The travel sector is once again at a crossroads with just over half of the nation’s population in lockdown due to COVID-19. In this post, we’ll sift through the rubble of the ASX travel sector to investigate four stocks potentially bucking the trend.
Things were just starting to look good…
Prior to the current lockdowns in Victoria and New South Wales, the travel sector was slowly but steadily on the mend. As recently as May, Qantas Airways (QAN) predicted they would achieve 95% of pre-pandemic capacity on their domestic routes by the end of the fourth quarter of FY21, and an even more impressive 107% in FY22. Online travel bookings portal Webjet noted it was back to around 90% of pre-pandemic retail bookings on its online travel agency, and a similar recovery was reported across the ditch by Auckland International Airport with respect to domestic air traffic. It appeared at the time that both Aussies and Kiwis had embraced the marketing spin and sought to get out and explore their own backyards.
Fast forward to today, and the lockdown in Victoria looks like stretching into at least September, and in New South Wales it could potentially push well into October. This is going to wipe out much of the first quarter of FY22 for many companies in the ASX travel sector. It has also popped the fledgling AU-NZ travel bubble. Despite this, we believe that there are some quality companies in this sector that still have excellent potential to grow their earnings throughout the crisis. But, as an investor you have to be extremely careful, because only a handful of ASX travel companies have business models which will allow them to prosper while others will inevitably fail.
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Travel stocks you may want to consider
Alliance Aviation Services (AQZ)
AQZ operates airline charter services for private, corporate and government organisations. These services could be anything from flying you and one-hundred of your mates to watch your beloved team play in an interstate grand final, to flying FIFO workers to mining hubs in the Pilbara. AQZ also provides ‘wet lease’ services to other airlines, such as Qantas, where they offer a complete airline service on a temporary basis. This, for example, is handy for Qantas when it wishes to meet extra short term demand on certain routes which it can’t cater for with current operating capacity. Finally, AQZ provides a range of aircraft servicing and maintenance services.
AQZ is one of only three travel-related companies that grew their earnings during the pandemic (the other is also in this list!). Underlying earnings growth in FY20 was 20% despite the crisis, and in FY21 it was an impressive 25%. AQZ was able to achieve this growth because their charter flights business has a significant exposure to the corporate sector, including a number of industries that were deemed essential during the pandemic. In particular, the mining sector contributed to significant stability and growth in earnings as AQZ provided extensive routes to mining hubs throughout Western Australia and Queensland.
AQZ’s wet lease operations were also well placed to take advantage of the boom in domestic travel through much of the second half of 2020 and the first half of 2021. As for its servicing and maintenance operations, even temporarily grounded aircraft still require some degree of upkeep in this regard.
In their recent FY21 full year results, management provided a positive outlook for charter and maintenance operations, but warned wet lease operations could be negatively impacted by the current lockdowns. Overall however, management noted that AQZ’s “robust and diverse business model” would limit the impact of lockdowns, and that its core business remains “strong”.
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Corporate Travel Management (CTD)
CTD is primarily focussed on providing travel booking services to travellers from the corporate and government sectors. It has significant exposure to corporate sectors such healthcare and mining which were deemed essential services during the pandemic. Geographically, it also has significant exposure to the UK, Europe and USA markets, where vaccination rates are greater and it is expected travel will rebound faster and stronger than in Australia. Over 80% of revenues are external to Australia, and therefore the current lockdowns are expected to have a smaller impact on CTD compared to many other ASX travel companies.
Also, CTD has a smaller reliance on international travel bookings compared to domestic travel bookings. The company has noted a strong resurgence in domestic travel demand, particularly in the USA, where many travel restrictions have already been eased and business is returning to normal. The company has shown that it can be highly profitable based upon domestic travel bookings alone. This assisted CTD in returning to an impressive 85% of pre-pandemic activity prior to the current lockdowns.
