Will the travel sector make you rich?
We have all heard of the travel stock narrative. COVID brought down the entire sector almost overnight and with the return of travel and the return of money to the sector they should be set to take off again. Today we break down this hypothesis and see if travel is heading to the moon.
There are three big household names in this space: QAN (Qantas), FLT (Flight centre), WEB (Webjet).
Qantas is currently available at $5.30 around 30% below its pre-COVID high. In their most recent financial statements released last month we see the true effect COVID has had on the company. For the half-year ending 31 December 2020 the company reported a statutory loss after tax of $1.081 Billion. Here is a look at their income statement:
Notice the underlying profit before tax has crashed from 771 million profit to a breathtaking loss of 1.034 billion. This represents a drop of 234%. Based on these results QAN has an EPS of -57.5, meaning its now a loss-making company. Fortunately, QAN has a decent balance sheet with 3.829B in current assets, including 2.6B in cash. Which largely allowed the company to cash-flow this loss without taking on massive amounts of debt. This strong balance sheet arguably saved QAN from the same fate of virgin airlines. Government assistance also allowed for tax cuts to help keep QAN operational. And with things improving there should be no need for official government bailout of the company.
Going forward we would expect to see the slow increase of revenue to QAN. With its strong financial position, it is well set to function and eventually pick up. We see little probability of the company crashing, like its counterpart Virgin. With the large majority of QAN revenue coming from domestic travel rather than international we could expect to see a large amount of the companies profit staring to come back as Australia truly opens and domestic travel begins to boom again.
In summary we don’t believe QAN is going to the moon any time soon, but with such a strong balance sheet we expect QAN to be a relatively low risk investment with reasonable upside potential over the next year. PROPHET considers QAN a BUY potential.
At their current price of $18.65 FLT represents a 53% discount from their pre-COVID high of $40. FLT also released their financial statements last month. From Dec 2019 to Dec 2020 we saw revenues drop 90%. The company saw a loss of 233.5 Million. Giving them an EPS of -117.2. Here’s a look at their balance sheet:
Flight centre also has a very strong balance sheet with net assets of 1.16B which has allowed it to again cash-flow the COVID losses and puts it in a strong position to weather future hardships as business returns to normal. We see FLT returning to business as normal as travel beings to open again. However, this is will likely not be as soon as QANTAS returns to normal. But FLT still seem to represent a bullish play, thus PROPHET is giving it a BUY recommendation.
At its current price of $6.08 WEB represents a 42% discount from its pre-COVID high of $10.5. In its most recent statements we saw revenues drop a staggering 90% with the company realising a loss of 40.4M in EBITDA
The company has 283M cash on hand and net assets of 636M. Unlike previous companies WEB took on more debt into its balance sheet, although not significant its balance sheet is not as rock strong as the previous two, but still will allow the company to cash-flow losses for the short term as profits return. PROPHET Invest considers WEB HOLD/BUY
In summary the travel sector has realised massive losses over the past year. With the three companies now being available at discounts of around 30-50%, while the market has largely recovered, investors are starting to see opportunity in these stocks for easy money as travel re-opens. All three companies have decent balance sheets which have allowed them to function despite the losses and will allow them to continue to do so for the short term. We see all three as decent opportunities for investors. Out of the three FLT and QAN are our favourite.
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