Travel companies are flying higher despite risk-off

Our basket consists of 40 stocks with exposure to the travel segment in different ways. Expectations for revenue growth next fiscal year are currently 31% for the industry highlighting the enormous pent-up demand expected for travel related activities as the global vaccine rollout continues. Analysts have price targets on average 10% above the current prices, but with 24-month forward EV/EBITDA already on par with the MSCI World the upside from here might be quite limited.

Source: Bloomberg and Saxo Group

Two stocks that have done well this month are Japan based Airtrip and US based Expedia Group up 31% and 17% respectively. As with all other equities post the pandemic, travel companies have seen their market value rise dramatically despite the lack of revenue coming back to pre-pandemic levels. Take Airtrip, analysts do not expect revenue to move pass pre-pandemic levels until FY23 (ending 30 September 2023) which is two years into the future. Nevertheless are investors valuing the company 72% above the market value by FY19 before the pandemic hit travelling. The story is the same for Expedia, which is expected to see revenue reaching pre-pandemic level in FY22 and the booking platform is also seeing its market value being 65% above the pre-pandemic level.

Digging deeper into the numbers it is clear what is driving the expectation. Investors are betting that demand will be so excessive combined with constrained supply of airlines that travel companies will be able to set higher prices and thus see a significant margin expansion. The biggest threat to that outcome is the unfolding energy crunch and potential for higher commodity prices for quite some time eating into margins. We also see increasing evidence of wage growth pressures among lower income groups and with travel being people heavy this is also a growing threat.