CTD’s low cost base and lack of debt has allowed it to recover quickly from the dip in earnings experienced in FY20. It broke-even in March, and managed to deliver a small underlying profit before interest, tax, depreciation and amortisation (EBITDA) in the fourth quarter of FY21. The company has no debt and $100m in the bank. Additionally, it has a large pipeline of new client wins which should drive earnings growth into FY22. In consideration of all of these factors, we believe CTD is therefore well placed to ride out the current lockdowns, and to quickly return to growth on the other side.
Serko International (SKO)
Much like CTD, SKO’s main business is also leveraged to corporate and government travel agencies. SKO provides corporate travellers with software to manage their bookings and expenses. If you’ve ever been on a business trip, then you know just how frustrating it can be to keep track of your receipts, and then to fill out the dreaded expenses claim form afterwards! SKO’s Zeno Travel and Zeno Expense software takes care of this arduous process via a number of integrated intelligent apps which the company sells via a software as a service (SaaS) model to customers all over the world.
The company had returned to around 73% of pre-COVID activity prior to the current lockdowns, but the pandemic did take a significant bite out of SKO’s earnings. In its FY21 results released in May, SKO reported a 37% decline in net profits on a 52% decline in revenue. To help manage the pressure on funding, the company recently conducted an equity raising of $65 million which was oversubscribed. It now has $68.6 million in cash with a current cash burn of around $2.6 million per month. Management are confident that there is sufficient cash to take the business to cash flow positive by around FY23.
Prior to the pandemic, SKO was experiencing rapid growth in revenues as more and more businesses adopted its industry leading software solutions. One major avenue of earnings growth into the future will be the major deal it signed in FY21 with Booking.com. SKO is in the process of migrating all of Booking.com’s business customers over to Zeno. We expect this will have a materially positive impact on revenue for FY22 and beyond. With New Zealand activity already above pre-pandemic levels, we’re confident that SKO is well placed to rebound strongly after Australian lockdowns are lifted.
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Sealink Travel Group (SLK)
SLK’s name is a little deceptive. They certainly do ‘link customers by the sea’ with their ferry offerings in a number of locations around the country, including the popular Rottnest ferry in Western Australia. However, this is only a small contributor to SLK’s group earnings. The company also has substantial public bus and coach operations, dining and accommodation vessels, and two 3.5-4 star holiday resorts.
The bread and butter of the business is most certainly its local and international bus services, which contribute approximately 83% to group revenues. The company operates over 1200 public transport bus routes in Australia for a number of state and local governments, and 20 London and 32 Singapore public transport bus routes. These operations were largely unaffected by the pandemic, and in fact grew in earnings contribution as new routes were won and added to the revenue mix.
The rest of the business, including Sealink ferry, dining and accommodation vessels, coach tourism, and accommodation resorts also performed strongly in the second half of 2020 and the first half of 2021 as domestic travel surged across Australia. Additionally, SKO provides private coach services for a number of mining companies in Western Australia, another strong area of growth.
SLK’s robust and diverse earnings streams allowed it to grow EBITDA strongly through the pandemic (+52% in FY20 and +85 per cent in FY21), and it is the only company in the entire ASX travel sector to have maintained a dividend throughout FY20 and FY21.
SLK’s principally contracted or non-discretionary essential transport services put it in an ideal position to weather the current lockdown crisis. This segment of the business stands to experience even further growth as SLK is in the box seat to win a number of new public transport routes in FY22. It also stands to benefit as lockdowns ease and Australians return to domestic travel. Finally, with a strong balance sheet to snag distressed travel assets, SLK is our top ASX travel sector pick.
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The future of travel
Clearly the current situation with respect to lockdowns in Victoria and New South Wales is dynamic, and if movement restrictions persist into the second quarter of FY22, we will likely see a continued dampening of sentiment toward the ASX travel sector. Despite this risk, we feel that the four stocks discussed here are well placed to weather the storm, and then to take advantage of what we expect will be significant pent up demand on the other side.
Main image source: zhao dongfang/Shutterstock.com
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