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Coronavirus sends leisure stocks into buy zone

Glenn Freeman  |  05 Feb 2020Text size  Decrease  Increase  |  
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China's coronavirus epidemic is cutting a swathe through global markets but the sell-off means 11 travel and leisure companies, including three from Australia, hold renewed appeal.

The Australian benchmark S&P/ASX200 index was down 1.34 per cent on Monday amid continued uncertainty about the fallout from the virus.

US stocks had fallen about 2 per cent from their record highs until last Friday, before the market recovered slightly overnight as China's stimulatory measures took effect.

Aiming to head off any panic, the Chinese government took steps to prevent damage to the economy by issuing travel bans and forcing businesses to temporarily close their doors.

Asian shares plumbed two-month lows, forced down by Chinese markets, which have plunged on fears the coronavirus epidemic would hit demand in the world's second-largest economy.

Luxury goods hold up

Earlier this week, Morningstar equity analyst Jelena Sokolova examined the effect coronavirus is likely to have on luxury goods. She concluded there are unlikely to be long-term consequences and doesn't expect to cut fair value estimates.

Just as the likes of luxury goods retailers LVMH and Richemont rely heavily on sales to tourists from China, travel and leisure stocks depend on China tourism.

"Since epidemics tend to be short-term, we don’t see the epidemic having long-term negative implications," Sokolova says.

"Should fears over the virus subside, consumption and travel, put on hold, could quickly return to the market. Hence, we don’t expect to adjust our fair value estimates for luxury coverage downward."

Gaming stocksSource: Morningstar  *Price-to-FVE current as of 4 February 2020.

Morningstar Australia analysts also doubt the coronavirus epidemic will have long-term consequences across the sector. 

But plunging investor sentiment has forced a few stocks into undervalued territory when measured against analysts' fair value estimates.

Ardent Leisure Group (ASX: ALG)

Ardent Leisure operates a series of theme parks in cities around the world, including Dreamworld on Queensland's Gold Coast – a city that relies on international tourists, particularly those from China.

"Critically, it is the mere fear of the virus spreading that could hit sentiment for Ardent Leisure, whose operations - including theme parks in Australia and family entertainment venues in the US - hinge on consumers having the confidence to frolic in crowded places," Han says.

He noted late last month that shares in Ardent have surged more than 60 per cent since hitting long-term lows of 91 cents a share in October last year.

"Signs of recovery are clearly emerging in the underlying businesses. Theme park attendance and revenue were up 11 and 5 per cent, respectively, for the first four months of fiscal 2020," Han says.

But he has also consistently maintained the company's path to hitting Morningstar's $2 fair value estimate is likely to be "rocky".

"The current spreading of coronavirus could make this path even rockier in the near term, as Chinese travellers account for a meaningful percentage of overseas visitors to the Gold Coast, around 10 per cent," Han says.

"Longer term, we are confident theme park EBITDA can return to $31 million in five years' time, from $10 million loss last year, and in line with the $32 million average EBITDA generated in the six years before the Dreamworld tragedy."

Ardent is trading more than 30 per cent below Morningstar's fair value estimate as of 2:30 Tuesday.

Crown Resorts (ASX: CWN)

Casino operator Crown Group also relies heavily on the Chinese tourist dollar, particularly via the high-roller customer segment, which contributes around 20 per cent of normalised group revenue.

"The vast majority of that cohort is from China, so there is an impact on the business [from the coronavirus]," Han says.

"And that's not counting the large number of visitors from China who use the main game floors at the casinos in Melbourne and Perth."

He says it's difficult to accurately gauge the exact exposure to a drop-off in in-bound tourism from China to the main gaming floors, "but the high roller is very important."

Crown's shares were trading at $11.56 at the close on Tuesday, slightly below Morningstar's $13.80 fair value estimate.

SkyCity Entertainment Group (ASX: SKC)

The same goes for trans-Tasman casino operator SkyCity Entertainment Group as for Crown.
New Zealand-based SkyCity has gaming properties in Darwin and Adelaide in Australia, but draws the majority of its earnings from Auckland casinos.

SkyCity generates 17 per cent of its revenue from high rollers, who move quite freely between casinos across the globe, depending on the level of rebates and other incentives.
But Han has made no change to SkyCity's fair value estimate, which remains at $3.70 – around 7 per cent more than its share price of $3.43 at 2:30pm Tuesday.

"With a benign regulatory outlook in most of its operating markets, SkyCity Entertainment is capable of generating solid free cash flow and providing shareholders with dependable dividend streams," Han says.

SkyCity Entertainment boasts a resilient earnings profile. Its revenue is underpinned by the Auckland complex, which operates under a monopoly casino licence that only expires in 2048 and more than 75 per cent of the group's total profits.

SkyCity Adelaide represents another 7 per cent of group earnings.

 

is senior editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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