3.83 after rallying this year off a low base.
To recap, Serko has a strong position in cloud-based solutions that help corporates manage their travel and expense programs.
The company is growing quickly. In November 2023, Serko announced 87% growth in total income to NZ$36.3 million for the six months to September 2024. The underlying loss (EBITDAF) was NZ $800,000, a 96% improvement.
Serko said business-travel demand is demonstrating resilience and that it anticipates revenue growth over the medium to long term.
In a good sign, Serko increased its guidance range from NZ$63-70 million to NZ$67-74 million.
At $3.83, Serko is capitalised at $466 million. The company has $84 million in cash, declining monthly cash burn and no debt.
Serko was oversold when I wrote about it in June 2023. Gains will be slower from here, but the business is on track to earn NZ$100 million in income in FY25, despite market fears of weakening travel demand.
Chart 2: Serko
Source: Google Finance. ASX shares shown.
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 30 November 2023
