6 stocks to play the tourism boom with

Financial journalist and commentator on 3AW and Sky Business
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Australia is in the middle of a tourism boom, particularly on the inbound side. According to the Australian Bureau of Statistics (ABS), tourist arrivals rose by 4% in December. While 4% does not sound like a boom, it’s the composition of the figure that shows why the Australian tourism industry is celebrating.

Changing market

Almost 9 million tourists came to Australia in 2017, led by a record 1,382,800 tourists coming from China, a number that rose by 13.3%. China is now the largest source of tourists to Australia, ahead of New Zealand. Visitors from New Zealand totalled 1,355,300 over the past year, but that number increased by just 1.3%. The booming Chinese middle-class has discovered Australia in a big way, and it has money to spend: according to the Tourism & Transport Forum Australia, not only are the Chinese Australia’s biggest source market, they are “far and away the highest spending” of all nationalities visiting Australia, spending $10 billion here a year. Tourists from China spend, on average, more than tourists from any other nation when they holiday in Australia.

And what’s exciting Australian tourism circles even more is that the other potential elephant for Australian tourism, the burgeoning Indian middle class, is just starting to be seen in meaningful numbers. The ABS says tourists from India totalled 302,900 visitors over the past year – up 16.5% on the year, and a record high. As broker CommSec puts it: “China’s and India’s growing and more affluent middle class are attracted to Australia’s clean and unique environment, high-quality restaurants and hotels, fresh food, safe cities, museums, art galleries and warm weather.”

Outbound tourism is also booming. A total of 10.5 million Australians returned from short stays overseas across the year to the end of November – up 6.9% on the previous year.

So is domestic tourism. Last year, a Tourism Research Australia survey found that domestic tourists spend $81 billion a year, on top of the $40 billion that international visitors spend.

Investors would be remiss if they were not looking for ways to participate in this boom, and there are several ways to do it on the stock market, from airports and airlines to hotel chains, adventure tour operators and travel booking services.

Here are six ways to play the tourism boom.

1. Sydney Airport (SYD)

Market capitalisation: $15.2 billion
FY18 forecast yield: 5.6%, unfranked
Five-year total return: 22.2% a year
Analysts’ consensus target price: $7.10

 

Australia’s main international gateway, Sydney Airport (SYD), serves 43 international airlines, seven domestic and regional carriers and 10 dedicated freight carriers, which fly to a network of 97 destinations (46 international, 23 domestic/interstate and 28 regional destinations). In 2017, Sydney Airport handled 43.3 million passengers, up 3.6%. About 16 million of these passengers, or 37%, were international: this figure rose by 7.2%.

The airport makes its money from aeronautical services (51% of revenue), retail operations (23% of revenue), property/car rental (15% of revenue) and parking/ground transport (11% of revenue). From these strong cash flows comes a robust distribution yield of 5.6%, but it is unfranked. The company is heavily debt-funded, with more than $8 billion of interest-bearing liabilities – more than half of its market capitalisation. SYD is a highly defensive asset that generates large cash flows: net operating income rose by 17% to $787.3 million in 2017. Analysts expect SYD’s distribution yield to push to 6.1% in 2019, and on consensus target price expectation there is scope for about 5.2% of capital growth.

2. Qantas (QAN)

Market capitalisation: $10.4 billion
FY18 forecast yield: 2.4%, unfranked
Five-year total return: 32.12% a year
Analysts’ consensus target price: $6.90

 

The nation’s flag carrier has been spectacularly turned around since its $2.8 billion loss in 2014. In FY17, Qantas earned underlying pre-tax profit of $1.53 billion – the largest in its history, and issued guidance for a better-than-expected annual underlying pre-tax profit of between $1.35 billion and $1.4 billion in FY18, on the back of the strength of its domestic operations.

In the first half of the current financial year, Qantas reported a net profit of $607 million, up 18%, on a revenue rise of 6%, to $8.7 billion. Budget subsidiary Jetstar reported record half-year underlying earnings of $318 million, up 15.6% on the back of improved domestic demand and capacity management. But profit fell 5.5% in its international business, despite a 7% increase in revenue, as higher fuel costs and increased competition from other airlines hit its bottom line. Qantas has told the market to expect underlying pre-tax profit of between $1.35 billion and $1.4 billion in FY18.

Qantas is not a great dividend payer, but has spent more than $1.6 billion on share buybacks since 2016, including a $378 million buyback announced in the interim result, to be conducted in the second half. Analysts see the stock as having plenty of attraction on potential capital gain grounds.

3. Event Hospitality & Entertainment (EVT)

Market capitalisation: $2.1 billion
Consensus estimated FY18 yield: 4.1%, fully franked
Five-year total return: 15.5% a year
Analysts’ consensus price target: $15.71

 

With hotel group Mantra Group (MTR) looking poised to be taken off the stock exchange through a takeover bid by French hotels giant Accor, the hotels business owned by Event Hospitality & Entertainment (the former Amalgamated Holdings) will be the focus of much greater investor interest as an exposure to tourism. The hotels business – conducted mainly through Rydges and more upmarket QT Hotel brands – was certainly the highlight of EVT’s recent half-year result, with revenue up 14% to $172.2 million and profit jumping 48.5% to $36.4 million. QT notched a very impressive 15% rise in revenue per available room.

