Atlantic Markets - Travel Sector Review
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Travel Sector Review

The recent market collapse has weighed heavily on certain sectors more than others, undoubtedly one of the biggest casualties is those relating to travel, leisure and tourism. The travel stocks are still bumping along lows with sporadic moves up and down in the short term as the market wrestles with short term impact Vs long term prospects. The sector enjoyed a brief spell of relief but as we see the global pandemic numbers flare up again it has put the sector back in the spotlight and bought share prices back down.

 

Tui Travel

Ticker:-   TUI

 

Brief History

TUI Travel PLC is a British leisure travel group headquartered in Crawley, West Sussex. The company was formed in September 2007 by the merger of First Choice Holidays PLC and the Tourism Division of TUI AG.  The company was originally founded in 1923 in Berlin. In 2000 it acquired Thomson Travel and in 2002 bought Hapag Lloyd, which itself owned the travel firm TUI (formerly Touristik Union International) and renamed itself TUI AG. In June 2014 TUI AG and TUI Travel announced the two companies would be merged.

 

Key Ratio’s

 

Period ending

30-Sep-19

30-Sep-18

30-Sep-17

30-Sep-16

30-Sep-15

PE Ratio - adjusted

11.6

13.9

12.2

14

15.9

PEG - adjusted

-

7

0.4

7

-

Earnings per share growth - adjusted

-23.28%

1.75%

32.56%

2.38%

-

Dividend cover

1.65

1.61

1.75

1.37

1.5

Revenue per share

3,205.90¢

3,128.09¢

3,139.32¢

2,905.40¢

2,966.64¢

Pre-tax profit per share

117.10¢

163.58¢

182.87¢

104.72¢

78.89¢

Operating margin

2.35%

4.09%

4.07%

4.19%

3.71%

Return on capital employed

14.30%

20.62%

24.95%

21.74%

36.81%

 

 

 

 

 

 

Dividend yield

5.20%

4.50%

4.70%

5.20%

4.20%

Dividend per share growth

-25.00%

10.77%

3.17%

12.50%

-

Operating cash flow per share

188.83¢

194.93¢

268.13¢

175.25¢

133.89¢

Cash incr/decr

-133.85¢

11.57¢

27.37¢

103.59¢

-91.97¢

Net asset value per share (exc. intangibles)

€ 0.79

€ 1.22

€ 0.16

-€ 0.26

-€ 2.90

Net gearing

74.40%

72.58%

75.09%

77.53%

82.84%

 

 

 

 

Summary

 

Tui were one of the biggest casualties of the sell offs, and whilst recovery moves are starting to come into play it still looks like there are plenty of challenges ahead before they are out of the woods. TUI was having a rough ride going into Covid. As it was already trading under £9.00/share  in January of this year, against its all-time highs above £18.00/share posted in the summer of 2018. Currently it is trading under £3.00/share. While the management of TUI is likely to suggest that the current share price is purely due to Covid, we feel the reality is that all that has happened is that the timing of a £3.00 share price has merely been pulled forward a quarter or two.

 

TUI is best known in the UK for its airline and charter holidays but it actually runs over 1,500 travel agencies and travel portals globally and it should have been capitalising on the rapid digitisation of the travel market over the past few years. Instead it has been losing ground to younger upstarts like Wizz Air, which has been able to find a lucrative niche in the European short hop travel sector, a niche that should never have been available to them if TUI had been leveraging its full potential.

The long-term trend of TUI suggests that the market remains unimpressed by the overall direction of the company, and that the future as a result does not look that attractive for a long-term investment. Rather like the banking sector however, the fact that the sector has been hit so hard does mean there is room for rapid upside on short term bargain hunting.

 

So, it is quite possible the stock could pop up to £3.60 in the coming weeks, and so could be of interest to active traders, just not for the long term. Too often we find individual investors buying into hammered stocks like this on the basis that "what goes down, must go up", well no they don’t, in the long run, the reality is that the market price today is the present value of current expectations of the future cash flows, price has very little interest in what prices were in the past.

 

Question: Is TUI showing signs of overhauling its rather unimpressive business strategy?

Answer: Not really, no.

Result: This is one to avoid for the longer term but could be tempting for those enjoying near term volatility.

 

EasyJet

Ticker:-   EZJ

Brief History

In 1995, EasyJet was established by Stelios, being the first company in the easyGroup conglomerate. When launched the company was based at Luton Airport which was traditionally used mainly for charter flights. In April 1996, their first fully owned aircraft was delivered, enabling the company's first international route to Amsterdam, which was operated in direct competition with rival airlines British Airways and Dutch flag carrier KLM. On 5 November 2000, EasyJet was floated on the London Stock Exchange. In October 2004, the FL Group, owner of the airlines Icelandair and Sterling, purchased an 8.4% stake in the airline. Over the course of 2005, FL increased its share in the company periodically to 16.9%, fuelling speculation that it would mount a takeover bid for the UK carrier. However, in April 2006 FL sold the stake.

