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Travel and leisure companies face corona fallout

Glenn Freeman  |  30 Apr 2020Text size  Decrease  Increase  |  
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Travel bans have been a key part of coronavirus containment measures around the world, hurting a range of companies within the tourism and leisure sectors.

In recent days, Australian political leaders have begun easing restrictions introduced to curb the spread of coronavirus. In NSW, social gathering restrictions will be relaxed from Friday, but Scott Morrison on Wednesday emphasised international travel bans will remain for some time.

However, the Prime Minister has stopped short of declaring a reopening of Australia's borders.

"I can't see international travel occurring anytime soon, the risks there are obvious," Morrison said on Wednesday.

In weighing companies directly exposed to the economic effects of coronavirus, Morningstar senior equity analyst Brian Han says investors must consider two questions:
"Does the company have the liquidity to sustain itself in an environment where there may not be a cent of revenue for six months?

"What is the minimum operating cost per month that we can still incur while keeping the business ticking over?"

As an example, Han refers to Crown Resorts (ASX: CWN). Investors recently learned controversial shareholder and Melco Resorts founder Lawrence Ho had sold his stake onto private equity firm Blackstone.

At the end of March, Crown management indicated the business needs operating cashflow of between $20 million and $30 million just to keep the lights on.

"Even though the casino is closed, the hotel remains open and you have to keep a skeleton staff operating it and keep the back office open," Han says.

"And in line with this monthly cash burn…how many months can they sustain zero revenue?"

Once you've been able to satisfy yourself the company is likely to survive, and Morningstar's equity research is a key resource here, Han says you can then start looking at discount-to-fair value.

Flight Centre (ASX: FLT)

Economic Moat: None | Morningstar Rating: 5-star | Price-to-Fair Value: 0.57

Travel booking company Flight Centre has been pummelled by the coronavirus crisis since the middle of March.

Government travel bans, lockdown measures and airline groundings have created what Han sees as an unprecedented liquidity squeeze on the company.

In response, management has flagged measures to cut monthly operating costs to $65 million by July 2020 - from $227 million previously.

Flight Centre's share price fell from $28.44 on 3 March to $12.60 on 19 March. The share price recovered slightly in mid-April but has since flattened to close at $10.30 on Thursday.
This leaves the company's shares more than 40 per cent below what Han believes they're worth, with an $18 fair value estimate. But he is encouraged by the company's balance sheet.

Flight Centre ended 2019 with corporate net debt of just $10 million, which was slightly higher than six months earlier but this was due to regular seasonal factors.

In terms of liquidity, Flight Centre's level of cash on hand had ballooned to more than $110 million. This will rise further still, Han expecting the group's liquidity to top $1.2 billion after a $500 million capital raising closes next month.

"It probably now has between 12 and 18 months of liquidity to sustain the business because of the capital raising, and that's the whole point of a capital raising," Han says.

He points to a Flight Centre rival Webjet, which announced a capital raising of between $174 million and $231 million on 15 March. Han says the uncertainty around the duration of the pandemic that has prompted such measures. 

"The trick—and companies are all struggling with this—is: how do they cut their operating costs per month?"

Companies in this situation must decide how many people to stand down, how many people to sack and how best to maintain the business.

"So, when the economy does reopen, they can restart straight away. But there are so many moving parts here, it's hard for companies themselves to work this out and for analysts too," Han says.

Event Hospitality and Entertainment (ASX: EVT)

Economic Moat: None | Morningstar Rating: 4-star| Price-to-Fair Value: 0.68

Event is another of Morningstar Australia's preferred companies in the leisure sector, currently trading at a discount to Morningstar's fair value estimate even after Han trimmed this by 5 per cent earlier this month.

This was in response to the forced closure of the group's cinemas in Australia and New Zealand as the respective governments introduced measures to contain the pandemic spread. Event's hotel operations and its Thredbo ski resort remain open but in a limited capacity.

Han has cut his earnings outlook by 41 per cent between fiscal 2020 and 2022. He has also increased his fair value uncertainty rating to high from medium because of the lockdown and social distancing measures.

