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Getting the ASX travel bug – an analysis

Promoted by Lincoln Indicators.

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 industries, with bookings hitting close to US$1.6 trillion in 2017 with 5% - 6% growth expected this year.

With such strong industry dynamics, it is not surprising to see many ASX-listed companies aim 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).

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FLT provides a complete travel agency service both 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 focused 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. More specifically, its WebBeds B2B business is experiencing strong growth, and recent acquisitions show continued support for this strategy.

All have delivered strong total returns for investors over the past five years and remain positioned to capitalise on 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 acquisition 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. CTD is expected to experience the most dynamic earnings growth next year with analysts anticipating 51.2% but, much of this comes from acquisitions, with the most recent being SCT Travel Group.

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 all earnings as dividends to shareholders. FLT is currently on a forward dividend payout ratio of 60% while both CTD and WEB have payout ratios of below 50%. This also translates to the dividend yield for FLT being the highest of all three at 3.48% inclusive of franking credits.

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 most substantial price appreciation in the past twelve months. However, over the past five years from a total return perspective, CTD is the standout out providing investors 42.5% pa returns.

Risks

Notwithstanding the valuation risks, 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 pose risks as integration, if not executed correctly, can be a challenge.

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 business/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 that has leveraged its ‘first to market’ position in the lucrative travel space. Though it is the most expensive of the three, the premium is due to its superior quality and significant 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

 

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ELIO D’AMATO

Lincoln Indicators is a fund manager and creator of Stock Doctor, Australia’s premier DIY Investment Platform. Elio D‘Amato is the Executive Director at Lincoln Indicators. www.lincolnindicators.com.au

Important: Lincoln Indicators Pty Limited (Lincoln) ABN 23 006 715 573, as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167. This communication may contain general financial product advice. Our advice has been prepared without taking account of your personal circumstances. You should therefore consider its appropriateness, in light of your objectives, financial situation and needs, before acting on it. If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) at www.lincolnindicators.com.au before making any decision.

Getting the ASX travel bug – an analysis
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