Getting the ASX travel bug – an analysis


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The rise of the travel industry, both in Australia and around the globe, has been impressive. According to Deloitte in its latest annual report on the sector, travel and tourism is one of the world’s fastest-growing sectors, with bookings hitting close to US$1.6 trillion in 2017 and 5% – 6% growth expected this year.

With such strong industry dynamics, it is not surprising to see many ASX-listed companies aiming to capitalise from such boom times. The main protagonists in this space are Flight Centre Travel Group (FLT), Corporate Travel Management Limited (CTD) and Webjet Limited (WEB)

FLT provides a complete travel agency service in Australia and overseas. Operating more than 30 brands across the leisure, corporate and wholesale markets it is the largest of the three. CTD, on the other hand, is more focussed on servicing specific corporate travel needs, delivering solutions for the resources and entertainment markets. Its success since inception has seen competitors scramble to retain market share. WEB started as an aggregator of flight options for consumers via the internet but has since developed a strong hotels business as well. More specifically, its WebBeds B2B business is experiencing strong growth. Recent acquisitions show continued support for the strategy.

All have delivered strong total returns for investors over the past 5 years, and remain positioned to continue to capitalise from the strong global trend. However, in what is a cut-throat industry, who do we see as being best placed to capitalise on the opportunities ahead of them?

Financial Health

Both FLT and CTD have a long history of being exposed to manageable levels of risk and are both Financially Healthy. For WEB, the acquisition of JacTravel Group last year saw it raise debt to aid with the funding of the transaction. This has tipped the Total Liabilities to Total Tangible Asset (TLTAI) ratio above our preferred thresholds, thus impacting overall Health. We expect to see the benefits of the acquisition used to pay down debt in the immediate-term.

Earnings growth and expectations

While all companies are expected to generate strong earnings growth in FY18 and FY19, only CTD has exhibited a history of consistent earnings per share (EPS) Growth. FLT and WEB have experienced recent dips, though FLT did return to positive annualised growth in the most recent interim period. Further, CTD is expected to experience the most dynamic earnings growth next year with analysts anticipating 51.2%.

Dividends

Seizing on the strong demand, it is not surprising to see that all three companies decided to retain a large part of their profits to fund future growth, rather than distribute earnings to shareholders in the form of dividends. However, FLT is currently on a grossed-up dividend yield of 3.49% paying $1.54 per share over the past twelve months.

Value and share price trend

Currently all companies have premiums placed on their valuations based on their strong outlooks. However, FLT trades on the cheapest forward Price Earnings (PE) ratio of 23.1. It has also delivered the strongest price appreciation in the past twelve months. However, over the past 5 years from a total return perspective, CTD is the standout out delivering investors 42.5% pa returns.

Risks

Notwithstanding the valuation risks mentioned, currency risk is always an issue with any travel related businesses. The strength of the industry has seen many new competitors emerge, potentially eroding market share. Also, the current roll-up acquisition strategies of each business poses risks as integration can be a challenge if not executed correctly.

In the case of WEB, it has experienced price volatility since 2017 following an audit disagreement. Since then the company continues to defend itself against various questions about the business. FLT is also in the process of realigning its business to improve margins and closing non-profitable businesses / stores. The benefits of a turnaround have seen the price rally. Time will tell whether they can continue to execute. CTD has key man risk with founder and largest shareholder Jamie Pherous, continuing to steer the ship after more than 23 years at the helm.

Verdict

Our preferred travel business is Stock Doctor Star Stock; CTD. With Strong Financial Health, a consistent history of delivering growth and strong prospects moving forward, CTD is a great Australian company who has leveraged its ‘first to market’ position in the lucrative travel space. Though it is the most expensive of the three, it carries that valuation due to its superior quality and potential for increased penetration into their target market. With a proven performer like Jamie Pherous still in the cockpit, we expect CTD to continue to take-off in the year ahead.

Code Financial Health rating Market cap ($M) ROA (%) EPSG 1yr (%) EPSG 1yr (%) fcst yr1 Gross DY (%) fcst yr1 Price chg 1yr (%) Return 5yr incl div (% pa)
CTD Satisfactory 2,728.05 12.64 24.78 42.4 2.31 18.59 42.54
FLT Strong 6,359.92 11.9 11.78 17.69 3.7 71.8 13.03
WEB Early Warning 1,419.32 4.83 -18.89 24.07 2.33 -0.23 26.82

 

Published Monday, 28 May 2018
www.afr.com. | Financial Review

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