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Travel demand to stage full recovery: Morningstar

Lex Hall  |  11 Aug 2020Text size  Decrease  Increase  |  
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You may have filed away your upcoming travel itinerary, but in the meantime it may be worth considering investment opportunities in travel and leisure.

Shares in the sector are trading at discounts of up to 35 per cent, according to Morningstar analyst Dan Wasiolek, who is sanguine about the long-term prospects of the sector.

Travel tech company Sabre (SABR), online booking giant Expedia (EXPE), Norwegian Cruise Line (NCLH), and hotel and resort chain Wyndham (WH) all look attractive, Wasiolek says.

His long-term outlook assumes a full recovery in travel demand, mimicking past demand shocks such as the terror attacks of 11 September 2001 and the global financial crisis of 2008.

“We believe now is an opportune time to review investment opportunities in the travel industry, given that demand and share prices have been disproportionately affected by the global spread of covid-19, which we see as largely transitory,” Wasiolek says.

As of July 31, shares of cruise line, hotel, online travel, global distribution system, and gaming coverage were down 35 per cent on average year to date versus a 2.5 per cent increase in the Morningstar Total US Market Index.

Wasiolek says such falls have led investors to wonder when will demand for travel operators return, and which companies are financially fit to weather the storm.

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Wasiolek has trawled through decades of historical travel demand and overlaid that analysis with Morningstar’s near-term and long-term GDP forecasts. The result, he says, “is our bifurcated outlook, which incorporates a more difficult near-term prognosis with a relatively sanguine long-term outlook.”

According to Wasiolek’s assumptions, travel demand will normalise over an extended time horizon, once either the outbreak is managed at a global level or a vaccine halts the spread.

“That said, this viral disruption has caused significant dislocation in travel valuations, providing an opportunity for long-term investors to pick up shares at a material discount. As a result, we find companies like Sabre, Expedia, Norwegian Cruise Line, and Wyndham attractive.”

Travel and leisure stocks: Sabre, Expedia, Norwegian Cruise Line, Wyndham Resorts

Travel and leisure company snapshot

Narrow-moat Sabre Corp holds the No 2 share of global distribution system air bookings (38.8 per cent as of the end of 2019 versus 37.1 per cent in 2018). The global distribution system segment represented 73 per cent of total 2019 revenue. The company also has a growing IT solutions division (27 per cent of revenue) that focuses on the airline, hospitality, and travel agent end markets. Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits.

Narrow-moat Expedia is the world's largest online travel agency by bookings, offering services for lodging (70 per cent of total 2019 sales), air tickets (7 per cent), rental cars, cruises, in-destination, and other (14 per cent), and advertising revenue (9 per cent). Expedia operates a number of branded travel booking sites, including Expedia.com, Hotels.com, Travelocity, Orbitz, Wotif, AirAsia, Egencia, and Vrbo. It has also expanded into travel media with the acquisition of Trivago. Transaction fees for online bookings account for the bulk of sales and profits.

Norwegian Cruise Line is the world's third- largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. With nine passenger vessels on order among its brands through 2027, Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sails to more than 450 global destinations.

Narrow-moat Wyndham Hotels & Resorts operates 813,000 rooms across 20 brands in the economy (around 50 per cent of total domestic properties) and midscale (40 per cent) segments. Super 8 is the largest brand, representing around 21 per cent of all rooms, with Days Inn (16 per cent) and Ramada (15 per cent) the next two largest brands.

The short-term recovery will be local

The longer-term may rebound but what about the short term?

Leisure, local, and car travel will rebound ahead of corporate, international, and air trips in the 2020 upcycle, Wasiolek says.

And companies Wyndham and Choice Hotels (CHH) are set to benefit from this near-term trend over Sabre, Amadeus (AMS), and Hyatt (H).

“Our analysis finds that lower-price-point hotels like economy and midscale units outperformed higher-price-point ones in the initial stages of the economic recovery after 9/11.

“In fact, economy and midscale hotel revenue per available room bottomed at less than 10 per cent of prior peak 9/11 levels versus luxury revPAR, which bottomed close to 20 per cent of 2000 demand.

“These economy and midscale hotels are often found off interstate and in non-urban areas and serve as a proxy for drive-to travel. And these lower-price-point hotels have outpaced the industry thus far during the covid-19 period, with economy revPAR down 24 per cent through July 31 versus 51 per cent and 75 per cent declines for US industry and luxury units, respectively.”

Rebound akin to post-9/11, post-GFC

As the 19th anniversary of the Twin Towers attack approaches, it’s easy to recall the fear at the thought of air travel and the subsequent plunge in demand.

It took three to four years for travel demand to stage a full recovery – as it did in the wake of the 2008 GFC – and Wasiolek expects that will be the case this time around.

One thing that will help the recovery is financial health, and the companies under Morningstar coverage face limited solvency risk, according to Wasiolek.

“Most travel and leisure operators have been able to secure enough liquidity to operate at near zero revenue through 2021, as there has been a strong monetary and fiscal response in the US and globally, helping foster availability to capital markets.

“Within hotel operators, we highlight Accor (AC) and Wyndham as holding strong financial health positions. Within online travel, Booking Holdings and TripAdvisor have strong liquidity profiles, while Expedia is a touch weaker.

“Within global distribution system companies, Sabre has a much more strained financial health position than Amadeus.

“In gaming, Las Vegas Sands (LVS) has a stout balance sheet, while Caesars (CZR) faces elevated credit risk.

“In cruise lines, Norwegian and Royal Caribbean (RCL) have secured large amounts of liquidity ensuring that cash is available through the second half of 2021, although it has come at a high relative cost.”

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is senior editor for Morningstar Australia

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