 

In March 2013, EasyJet was promoted to the FTSE 100; during the same month, the company launched its 100th route from Gatwick Airport, offering flights directly from London to Moscow. By 2015, the company was flying routes to more than 130 destinations in 31 countries, operated 26 bases centred around Europe, and had a total of 10,000 employees.

 

Key Ratio’s

 

Period ending

30-Sep-19

30-Sep-18

30-Sep-17

30-Sep-16

30-Sep-15

PE Ratio - adjusted

13

11.1

14.8

9.3

12.8

PEG - adjusted

-

0.3

-

-

0.6

Earnings per share growth - adjusted

-25.02%

43.39%

-23.89%

-22.07%

21.48%

Dividend cover

2.02

2.02

2.02

2.01

2.52

Revenue per share

1,397.92p

1,291.30p

1,104.98p

1,022.22p

1,025.94p

Pre-tax profit per share

94.14p

97.43p

84.29p

111.00p

150.19p

Operating margin

6.73%

7.54%

8.00%

10.92%

14.68%

Return on capital employed

9.27%

10.66%

10.93%

14.98%

26.44%

Dividend yield

3.80%

4.50%

3.40%

5.30%

3.10%

Dividend per share growth

-25.09%

43.28%

-23.98%

-2.54%

21.59%

Operating cash flow per share

166.61p

210.40p

145.16p

84.73p

133.33p

Cash incr/decr

56.92p

68.75p

-0.66p

14.01p

49.48p

Net asset value per share (exc. intangibles)

616.79p

681.98p

494.36p

476.63p

445.94p

Net gearing

63.43%

53.77%

53.07%

50.88%

53.42%

 

 

 

 

 

 

Summary

 

EasyJet is another stock that was doing pretty badly before Covid. It posted all-time highs above £18.00/share in 2015 and it was trading at 'only' £15.00/share in January 2020. As with TUI it is easy to suggest that all the recent share price wobbles were purely due to Covid. But that simply is not the case.

 

Below is a graph of Wizz Air compared against EasyJet. Wizz Air is 'only off' 22% during this time period while EZJ is down nearly 64%, despite being in the same business and largely in the same geographic location.

 

EasyJet was simply in a weak position entering Covid and was not in a position to respond rapidly enough. The airline sector is tough, only the very fittest survive long term and EasyJet has been found out. It entered Covid in a weak position, it must now reorganize itself rapidly to be even leaner and meaner to be able to take on the fresh challenges ahead.

 

So far, the price action is suggesting that the market does not have confidence that senior management have the plans to make the required changes. So EZJ is another one to avoid for the long term until this changes. As with TUI however, it could quite easily pop up to £6-7/share in the next few months and so will remain of interest to the active traders. For the long term though avoid, until business plans shift.

Carnival

Ticker:-   CCL

 

Brief History

 

Carnival Cruise Line was founded in 1972 by Ted Arison. Until 1975, the line consisted of only one ship, the Mardi Gras. In 1975 another ship was acquired, the Carnivale. Carnival is one of ten cruise lines now owned by the world's largest cruise ship operator, the American-British Carnival Corporation & plc. In 2018 Carnival Cruise Line was estimated to hold an 8.9% share of cruise industry revenue and 22.0% of passengers. It has 26 vessels and is the largest fleet in the Carnival group. The ships fly flags of convenience: 18 of the ships fly the Panama flag, six that of the Bahamas and two that of Malta. The firm’s headquarters are in Miami, Florida, United States. The North American division of Carnival Corporation has executive control over the corporation and is headquartered in Doral, Florida.

 

Key Ratio’s

 

Period ending

30-Nov-19

30-Nov-18

30-Nov-17

30-Nov-16

30-Nov-15

PE Ratio - adjusted

9.6

13.2

17

14

19.7

PEG - adjusted

-

0.6

-

0.2

1.3

Earnings per share growth - adjusted

-2.47%

23.27%

-3.22%

65.04%

15.31%

Dividend cover

2.17

2.28

2.26

2.76

2.05

Revenue per share

13,263.87¢

12,025.69¢

11,152.48¢

10,438.49¢

10,008.57¢

Pre-tax profit per share

1,948.98¢

2,042.60¢

1,698.03¢

1,801.21¢

1,145.82¢

Operating margin

15.73%

17.61%

16.04%

18.74%

16.38%

Return on capital employed

9.89%

11.04%

9.76%

10.95%

6.37%

Dividend yield

4.80%

3.30%

2.60%

2.60%

2.50%

Dividend per share growth

2.56%

21.88%

18.52%

22.73%

10.00%

Operating cash flow per share

-

-

-

-

2,894.80¢

Cash incr/decr

-

-

-

-

677.68¢

Net asset value per share (exc. intangibles)

$135.54

$129.57

$127.70

$117.27

$123.90

Net gearing

43.70%

42.35%

40.62%

41.88%

39.42%

 

 

 

 

 

 

 

Summary

 

Carnival is trading back down to its February/March 2020 lows. It is not a coincidence that the three stocks on our list that have fared the worst post Covid-19 were also the three worst performers heading into Covid, namely Carnival, EasyJet and TUI. Carnival had highs of £54/share in mid-2017, but was trading down at £32 in January of this year. Indicating that the markets were not that impressed with its long-term prospects, even before Covid.

