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How coronavirus is affecting airline, leisure and media stocks

Emma Rapaport  |  12 Mar 2020Text size  Decrease  Increase  |  
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Industries reliant on business confidence and consumer sentiment are being rattled by the coronavirus.

Morningstar equity analysts have examined how the outbreak could affect pockets of the market and where opportunities are emerging after this week’s sell-off.

Qantas tipped to weather the storm

Global airlines, including Qantas (ASX: QAN) have been hit hard by the virus. Qantas fell 9.9 per cent on Thursday after US President Donald Trump suspended travel from Europe.

Qantas slashed the capacity of its international flights by almost a quarter this week for the next six months. There will be fewer Qantas and Jetstar flights, and smaller planes, travelling to Asia, the US, the UK and New Zealand, until mid-September.

Morningstar equity analyst Angus Hewitt says the coronavirus, also known as COVID-19, is "proving highly disruptive" but has maintained his $5.00 fair value. He expects Qantas to turn a profit in fiscal-2020.

Qantas is trading at roughly a 20 per cent discount to its fair value.

"The impact of novel coronavirus, or COVID-19, is weighing on air travel demand across the globe, and Qantas is not immune," Hewitt says in a Wednesday note co-authored with equity analyst Gareth James.

"Despite announcing reductions to capacity and an off-market buyback on 20 February 2020, the COVID-19 impact is proving highly disruptive, and Qantas has now earmarked deeper cuts and cancelled its buyback.

"We lower our fiscal 2020 net profit after tax forecast to $647 million, from our previous estimate of $787 million, representing a 30 per cent drop compared with fiscal 2019.
"However, we don't expect this to persist in the longer term and anticipate air travel demand recovery from fiscal 2021."

Hewitt is anticipating a U-shaped impact on demand COVID-19, like the impact experienced during SARS in 2002, and forecast a return to capacity growth from fiscal 2021.

"Qantas' balance sheet remains strong, despite near-term earnings pressure, and we expect the firm will be able to weather the storm," he says.

Qantas cancelled its $150 million off-market buyback in order to preserve its balance sheet

Hewitt similarly thinks the rout for shares in Air New Zealand (ASX: AIZ) is similarly overdone.

Media companies face new hurdles

Shares in media firms are similarly feeling the full brunt of market fears. "Demand for advertising services provided by these entities hinges on business confidence and consumer sentiment--two qualities in short supply amid the current contagion fears," says Morningstar equity analyst Brian Han.

"In such a precarious environment, sheer discretionary nature of marketing spending is laid bare as businesses batten down the hatches.

"Uncertainties regarding the coronavirus' duration and its secondary impact on the credit market are wreaking havoc on sentiment, at a time when advertising conditions were already weak."

The fears are reflected in the stock price corrections suffered to date.

Shares of the six no moat-rated media companies under Morningstar coverage (Nine (NEC), News (NWS), oOh!media (OML), Sky (SKT), Seven (SVM), Southern Cross (SXL)) are down an average of 37 per cent so far in 2020, with an average discount to our fair value estimates at 47 per cent--a significant deterioration from the average 24 per cent discount at the start of the year, Han pointed out of Tuesday.

"Highlighting this discount to valuation in the current environment is akin to trying to sell boats amidst a category-5 hurricane," he says.

At this fluid stage, Han is resisting the temptation to downgrade his intrinsic assessments, especially with no reliable yardsticks to gauge the coronavirus' sustainable earnings impact.

"Long-term value is clear but the path to get there is not."

Discretionary nature of leisure stocks laid bare

Leisure stocks are feeling the full brunt of market fears about the coronavirus. "Demand for services provided by these entities hinges on consumers having the confidence to frolic in crowded places," Han says.

"When that confidence evaporates due to contagion health concerns, the sheer discretionary nature of spending on such activities is laid bare, with the potential financial impact exacerbated by the significant embedded fixed costs."

The fears are reflected in the stock price corrections. Shares of the four no moat-rated leisure companies under coverage (Ardent Leisure (ALG), Event Hospitality and Entertainment (EVT), Flight Centre (FLT), Village Roadshow (VRL)) are down an average of 36 per cent so far in 2020, with an average discount to our fair value estimates also sitting at 36 per cent--a significant reversal from the average 3 per cent discount at the start of the year, Han said Tuesday.

As with media stocks, Han is sticking to intrinsic assessments. Seven West Media, Sky and Sourthern Cross are currently trading well below what Han thinks they're worth at five stars

Stock prices, YTD

travel and media stocks

Source: Morningstar Direct 

 

is an editor for Morningstar.com.au

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

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