"Pent-up demand for hedonistic leisure activities after a long isolation period is one thing.How fast that discretionary consumption will ramp up in the face of continuing health and financial concerns is quite another," Han says.

But he doesn't expect Event to need any additional shareholder capital in the current environment and remains confident the company will survive the coronavirus fallout and bounce back over the longer term. This is largely because of the group's solid balance sheet.

He views projected net debt-to-EBITDA of 2-times as of the end of 2020 as manageable, but this is tipped to fall further to 1.2 times in 2021 due the group's sale of a German cinema.
Han is further encouraged by an outlook for lower dividends and the group's $2 billion property portfolio: "a source of hard asset comfort for any lender even in this environment."

Qantas (ASX: QAN)

Economic Moat: None | Morningstar Rating: 4-star| Price-to-Fair Value: 0.78

The viability of passenger airlines amid coronavirus bans and restrictions on international and domestic travel was brought into stark relief by Virgin Australia's travails earlier this month.

Virgin became the first Asian carrier to fall victim to the pandemic, after the airline last month grounded most of its planes and stood down the majority of its 10,000 staff. After an 11th-hour bail-out appeal to the Australian government failed, Virgin entered voluntary administration on 20 April.

Australia's flagship carrier Qantas also faces a bleak near-term outlook, which Morningstar expects to result in an after-tax loss of $86 million in fiscal 2020.

But the differences between Qantas and Virgin outnumber the similarities, Qantas ranking among the world's most capitalised airlines. The flying kangaroo has also strengthened its balance sheet since the global financial crisis, when it raised capital from shareholders, says Morningstar equity analyst Angus Hewitt.

He also notes Virgin held a smaller market share and only recorded a net profit twice in the last decade, after inclusions of abnormal and one-off items: "so Virgin wasn't in a good position coming into this."

Though he trimmed Qantas's fair value estimate and increased the Uncertainty Rating last month, the $3.67 share price as at Thursday's close sees it trade at a 22 per cent discount.
The airline has grounded 150 aircraft and all its wide-body fleet and halted all international flights until at least the end of May.

"But we anticipate this stifled demand will prove short-lived," Hewitt says.

"We continue to forecast a U-shaped impact on demand from COVID-19, similar to the impact experienced during SARS in 2002, and expect a return to capacity growth from fiscal 2021."

Qantas's balance sheet is in good shape, holding no debt covenants with lenders and no expectation of a capital raising.

Management's cost-cutting—including standing down most staff, suspending executive and board pay, delaying capital expenditure and cancelling the second-half dividend—also stand the company in good stead.

Qantas has cancelled its planned $150 million buyback and is delaying payment of $201 million of first-half dividends until September.

Sydney Airport (ASX: SYD)

Economic Moat: Narrow | Morningstar Rating: 4-star| Price-to-Fair Value: 0.86

Sydney Airport's near-term outlook is similar to that of Qantas.

In response, Morningstar Australasia director of equity research Adam Fleck cut his fair value estimate to $6.80 from $7.30 last week. But he is upbeat about next year.

"Despite the challenging near-term environment, we expect passenger volumes to rebound strongly from 2021 as the pandemic is contained and we make minimal changes to our long-term forecasts," Fleck says.

Shares traded at $5.85 at Thursday's market close, 14 per cent below Morningstar's revised fair value estimate.

Fleck forecasts an after-tax loss of $102 million in fiscal 2020 largely due to the slashed passenger volumes. And he says management’s plan to cut operating expenses by 35 per cent only partly offsets this profit decline.

Another key risk is the airport's debt, tipped to almost double to 13.5-times in fiscal 2020 from 7.2-times a year earlier in response to slower earnings.

But Fleck is confident in the airport's liquidity, highlighting an additional $850 million in bank funding that has been secured. This has lifted its total combined liquidity to $2.8 billion, and management has said it doesn't expect to need a round of capital raising.

This is also not expected in Fleck's base case modelling, but it's also not entirely ruled out if a government lockdown endures for longer than is currently expected.

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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