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Will qantas, webjet and flight centre come back to glory days soon?

Here are James Dunn’s views on 3 travel stocks that have been slammed by Covid-19 and which one to buy.

As could only be expected, COVID-19 has slammed the businesses – and share prices – of the market’s travel majors. The travel stocks are slowly recovering on the stock exchange, as investors try to anticipate factors such as the likelihood (and likely timeframe) for an effective vaccine; in the absence of that, countries getting on top of their case numbers through effective measures; the eventual unwinding of international travel restrictions; and a staged resumption of business travel. All of these factors could (hopefully) represent a case for the travel companies to (slowly) return to prior levels – investors do have to accept, however, that they are buying stocks that will make a loss in FY21. What happens in FY22 is most important.

Of the three presented here, I reckon Qantas is the best buy right now – it is actually less exposed to international travel than Flight Centre and Webjet, and international is the most problematic area right now. Qantas took very decisive action to protect its balance sheet and retain cash, and with the value of the loyalty business and the domestic air operations underpinning the share price, QAN looks to offer quite good value at present levels.

 

1. Qantas Airways (QAN:ASX)

Market capitalisation: $9.7 billion
One-year total return: –34.1%
Three-year total return: –9.2% a year
Five-year total return: +6.4% a year
FY21 (June) forecast yield: no dividend expected
FY22 price/earnings ratio: 12.2 times earnings
Analysts’ consensus valuation: $4.63 (Thomson Reuters), $4.32 (FN Arena)

Qantas was hammered by the coronavirus pandemic, which drove Australia’s flag carrier to declare its worst financial result for a century – a net loss of $1.96 billion, amid widespread devastation in the travel and tourism industries. As for so many companies, the 2020 financial year was a tale of two halves, with a drastic impact on the business as both domestic and international air travel was virtually halted in the second half.

In the first half of FY20 Qantas reported an underlying profit before tax of $771 million, a decrease of only $4 million from the prior year; that turned into an underlying profit of $124 million for the full year ended 30 June 2020. Qantas suffered a near-$4 billion downturn in revenue, slashed the value of its airline fleet by $1.4 billion, and reduced its workforce by 6,000 employees. Qantas has also had to borrow more money to meet the costs of running the company while flying is heavily restricted: total borrowings rose from $5.1 billion to $6.7 billion in FY20. However, Qantas conducted a highly successful $1.9 billion capital raising through institutional investors in July, which showed that investors see it as far from a basket-case.

It’s clear that international travel is not returning to pre-COVID “normal” anytime soon. Qantas thinks that international flights are “unlikely to restart before July 2021,” with the exception of mutual ‘travel bubbles’ with countries such as New Zealand, Singapore and Japan as they bring COVID-19 under control.

On the domestic front, as borders re-open, Qantas is slowly adding capacity and re-activating routes – but again, it’s a long way back to normality. There is definitely pent-up demand waiting to book flights, in both international and domestic: border re-openings and “bubble” negotiations could accelerate this, although it is probably best not to expect international to contribute until FY22.

Clearly, investors are looking a long way into the future, but they are looking at the fact that most of the value in Qantas is in the loyalty (Frequent Flyer) business and the domestic airline, with not much value ascribed to the international operations. The domestic business has traditionally been much more profitable than the international business, but no-one can predict when it will be back to “normal” – and if, indeed, business travel ever gets back to the level it was before COVID. On the other hand, Virgin’s difficulties, and what sort of operation it becomes under its new ownership, could be a clear positive for Qantas.

Qantas will make a loss this financial year, but analysts do expect it to return to profit in FY22. The stock looks cheap, even with the uncertainty, as professional analysts attempt to “look-through” the current environment, to a post-COVID normal. Thomson Reuters’ collation of analysts’ valuations (11 analysts) comes to a consensus of $4.63; FN Arena’s consensus (six analysts) is not so bullish, at $4.32. On Thomson Reuters’ numbers, at this price investors are paying 12 times FY22 earnings for QAN.

The most bullish on the stock is Macquarie, with a price target of $4.95, with Morgan Stanley at $4.90 and UBS at $4.50.

 

2. Flight Centre (FLT:ASX)

Market capitalisation: $2.6 billion
One-year total return: –65.7%
Three-year total return: –29.2% a year
Five-year total return: –14.8% a year
FY21 (June) forecast yield: no dividend expected
FY22 price/earnings ratio: 29.9 times earnings
Analysts’ consensus valuation: $14.30 (Thomson Reuters), $13.53 (FN Arena)

No-one could be surprised that COVID has ravaged Flight Centre’s business: the company has closed 421 of the 740 local travel agencies it operated before the pandemic. As the company puts it, “Never before had we imagined – let alone faced – a scenario whereby all discretionary travel would be halted for a prolonged period.” According to the Australian Bureau of Statistics (ABS), there was an industry-wide 99.4% decrease in Australian short-term resident departures during the fourth quarter of FY20 (to 30 June). And Sydney Airport’s traffic figures for June 2020 showed just 317,000 passengers passed through Australia’s busiest airport in June – down 92% from the same time last year.

