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Ride the travel boom with these 2 companies

Australia’s inbound travel boom is attracting headlines as growth in Asian tourists here soars. Less considered is the outlook for outbound tourism and what it means for travel agency stocks over the next few years.

In a decade or two, tourism could challenge mining (excluding energy) as Australia’s largest export industry, such is the growth potential. And the number of international tourists arriving here each year will double or triple, provided our tourism industry gets its act together. We could one day have more tourists than residents each year, a challenge that France, Spain, Iceland and other in-demand tourist destinations are grappling with.

Outbound tourism seems relatively less exciting. If one believes the press, Australians are struggling with record personal debt, anaemic wages growth and rising utility bills. That’s hardly conducive to millions of us flocking overseas each year for a holiday.

But outbound travel is growing strongly. Bell Potter last year tipped that Australians are likely to spend more of their household income on overseas holidays than on domestic ones in the next few years, and noted that spending on outbound travel had grown 10.4% annually over the previous three years.

Outbound travel has several tailwinds. An ageing Australian population is boosting demand for offshore holidays. Plenty of self-funded retirees I know base their retirement sums on having an overseas holiday every year – not one big trip when they retire, as in years past. Witness the boom in cruising holidays for old (and young) travellers.

The millennial generation (roughly aged 25 to 34) is also driving outbound tourism.

It’s a given that people in their 20s and 30s have multiple overseas holidays, and not just cheap backpacking jaunts. For some, saving is just a means to another international holiday; travel is a rite of passage rather than a reward.

Australia’s inbound tourism boom is underpinning outbound growth. Planes that arrive full of international passengers do not want to leave empty. They need to attract outbound tourists to drive plane capacity and yields. That’s one reason international airfares have fallen and competition for Australian travellers is intensifying.

Soaring growth in inbound tourism will also encourage more Australians to holiday overseas. Who wants to visit tired domestic attractions that are swamped by overseas tourists, or pay $5,000 for a week at the Gold Coast when the same amount buys a five-star holiday in Bali or Fiji?

It’s a no-brainer that more Australians will holiday in developing nations, which are offering five-star facilities, and more people from developing nations will holiday here.

Complementing this trend is the continuing migration of travel bookings online. Australians started booking domestic plane flights online and now many do so for expensive holidays. Others use a blended model of online bookings and bricks-and-mortar travel agents.

This all points to more Australians travelling overseas and booking their holiday through websites or blended travel agency services. It’s not a new trend, but the market has a habit of underestimating the strength and duration of megatrends.

Here are two ways to play the trend:

  1. Webjet(WEB)

I went cold on Webjet for this report in late 2016, on valuation grounds, when it traded just below $10. The stock is now $11. Operationally, my main concern was the risk of greater competition from international online travel agents, such as Expedia, that have deeper pockets and greater scale than Webjet.

I was wrong. Webjet’s latest interim results shows it is meeting the competitive challenge and exceeding market expectation. Webjet delivered with 32% growth in revenue and 26% growth in underlying earnings (EBITDA) for the first half of 2017-18. Webjet’s full-year guidance for at least $80 million beat the consensus forecast.

Webjet’s 22% growth in total transaction value, a cracking result, suggests it is growing faster than its peers as it adds higher-margin holiday packages to its bookings platform. The business-to-business travel service is growing rapidly and will overtake the consumer travel operation, and revenue from the Thomas Cook partnership will be recognised in 2019-20. The market has underestimated Webjet’s potential in corporate travel.

An average share price target of $13.13, based on the consensus of six broking firms, suggests Webjet is materially undervalued at the current price. The consensus is too bullish, too small to rely on and skewed by one or two high analyst valuations.

Still, the well-run Webjet has terrific momentum and several drivers to justify a higher price in 2018, although gains will be slower from here. Longer-term, Webjet has a formidable online platform in a growth market, is well run and has plenty of growth options.

Chart 1: Webjet (WEB)

Source: ASX

  1. Flight Centre Travel Group (FLT)

I included the blended travel agency (offline/online) in the Switzer Report Takeover Portfolio [1]at $31.65 in December [1]2 [1]016 [1]. Flight Centre has since rallied to $57.15, terrorising short-sellers who took big bets that the company would follow the path of media houses and department stores that were disrupted by online rivals.

Flight Centre’s latest result impressed. Underlying first-half profit of $139.4 million was 23% above company guidance and FY19 guidance was raised to $365-$385 million. Total transaction value, up 8.7% to $10.2 billion, underpinned the result.

A highlight was growth in Flight Centre’s international and corporate business. Together, they accounted for almost three-quarters of group sales growth. The market tends to overlook this business, focusing more on Flight Centre’s domestic operations in leisure travel.

Flight Centre’s Americas business was profitable for the first time, the Canadian business has picked up and the Asian business is growing strongly, off a small base. Flight Centre’s international expansion looks like its gone up a notch.

Longer term, I’m not convinced that bricks-and-mortar travel agencies are dead. Certainly, those with weak online offerings will be disrupted by internet travel agencies. But Flight Centre’s blended model appeals to travellers who research their holiday online and want in-store travel agents to advise them and book holidays, especially for dearer trips.

Flight Centre is growing its share of online travel bookings in Australia. Its internet strategy initially was underwhelming. But that has changed with the launch of Flight Centre Apps for mobile devices and other online initiatives that are supporting its leisure travel brands. My experience with Flight Centre online has been encouraging.

An average valuation of $52.78, based on the consensus of 12 broking firms, suggests Flight Centre is overvalued at the current price. The stock is neither cheap nor overvalued. The insightful share-valuation service, Skaffold, values Flight Centre at $52.93 in 2018, rising to $57.73 in 2019 and $62.97 in 2020.

The current price looks about right, making Flight Centre a stock for portfolio watchlists and one to buy on any significant price weakness during inevitable sharemarket pullbacks.

Stronger-than-expected growth in Flight Centre’s international and online operations, something the market has underestimated, could be the next re-rating catalyst. The short-term risk is that the strong earnings growth trajectory from the first-half of FY18 slows in the second-half – a reason, perhaps, why Flight Centre’s FY18 guidance upgrade was modest.

Chart 2: Flight Centre(FLT)

Source: ASX

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.