 

Carnival is the only stock on our list that has a very strong excuse around Covid, due to the nature and demographic of its clientele, packing thousands of pensioners into a confined space for days on end is clearly the very worst line of business to be in while the world works out how to deal with the pandemic. Even here you do need to look through the few months ahead. Stock market prices are the discounted present value of expected future cash flows. To predict future cash flows beyond 10 to 15  years is virtually impossible so is not often attempted. As a result, the current price of CCL is, very broadly, the expectation of its earnings over the next 10-15 years, it is not just what happens this winter. Long term investors wrote off 2020, and even H1 of 2021 months ago, investors are now looking at what the winter of 2021 and beyond looks like for CCL and the share price suggests they don't like what they see.

 

Many in the marketplace will remain myopic about what Covid is up to over the next 2-3 months, and these stories could be used to lift or drop CCL share price like a lifeboat in a storm, but we do feel that these stories will all rather be a storm in a teacup. Avoid this one, the long-term cash flow story is just not looking good enough. As with TUI and EZJ, active traders could be interested in the volatility due in the weeks ahead, but it is another one to avoid for the long term until its outlook improves.

Intercontinental Hotels

Ticker:-   IHG

Brief History

 

InterContinental Hotels Group plc is a British multinational hospitality company headquartered in Denham, Buckinghamshire, England. IHG has about 840,000 guest rooms and 5,656 hotels across nearly 100 countries. IHG owns several brands, including InterContinental, Regent Hotels, Six Senses Hotels, Kimpton Hotels and Resorts, Hualuxe, Crowne Plaza, Voco Hotels, Hotel Indigo, Holiday Inn, Holiday Inn Express, Holiday Inn club vacations, avid, Candlewood Suites, EVEN Hotels, and Staybridge Suites.

 

Fundamentals

 

Period ending

31-Dec-19

31-Dec-18

31-Dec-17

31-Dec-16

31-Dec-15

PE Ratio - adjusted

22.1

18.6

24.9

23.2

19.8

PEG - adjusted

7.4

0.9

1.2

1.4

2

Earnings per share growth - adjusted

3.44%

19.87%

20.31%

16.24%

10.49%

Dividend cover

7.6

2.56

2.35

2.16

2.06

Revenue per share

2,533.17¢

2,374.40¢

1,627.10¢

938.92¢

987.10¢

Pre-tax profit per share

296.73¢

263.88¢

359.14¢

323.56¢

773.04¢

Operating margin

13.68%

13.44%

24.39%

39.65%

83.31%

Return on capital employed

529.84%

104.90%

-509.09%

-816.87%

167.67%

 

 

 

 

 

 

Dividend yield

0.60%

2.10%

1.70%

2.00%

2.50%

Dividend per share growth

-63.68%

18.10%

230.09%

-61.03%

19.34%

Operating cash flow per share

357.50¢

388.16¢

315.89¢

411.70¢

343.82¢

Cash incr/decr

-273.74¢

308.23¢

-41.06¢

-503.68¢

606.06¢

Net asset value per share (exc. intangibles)

-$15.55

-$12.45

-$12.42

-$11.23

-$4.97

Net gearing

136.85%

127.64%

143.22%

125.93%

91.54%

 

 

Summary

 

CEO Keith Barr said the coronavirus is “the most significant challenge both IHG and our industry have ever faced” and that Intercontinental expected “continued disruption in the months ahead.“

 

The group has had a strong trend for the past 20 years. Naturally it was affected by the 2008-2009 financial crisis, like all stocks, but it recovered rapidly from that crisis, and it has also recovered well from the covid induced lows. This is the only stock in this report that has a positive long-term graph.

 

It entered the pandemic in a strong position, and so it is no surprise that it has recovered well from the lows of £24 posted in March, as it currently trades above £40 compared to the £46 trading in January 2020.

