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Opportunity shifts from retail to travel: Morningstar

Brian Han  |  01 Feb 2021Text size  Decrease  Increase  |  
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This is an extract from Morningstar senior equity analyst Brian Han's monthly column Brianstorm. Morningstar Premium subscribers can view the full version and previous columns here.

Strong performance by Australian retailers in 2020 wasn't all that surprising given the year we went through. We had random outbreaks of covid infections. We had to keep up to date with an ever-mutating list of venues that have been visited by possible coronavirus carriers. And we had to deal with bewildering and forever-shifting government restrictions on movements and border controls.

All this made everyone nervous just to walk out the door, with the fragile sentiment not helped by constant media hysteria. Consequently, consumers turned to the age-old therapy to fill the void in their lives … shopping. For alcohol, games, furniture, more alcohol, food, electronics, pets, power drills, bikes. Anything and everything, just to get their minds off the fact they are prisoners in their own houses, locked down with their annoying housemates, partners, kids or, worst of all, themselves. And they have been able to do all this shopping without getting off their couch or bed, thanks to the Internet and broadband.

Is it any wonder the ASX consumer discretionary index (to which all retailers belong) has crushed the overall market in terms of performance since the market low in March 2020?

Consumer discretionary and IT massively outperform all ASX others since COVID-low (23 March 2020)

consumer discretionary and IT massively outperform all ASX others since COVID-low

Source: ASX. Closing prices on 27 January 2021

The stark underperformance of sectors such as consumer staples, healthcare and utilities since covid hit in late March 2020 is counterintuitive. These are “defensive” sectors and typically outperform in times of uncertainty and risk aversion, emotions coronavirus has induced in abundance in everyday life. Yet, in the surreal world of the equities market, traditionally high-beta or risk-seeking sectors such as information technology and consumer discretionary are surging, thanks in no small part to all the cheap money and fiscal stimuli sloshing around in the system.

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The key development to look out for as 2021 unfolds is the sustainability of this phenomenal top-line growth of discretionary retailers. How much more stuff can consumers buy to fill their lounge rooms, kitchens, studies and backyards? How much of that spending will be redirected to out-of-home leisure and travel activities, when covid treatments and vaccines gradually bring the pandemic under control? Could retailers be hit with a double whammy of cycling against the current buoyant sales growth AND normalisation of hitherto heavily subsidised wages and rents? And we won’t even begin to speculate on the brewing governance storm facing retailers, as some give back Jobkeeper benefits (bravo, Toyota, Super Retail, Coca-Cola Amatil!), while others stay mum while making hay!

MORE ON THIS TOPIC:  Slow vaccine rollout to delay Sydney and Auckland airport recovery

Judging by the current stock prices relative to our analysts’ fair value estimates, the risk-reward proposition is favouring leisure and travel-related shares, rather than consumer discretionary shares. This is especially so when one considers the horrendously low bar (and market expectations) for the much-maligned leisure and travel-related companies, relative to the high-flying retailers. The shift in earnings multiples from this potential mean reversion could be abrupt and may well overshoot on the upside, just like what is happening in the retail space.

Risk-reward proposition shifting to outdoor travel/leisure stocks vs indoor retail stocks*

Risk-reward proposition shifting to outdoor travel/leisure stocks vs indoor retail stocks

* Data as at 27 January 2021 ** Morningstar forecast or most recent company guidance *** Metcash is April year-end, Myer and Premier Investments are July year-end
Source: Company reports and Morningstar estimates

No one knows for sure when conditions will normalise in the travel and leisure space. However, there does appear to be significant pent-up demand for good old-fashioned outdoor leisure and travel. In fact, for every person who claims how good it has been to spend time with family and kids in the house during the current pandemic, there is likely another who secretly harbours a desire to get back to work, travel and reclaim some “me” time away from home.

We have no hard data to back this up, especially as forward bookings on activities such as flights, hotels and amusement venues are almost non-existent due to ever-fluctuating government and travel restriction changes. But anecdotal evidence is everywhere you look, whether from talking to your neighbours and colleagues, reading popular press or scanning Twitter chatters. Even trending search terms on Google provide signs of mounting cabin fever, with queries on “Airbnb”, “camping” and “caravans” rapidly climbing.

Rising trend in Google search terms another piece of evidence on pent up demand?

Rising trend in Google search terms another piece of evidence on pent up demand?

Source: Google Trends

Recent airport data also lend support to evidence of pent-up demand to travel. For instance, monthly international passengers through Sydney Airport continue to languish at around 3 per cent of pre-covid levels. However, domestic passengers have gradually recovered to around 30 per cent, notwithstanding the myriad border controls and restrictions.

Sydney Airport traffic numbers already show recovery in domestic travel, despite confusions on border rules

Sydney Airport traffic numbers already show recovery in domestic travel, despite confusions on border rules

Source: Company reports

In New Zealand where the pandemic has been even better controlled, monthly domestic passengers through Auckland Airport are now at almost 70 per cent of pre-covid levels. One can only imagine the pace of recovery on the international front when overseas borders open, and consumers become more comfortable with the new norm of masks, vaccine certificates and other regulatory protocols on international travels.

At the end of the day, the dilemma is one that faces investors in any market cycle: Persist with momentum by sticking with retailers buoyed by a covid-induced surge in demand? Or anticipate normalisation of conditions and back leisure and travel-related entities whose fortunes are down in the dumps because of coronavirus? As a research team which anchors its investment philosophy on sustainable, mid-cycle earnings and returns, we believe the risk-reward proposition is leaning towards the latter.

is a senior equity analyst in the equity research team at Morningstar

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