Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Travel companies are flying higher despite risk-off
5 minutes to read
Peter Garnry
Chief Investment Strategist
Summary: Travel related companies were among the hardest hit parts of the equity market in 2020 as travel restrictions during the pandemic crushed demand for traveling. With vaccines being rolled out this year traveling is slowly getting back and in September our travel basket is the only theme basket that is up despite rising commodity prices which in theory should also hit travel companies. Investors are betting that demand will far exceed supply of airlines and hotel rooms paving the way for historically high margins in the travel industry. Given the inflationary pressures we are observing we are more skeptical.
The best performing equity theme in September is our travel basket up 6.3% as of yesterday’s close with all other themes in negative. How come investors are bidding up travel companies when the world is undergoing an energy crunch which in theory should cut disposable income and increase travel prices?
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.
| Name | Industry | Market Cap (USD mn.) | FY22 Sales growth (%) | Diff to PT (%) | 24M Fwd EV/EBITDA | 5yr return |
| Boeing Co/The | Airliner manufacturer | 128,021 | 26.1 | 25.6 | 15.5 | 80.3 |
| Airbus SE | Airliner manufacturer | 106,662 | 6.0 | 18.8 | 9.1 | 127.4 |
| Airbnb Inc | Booking platform | 105,977 | 68.5 | 1.3 | 51.8 | NA |
| Booking Holdings Inc | Booking platform | 99,888 | 53.8 | 3.7 | 15.1 | 65.3 |
| Marriott International Inc/MD | Hotel chain | 50,018 | 25.9 | -2.8 | 16.3 | 139.1 |
| Hilton Worldwide Holdings Inc | Hotel chain | 38,055 | 30.9 | -2.2 | 17.9 | 198.6 |
| Southwest Airlines Co | Airlines | 31,387 | 73.5 | 22.5 | 5.4 | 41.8 |
| Amadeus IT Group SA | Travel software | 30,209 | 34.9 | 0.6 | 14.2 | 37.7 |
| Carnival Corp | Cruise lines | 29,166 | -56.1 | 9.7 | 8.9 | -39.8 |
| Delta Air Lines Inc | Airlines | 27,798 | 65.9 | 26.7 | 5.5 | 20.0 |
| Aena SME SA | Airport Services | 25,592 | 9.6 | 2.4 | 13.2 | 23.8 |
| Expedia Group Inc | Booking platform | 25,455 | 60.8 | 6.6 | 10.8 | 50.0 |
| Royal Caribbean Cruises Ltd | Cruise lines | 23,424 | -10.6 | 3.9 | 11.0 | 33.5 |
| Ryanair Holdings PLC | Airlines | 22,076 | 217.5 | 12.2 | 7.7 | 38.1 |
| Trip.com Group Ltd | Booking platform | 19,130 | 16.8 | 23.5 | 14.9 | -35.6 |
| Sydney Airport | Airport Services | 16,006 | -26.1 | 12.3 | 26.3 | 43.3 |
| Huazhu Group Ltd | Hotel chain | 15,269 | 30.8 | 26.2 | 19.1 | 325.6 |
| Air China Ltd | Airlines | 14,151 | 29.9 | 32.7 | 6.5 | 4.0 |
| Vail Resorts Inc | Ski resorts | 13,846 | 32.1 | 0.7 | 16.9 | 140.9 |
| China Southern Airlines Co Ltd | Airlines | 13,540 | 22.1 | 30.2 | 8.1 | 3.5 |
| Aeroports de Paris | Airport Services | 13,241 | 16.8 | -7.1 | 13.1 | 39.3 |
| Shanghai International Airport Co Ltd | Airport Services | 13,177 | 7.9 | 14.6 | 23.2 | 70.6 |
| International Consolidated Airlines Group SA | Airlines | 12,326 | 14.8 | 23.7 | 5.1 | -13.6 |
| Host Hotels & Resorts Inc | Hotel REITs | 12,080 | 67.3 | 9.8 | 12.7 | 28.4 |
| InterContinental Hotels Group PLC | Hotel chain | 12,022 | 38.4 | 3.4 | 14.7 | 60.5 |
| Norwegian Cruise Line Holdings Ltd | Cruise lines | 10,335 | -28.0 | 9.4 | 9.5 | -25.9 |
| Accor SA | Hotel chain | 9,645 | 40.2 | 11.2 | 13.9 | -3.2 |
| Whitbread PLC | Hotel chain | 9,208 | 160.2 | 6.8 | 13.0 | 8.7 |
| Choice Hotels International Inc | Hotel chain | 7,201 | 37.7 | -9.2 | 18.3 | 199.9 |
| TravelSky Technology Ltd | Travel software | 5,654 | 18.1 | 21.8 | 7.4 | -12.7 |
| Grupo Aeroportuario del Sureste SAB de CV | Airport Services | 5,618 | 30.8 | 4.7 | 10.0 | 37.3 |
| TUI AG | Travel agency | 4,996 | -25.4 | -32.6 | 6.0 | -39.9 |
| Travel + Leisure Co | Hospitality services | 4,958 | 39.5 | 24.3 | 8.6 | 123.5 |
| TripAdvisor Inc | Booking platform | 4,801 | 55.4 | 24.4 | 10.2 | -37.9 |
| Park Hotels & Resorts Inc | Hotel REITs | 4,772 | 59.9 | 14.9 | 12.6 | NA |
| Sabre Corp | Travel software | 3,849 | 30.8 | 11.0 | 13.5 | -52.4 |
| Flight Centre Travel Group Ltd | Travel agency | 3,062 | 183.3 | -14.4 | 10.2 | -21.8 |
| MakeMyTrip Ltd | Booking platform | 2,703 | 131.9 | 29.1 | 44.1 | 9.4 |
| On the Beach Group PLC | Booking platform | 858 | -41.2 | 2.7 | 13.7 | 97.2 |
| Airtrip Corp | Travel agency | 758 | -15.1 | 12.1 | 10.9 | 156.4 |
| Aggregate figures (sum or median) | 976,938 | 30.8 | 10.4 | 12.8 | 37.5 |
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.
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