 

IHG remains in the growth phase of its cycle and appears to be an attractive long term buy here. In the near term we can also see IHG moving up to £46

 

 

Whitbread

Ticker:-   WTB

 

 

Brief History

 

Whitbread plc is a British multinational hotel and restaurant company headquartered in Houghton Regis, Bedfordshire, United Kingdom. The business was founded as a brewery in 1742 and had become the largest brewery in the world by the 1780’s. Its largest division is currently Premier Inn, which is the largest hotel brand in the UK with over 785 hotels and 72,000 rooms. Whitbread's brands include the restaurant chains Beefeater, Brewers Fayre and Table Table. The business was formed in 1742 when Samuel Whitbread formed a partnership with Godfrey and Thomas Shewell and acquired a small brewery at the junction of Old Street and Upper Whitecross Street and another brewhouse for pale and amber beers in Brick Lane, Spitalfields. Godfrey Shewell withdrew from the partnership as Thomas Shewell and Samuel Whitbread bought the large site of the derelict King's Head brewery in Chiswell Street in 1750. The new brewery was to produce porter and was renamed the Hind Brewery after the Whitbread family coat of arms.

 

Key Ratio’s

 

Period ending

27-Feb-20

28-Feb-19

01-Mar-18

02-Mar-17

03-Mar-16

PE Ratio - adjusted

21

28.2

20.1

15.6

15.9

PEG - adjusted

1.6

-

-

5.2

1.3

Earnings per share growth - adjusted

12.56%

-9.80%

-22.48%

3.08%

11.69%

Dividend cover

5.92

1.73

1.89

2.56

2.64

Revenue per share

1,026.35p

1,015.25p

994.59p

1,538.90p

1,447.64p

Pre-tax profit per share

138.73p

108.06p

211.31p

255.36p

241.64p

Operating margin

19.72%

14.38%

23.18%

17.67%

17.93%

Return on capital employed

5.70%

4.13%

13.24%

16.87%

16.35%

 

 

 

 

 

 

Dividend yield

0.80%

2.10%

2.60%

2.50%

2.40%

Dividend per share growth

-67.24%

-1.48%

5.58%

6.03%

9.98%

Operating cash flow per share

116.04p

298.86p

307.68p

310.21p

283.75p

Cash incr/decr

-1,433.12p

1,641.41p

13.53p

2.03p

26.95p

Net asset value per share (exc. intangibles)

1,771.77p

2,996.22p

1,369.35p

1,114.34p

1,063.56p

Net gearing

52.10%

43.67%

42.72%

46.15%

45.41%

 

 

 

 

 

 

 

 

 

 

 

Summary

 

Whitbread shares did lose some shine after it sold the popular Costa Coffee brand to Coca Cola.

And whilst they are the UK’s leading hotel business and is expanding in Germany the business remains under pressure.

 

Whitbread is also back trading towards the 2020 lows, it has attempted to rally on a few occasions over the summer, but managed sideways range between £20-£28.00/share.

 

It had been in a strong bull trend up to 2015, when it posted highs above £46.00. From 2015 though, the company has moved into the mature stage of the growth cycle and is showing little signs of becoming a growth story again. As a result, Whitbread is another company, like Carnival, that can be valued on a discounted cash flow model with more accuracy than the growth companies. As with others in the sector it is apparent that analysts crunching the numbers do not see a particularly attractive future for Whitbread in the post pandemic world. As mentioned already the current price is NOT dependent on what Covid gets up to this winter, while that will grab all the headlines, the price is actually looking far beyond that into H1 2021 and beyond.

 

The daily Covid stories at this stage are simply a distraction creating near term volatility. As with EZJ, CCL and TUI, this near-term volatility is set to create trading opportunities, but we would not recommend confusing short-term trades with investment opportunities at these levels.

 

 

 

Sector Summary

Over the last few months, shares of all travel related stocks have collapsed, especially the cruise companies, airlines and hotels due to the fear that it will take years for companies in the travel industry to recover, even to the point that Berkshire Hathaway CEO Warren Buffett, famous for his saying “you should be greedy when others are fearful,” has exited all of his positions in airline companies.

 

But it is worth remembering that the travel and tourism industry contributed over $9 trillion to global gross domestic product (GDP) in 2019, making it one of the largest sectors on the planet. The chart above shows that all the stock in this sector (except IHG) have fallen far more than the ftse as a collective. This highlights the investor fear in these area’s in the near term.

 

 

Traders can consider buying EZJ, CCL, and TUI at the current levels, but only on the understanding that this would be a bargain hunting volatility play, and not on the basis of sound long term foundations. For the longer term IHG is the only company that looks to be at attractive levels here, as it looks well set to emerge from the pandemic in a strong position, arguably even in a stronger position as some of its competition that may not survive the Covid winter ahead.

 

 

 

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Disclaimer

We have provided this information for your general guidance only and it should not be considered as

investment advice. Atlantic Capital Markets will not be liable for any loss or damage caused by a reader’s

reliance on information provided by us. We make no claims or representations as to the accuracy or

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