Travel companies are flying higher despite risk-off

Travel companies are flying higher despite risk-off

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Travel related companies were among the hardest hit parts of the equity market in 2020 as travel restrictions during the pandemic crushed demand for traveling. With vaccines being rolled out this year traveling is slowly getting back and in September our travel basket is the only theme basket that is up despite rising commodity prices which in theory should also hit travel companies. Investors are betting that demand will far exceed supply of airlines and hotel rooms paving the way for historically high margins in the travel industry. Given the inflationary pressures we are observing we are more skeptical.


The best performing equity theme in September is our travel basket up 6.3% as of yesterday’s close with all other themes in negative. How come investors are bidding up travel companies when the world is undergoing an energy crunch which in theory should cut disposable income and increase travel prices?

Our basket consists of 40 stocks with exposure to the travel segment in different ways. Expectations for revenue growth next fiscal year are currently 31% for the industry highlighting the enormous pent-up demand expected for travel related activities as the global vaccine rollout continues. Analysts have price targets on average 10% above the current prices, but with 24-month forward EV/EBITDA already on par with the MSCI World the upside from here might be quite limited.

NameIndustryMarket Cap (USD mn.)FY22 Sales growth (%)Diff to PT (%)24M Fwd EV/EBITDA5yr return
Boeing Co/TheAirliner manufacturer128,02126.125.615.580.3
Airbus SEAirliner manufacturer106,6626.018.89.1127.4
Airbnb IncBooking platform105,97768.51.351.8NA
Booking Holdings IncBooking platform99,88853.83.715.165.3
Marriott International Inc/MDHotel chain50,01825.9-2.816.3139.1
Hilton Worldwide Holdings IncHotel chain38,05530.9-2.217.9198.6
Southwest Airlines CoAirlines31,38773.522.55.441.8
Amadeus IT Group SATravel software30,20934.90.614.237.7
Carnival CorpCruise lines29,166-56.19.78.9-39.8
Delta Air Lines IncAirlines27,79865.926.75.520.0
Aena SME SAAirport Services25,5929.62.413.223.8
Expedia Group IncBooking platform25,45560.86.610.850.0
Royal Caribbean Cruises LtdCruise lines23,424-10.63.911.033.5
Ryanair Holdings PLCAirlines22,076217.512.27.738.1
Trip.com Group LtdBooking platform19,13016.823.514.9-35.6
Sydney AirportAirport Services16,006-26.112.326.343.3
Huazhu Group LtdHotel chain15,26930.826.219.1325.6
Air China LtdAirlines14,15129.932.76.54.0
Vail Resorts IncSki resorts13,84632.10.716.9140.9
China Southern Airlines Co LtdAirlines13,54022.130.28.13.5
Aeroports de ParisAirport Services13,24116.8-7.113.139.3
Shanghai International Airport Co LtdAirport Services13,1777.914.623.270.6
International Consolidated Airlines Group SAAirlines12,32614.823.75.1-13.6
Host Hotels & Resorts IncHotel REITs12,08067.39.812.728.4
InterContinental Hotels Group PLCHotel chain12,02238.43.414.760.5
Norwegian Cruise Line Holdings LtdCruise lines10,335-28.09.49.5-25.9
Accor SAHotel chain9,64540.211.213.9-3.2
Whitbread PLCHotel chain9,208160.26.813.08.7
Choice Hotels International IncHotel chain7,20137.7-9.218.3199.9
TravelSky Technology LtdTravel software5,65418.121.87.4-12.7
Grupo Aeroportuario del Sureste SAB de CVAirport Services5,61830.84.710.037.3
TUI AGTravel agency4,996-25.4-32.66.0-39.9
Travel + Leisure CoHospitality services4,95839.524.38.6123.5
TripAdvisor IncBooking platform4,80155.424.410.2-37.9
Park Hotels & Resorts IncHotel REITs4,77259.914.912.6NA
Sabre CorpTravel software3,84930.811.013.5-52.4
Flight Centre Travel Group LtdTravel agency3,062183.3-14.410.2-21.8
MakeMyTrip LtdBooking platform2,703131.929.144.19.4
On the Beach Group PLCBooking platform858-41.22.713.797.2
Airtrip CorpTravel agency758-15.112.110.9156.4
Aggregate figures (sum or median)976,93830.810.412.837.5

Source: Bloomberg and Saxo Group

Two stocks that have done well this month are Japan based Airtrip and US based Expedia Group up 31% and 17% respectively. As with all other equities post the pandemic, travel companies have seen their market value rise dramatically despite the lack of revenue coming back to pre-pandemic levels. Take Airtrip, analysts do not expect revenue to move pass pre-pandemic levels until FY23 (ending 30 September 2023) which is two years into the future. Nevertheless are investors valuing the company 72% above the market value by FY19 before the pandemic hit travelling. The story is the same for Expedia, which is expected to see revenue reaching pre-pandemic level in FY22 and the booking platform is also seeing its market value being 65% above the pre-pandemic level.

Digging deeper into the numbers it is clear what is driving the expectation. Investors are betting that demand will be so excessive combined with constrained supply of airlines that travel companies will be able to set higher prices and thus see a significant margin expansion. The biggest threat to that outcome is the unfolding energy crunch and potential for higher commodity prices for quite some time eating into margins. We also see increasing evidence of wage growth pressures among lower income groups and with travel being people heavy this is also a growing threat.

Source: Bloomberg
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