Now is the time to buy travel stocks

It’s time to buy travel and tourism stocks. With some Australian State borders reopening and promising vaccine news, travel stocks will outperform the share market next year.

Yes, the sector is a long, long way from a full recovery. Australia’s international tourist and foreign-student markets will take years to reach previous heights.

Much could go wrong with COVID. Pfizer’s news this week on its trials results boosted markets, but its vaccine still must be approved and distributed. How many people will refuse it?

Australia, almost COVID-free for now, faces the risk of new outbreaks as people mingle over summer. Don’t discount the risks of outbreaks as we head towards winter 2021.

Then there’s an economy in recession, high unemployment and the end of government wage subsidies in the next five months. That’s when household belts will really tighten.

Business travel, recovering faster than leisure travel, is challenged. Cost-cutting companies will favour Zoom meetings over costly business flights and short-stay hotel visits.

Consumer psyche is another issue. How many people, particularly older Australians, will want to travel overseas with the same fervour? Or even fly interstate if COVID lingers?

There’s a good reason why travel and tourism was the first sector to be smashed during COVID and will be the last to recover. It’s more affected by the pandemic than any other industry.

The good news is this awful outlook has been factored into in the share prices of several high-quality travel stocks. If anything, there’s too much pessimism.

The reopening of the New South Wales/Victoria border at the end of November is great news. So, too, Victoria’s decision last week to finally remove the “ring of steel” and allow Melburnians to travel to the State’s regions, and vice versa. In other good news, South Australia will soon decide whether to reopen its border with Victoria.

Even recalcitrant border states, such as Queensland and Western Australia, will have to reopen their border by early December at the latest, to enable Christmas travel. It would take a brave State Premier to keep borders shut and families apart during the festive season.

A gradual reopening of international borders is another plus. The “bubble” arrangement with New Zealand will slowly and steadily extend to other countries. Expect inbound international travel to remain low and slow for most of 2021, before much stronger growth in 2022.

Australians are itching to holiday and see loved ones interstate. Pent-up travel demand is at an all-time high, according to the American Society of Travel Advisors. Almost half of its survey respondents said travel will be their first major purchase when the pandemic ends.

For all the talk about high unemployment, Australians have built up a huge savings buffer during COVID, thanks in part to government support and spending cutbacks. Those who normally holiday each year presumably have money saved for a new trip.

For clarity, I’m not suggesting the travel sector will recover quickly or that stocks in this sector will get back to their previous highs anytime soon. Prospective investors need to hold these stocks for at least three years and be prepared for bouts of high volatility.

However, I do believe the underperformance of travel stocks will reverse in the next six months. And that more capital will rotate from growth stocks, such as tech and resources, into better-value plays, such as banks and parts of the travel sector.

Gains this weeks are just the start. From a charting perspective, key travel stocks that have traded sideways in accumulation phase since March are poised to break through price resistance and head higher.

Overseas signs for tourism stocks are good. Stocks that benefit most from greater travel and a vaccine – the so-called “reopeners” – soared in the United States this week. They include casinos, airlines, hotel chains and cruise ships.

Here are four Australian travel-related stocks to watch:

 

1. Qantas Airways (QAN)

Peter Switzer, founder of this Report, asked me in August to nominate my top stock for the next 12 months. My answer: Qantas.

It was a tough call at the time, with Victoria in a harsh lockdown and COVID rampant overseas. But as contrarian ideas go, Qantas was a beauty. The airline was $3.78 in late August and now trades at $5.19 after soaring 10% early this week.

I wrote to Peter in late August: “Global airlines are a basket case because of COVID-19. Australian airlines are no exception. Border closures, grounded fleets, Virgin’s demise and rebirth, massive job cuts at Qantas… the list goes on.

“Fast forward 12 months and the aviation outlook will be improving. Granted, a recovery in international flights will be protracted due to lingering COVID-19 problems overseas. But domestic travel will be poised to recover strongly from this time next year thanks to huge pent-up travel demand. A persistently lower oil price will be another tailwind for Qantas.”

That view still holds. Qantas’s recovery is just starting.