EVT’s hotel portfolio should definitely benefit from the long-term growth in inbound tourism to Australia, and the company is doing good things in building its Thredbo alpine resort into an all-year-round destination, but the fly in the ointment is that with EVT, investors also get the Australian and New Zealand cinema businesses (including Event Cinemas, Greater Union, Birch Carroll & Coyle), which operates in a highly competitive sector, plus a $1.6 billion property portfolio. But EVT is a good exposure to the tourism accommodation market, with a nice fully franked yield, and analysts see healthy scope for capital growth.

4. SeaLink Travel (SLK)

Market capitalisation: $393 million
FY18 forecast yield: 3.7%, fully franked
Five-year total return: n/a
Analysts’ consensus target price: $4.50

SeaLink Travel is a diversified tourism and transport player, offering passenger and freight ferry services between Cape Jervis and Kangaroo Island in South Australia under the Kangaroo Island SeaLink brand; tourist cruises and other charter cruises on Sydney Harbour, under the Captain Cook Cruises brand as well as regular ferry passenger services; Murray River cruising aboard the historic paddle-wheeler Murray Princess in South Australia; passenger ferry services between Townsville and Magnetic Island and Palm Island in Queensland; travel agencies in Adelaide, Sydney and Townsville which sell SeaLink and other products to both inbound and domestic customers; passenger ferry services between Perth and Rottnest island; coach tours throughout South Australia and Kangaroo Island; packaging holidays throughout Australia; accommodation and restaurant facilities at Vivonne Bay Lodge on Kangaroo Island; and passenger ferry services between Darwin and Mandorah and Darwin and Tiwi Islands.

Last month, SeaLink announced a record $23.8 million interim net profit, and accompanied that with news of the $43 million purchase of the Kingfisher Bay Resort Group, including two resorts on Queensland’s famous Fraser Island. Kingfisher Bay Resort Group is the biggest hospitality, touring and transport operation on Fraser Island. The deal comprises the freehold assets of Kingfisher Bay Resort and Village, Eurong Beach Resort, Fraser Explorer Tours and Fraser Island Ferries, which runs a service from Hervey Bay to the Western Side of Fraser Island – the sole ferry access to Fraser Island.

SeaLink’s strategy is to be a tourism provider with a national footprint, and the major provider of connections to “iconic” Australian destinations. This strategy is developing well, and the company is building a robust fully franked dividend stream, with 4% projected for FY19. Analysts also see healthy grounds for capital growth.

5. Experience Company (EXP)

Market capitalisation: $393 million
Consensus estimated FY18 yield: 1.6%, fully franked
Five-year total return: n/a
Analysts’ consensus price target: $1.015

 

Experience Company (EXP, the former Skydive The Beach Group Limited) is an adventure tourism and leisure company that’s very well-placed to pick up on the thirst for adventure that appeals to many of the younger travellers that come to Australia. EXP offers tandem skydiving experiences in 18 locations in Australia and three locations in New Zealand, and also provides activities such as white-water rafting, helicopter touring, hot air ballooning, canyoning and boat tours to the Great Barrier Reef in North Queensland, Australia.

Revenue for the December half was up 52% at $59.2 million, while net profit rose 28%, to $3.6 million. EXP maintained its guidance at $135 million–$140 million and EBITA of $35 million–$37 million.

Experience has grown significantly in the recent past. During the December half-year, it brought into its business Byron Bay Ballooning (Byron Bay, NSW), Wine Country Ballooning (Hunter Valley, NSW) and Great Barrier Reef Helicopters (Cairns and Port Douglas, Far North Queensland). The largest of these acquisitions, Great Barrier Reef Helicopters, saw the company’s institutional investor base stump up $20 million. The company’s operations have recently been marred by tragedy, with a triple-fatality accident in far north Queensland in October and a single fatality at Queenstown in New Zealand in January. Both of these events hit the share price, but operations resumed at both sites after investigations.

Experience is a business with high potential in its niche area of Australian and New Zealand tourism. The fully franked yield is not greatly alluring yet but can be expected to grow. In the meantime, analysts see a fair degree of capital gain potential.

6. Webjet (WEB, $12.48)

Market capitalisation: $1.48 billion
Consensus estimated FY18 yield: 1.6%, fully franked
Five-year total return: 24.7% a year
Analysts’ consensus price target: $13.70

 

Online travel agency Webjet is a good way to pick up on the tourism market, in both directions: its main business is the travel booking website of the same name, which offers flights, hotels, holiday packages, cruises, car hire, travel insurance and travel deals: it also runs the Online Republic brand, and has a business-to-business division comprising the Lots of Hotels and Sunhotels brands. The company operates in Australia, New Zealand, North America, Singapore and Hong Kong. Webjet is the world’s second largest wholesaler of online hotel inventory, behind only Spanish firm Hotelbeds.

Webjet is performing extremely well. In the December 2017 half-year, the company delivered a 55% rise in total transaction value (TTV), to $1.44 billion. The company’s revenue (excluding revenue as principal) surged 52% to $131.9 million, while net profit rose 45% to $23.8 million. The result was powered by WebBeds, the company’s business-to-business (B2B) segment, which boosted bookings by 227%, TTV by 168%, revenue by 170% and operating earnings by almost 1400%. The business-to-consumer (B2C) segment was pedestrian in comparison, with bookings up 12% and TTV up 17%.

The company is well on track to achieve its FY 2018 guidance of more than $3 billion in TTV and at least $80 million in EBITDA (earnings before interest, tax, depreciation and amortisation) – which would represent rises of 54% and 57% respectively. But several brokers believe this guidance could prove to be conservative.

Webjet offers a growing dividend stream, but one that is not yet investment-grade for income-oriented investors. On potential capital growth terms, however, analysts like the stock a lot.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

 

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