In FY20, Flight Centre group reported a loss of $662 million, down from a profit of $264 million the previous year.

From an ordinary dividend of $1.48 in FY19 – which was topped-up by a special dividend of $1.49 – shareholders got nothing in the way of dividends. The losses were incurred entirely during the March-June period: prior to this, FLT was operating profitably – in fact, its total transaction value (TTV) had been tracking at record levels through to February 29. FLT’s global corporate business generated a $74 million underlying profit, from $6.9 billion in TTV during FY20, while the global leisure business recorded a $20 million profit during the eight months to February 29, before incurring significant losses during the four months to June 30.

Flight Centre is being very conservative in its estimates (more so than Qantas): it believes that demand for international travel, which is its main revenue source, will not fully recover before FY23 or FY24 in the absence of an effective vaccine. However, it does expect gradual sales growth during the year as: it expects gradual sales growth during the year as travel bubbles and corridors open between countries (as indeed, is happening now), and businesses and governments work together to develop broader re-opening strategies and plans.

Like Qantas, Flight Centre raised capital to shore-up its balance sheet: in April, it raised $900 million through a $700 million capital raising and a $200 million increase in its debt facilities. In all, this gave it a $1.9 billion cash balance at July 31, 2020, including about $1.1 billion in liquidity (before its existing bank covenants). Analysts say this gives it ample liquidity for 2021.

FLT is locked-in for a loss in the current financial year, but analysts expect it to return to profit in FY22 – with most of that earned in the second half of the financial year. It is highly leveraged to the re-opening of borders and the news flow on a COVID-19 vaccine. Corporate travel demand is stirring, but from a low base, and FLT faces a challenging period. Its most positive broker is Credit Suisse, with a price target of $15.31; at the other end of the spectrum, Ord Minnett expects the share price to weaken severely, with a price target of $9.70.

 

3. Webjet (WEB:ASX)

Market capitalisation: $1.3 billion
One-year total return: –42.9%
Three-year total return: –18.6% a year
Five-year total return: +6.4% a year
FY21 (June) forecast yield: no dividend expected
FY22 price/earnings ratio: 37.1 times earnings
Analysts’ consensus valuation: $3.70 (Thomson Reuters), $3.85 (FN Arena)

In FY20, online travel agency Webjet saw total transaction value (TTV) sink by 21% to $3 billion, revenue fall by 27% to $266.1 million, and net profit plunge from $81.3 million to a $143.5 million loss. It was a deterioration on all counts: from 22 cents in FY19, shareholders only received the interim FY20 dividend of 9 cents a share – there was no second-half dividend. Like Qantas and Flight Centre, it is leveraged to benefit from strong pent-up demand for leisure travel, with international travel likely to be substituted for domestic flights.

The company’s business-to-business (B2B) brand, accommodation provider WebBeds, is it fastest-growing business, or at least it was prior to COVID: WebBeds is a “bedbank” that has grown in just seven years to be the number two in the global market, behind Spanish group Hotelbeds. A bedbank is a B2B accommodation wholesaler that buys rooms from accommodation providers in a bulk, at discounted prices for specific dates, and sells its inventory to booking websites, travel agents, airlines, and tour operators. The “bedbank” business is the strategy Webjet chose back in 2013 to transform itself from a domestic online travel agency into a global digital business – and prior to COVID, this had been a huge success. In FY20, despite the effects of COVID-19, the WebBeds business almost matched the revenue it generated in FY19. It is also a more profitable business than the business-to-customer part of Webjet, with an EBITDA (earnings before interest, tax, depreciation and amortisation) margin running at 45% compared to 38.6% for the B2C business. WebBeds now contributes more than 60% of Webjet’s total earnings.

Webjet will make a loss in FY21 before a return to profitability (and a greatly reduced dividend) in FY22. Through WebBeds, it is mostly reliant on a recovery in international travel. Broker UBS is well out in front of its peers on consensus, with a $4.95 price target over the next 12 months. UBS expects a loss of $68 million in FY21, but a return to profit, to the tune of $88 million, in FY22. That equates to a loss per share of 20.2 cents this year, but earnings per share of 25.9 cents in FY22. UBS rates ‘buy’ at FY22 11.9 times earnings.


About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.