Chart 1: Qantas (QAN)

Source: ASX

 

2. Sydney Airport Holdings (SYD)

I’ve been a fan of Sydney Airport for years and have nominated it several times in this Report and on Switzer TV programs and webinars. Leading airports are fabulous monopoly assets and none locally are better than Sydney Airport, given that city’s tourism market.

I nominated Sydney Airport and Auckland International Airport (AIA) in this Report on April 22 in my column “Airport stocks destined to rise once more”.

Sydney Airport was $5.70 at the time and now trades at $6.75 after soaring gains this week. AIA has rallied from $5.46 to $7.31 and has further to run, albeit gains will be slower from here.

AIA said at its recent annual meeting there had been a larger-than-expected rebound in domestic air travel and car parking at its airport. The same will be true of Sydney Airport.

I expect Sydney Airport to have record domestic travel in FY22, assuming COVID is contained in Australia. Then, for a muted recovery in international travel to pick up pace in FY23.

Either way, Sydney Airport is undervalued, though not excessively so after gains this week.

Chart 2: Sydney Airport (SYD)

Source: ASX

 

3. The Star Entertainment Group (SGR)

I’ve written favourably about the integrated resort operator several times in this Report this year.  Poker machines and other forms of gambling recovered faster than expected in markets such as New Zealand. I expect that to be the case for The Star.

At its Annual General Meeting in late October, Star CEO Matt Bekier said trading performance from July to October was “pleasing”. Domestic gaming revenue was approximately three quarters of that at the same period a year earlier – a good achievement given the pandemic.

The Star’s Queensland properties have traded strongly and the Sydney casino should improve as social-distancing restrictions in that city are eased.

Disarray at rival Crown Resorts, the subject of a high-profile NSW Government inquiry, could boost The Star’s Sydney casino. Counsel assisting the NSW inquiry concluded that Crown is not a “suitable person to continue to give effect to the licence (for Sydney’s new Barangaroo casino)”.

Crown is under growing pressure to delay the planned mid-December opening of its high-roller Sydney casino until the independent Liquor and Gaming Authority NSW determines its suitability to hold a licence. That uncertainty is good for The Star’s Sydney casino.

After a small bounce following the March share market sell-off, The Star has tracked sideways for much of this year. It rallied 7% to $3.80 on Tuesday – the start of a larger recovery that will unfold over the next 18 months as more social-distancing restrictions are relaxed. And as more people flock back to poker machines and other gambling.

Chart 3: The Star Entertainment Group (SGR)

Source: ASX

 

4. Flight Centre Travel Group (FLT)

The travel agency is a new addition to my ideas list this year. I preferred Webjet (WBJ) to Flight Centre, nominating Webjet in May 2020 as a takeover target at $3.24. It now trades at $4.85.

Flight Centre has disappointed in the past two years. After peaking at around $60 in mid-2018, the stock fell to $8.92 at the height of the share market sell-off in March 2020.

Flight Centre had many challenges before the pandemic. Its large bricks-and-mortar travel-agency network was being disrupted by online rivals. Flight Centre’s transition to online travel retailing was well underway, but too many retail shopfronts was a headwind.

The pandemic will create three long-term benefits for Flight Centre. First, it has forced the company to rationalise its shopfront network by closing many stores. My local Flight Centre store, for example, has permanently shut. It should never have been there in the first place.

Second, the pandemic has quickened Flight Centre’s push into business travel. Once known mostly as a leisure-travel provider, it has a large, growing business-travel division.

Early signs suggest business travel is recovering faster than leisure travel given pent-up demand from company managers to visit clients and attend interstate meetings.

I doubt business travel will ever be quite the same again due to Zoom and other online meeting technologies. But there is plenty of room for a short-term recovery.

Third, Flight Centre has strengthened its balance sheet during the pandemic and excelled at cutting costs. It will emerge from the pandemic as a more streamlined, efficient business with higher margins and a greater online presence.

After mostly trading sideways since April, Flight Centre leapt 10% on Tuesday after the monster US equities rally. Its recovery will take time, but has a long way to play out.

More fund managers will buy Flight Centre in the next few weeks/months in anticipation of recovering travel demand amid border reopenings. But the real story is how COVID will positively reshape Flight Centre over the next three years.

Chart 4: Flight Centre (FLT)

Source: ASX