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Cameron England

Broker E&P Capital sees share price rerating for major travel operators

Cameron England
Travel stocks are set for strong performances in the next couple of years.
Travel stocks are set for strong performances in the next couple of years.

After weakness over the past month or so travel stocks are likely to regroup and with “another leg to the rally” for three majors in the sector, E&P Capital says.

Analysts Kieran Harris and Julian Mulcahy are predicting there’s more to come in the organic growth story for Corporate Travel Management, Flight Centre and Webjet, but all for different reasons.

Unsurprisingly all of these stocks took heavy hits in early 2020 as the pandemic shut the industry down globally, but have recovered – albeit not to their former glory and all three have come off recent peaks around late July, early August this year.

But E&P has positive ratings on all three, with Flight Centre the preferred pick.

“While the cyclical rebound from Covid is largely captured in expectations for FY24, we believe there is another leg to the rally,’’ E&P says. “For those wanting to pick only one, we have ranked the companies according to valuation, earnings predictability, management access, long term growth potential, earnings quality and capital structure.

“Based on this approach, Flight Centre rates the best. The strong tailwind for leisure is well known, as is the improved cost structure, but the dramatic rise in the corporate business (50 per cent of total transaction value in FY23) is yet to be captured in the stock’s rating.’’

E&P has a valuation of $27.68 on Flight Centre shares, which were trading at $19.67 on Monday, presenting more than 40 per cent upside.

“Flight Centre has recovered strongly from Covid, emerging with a better business mix and more efficient cost structure,’’ E&P says.

“We believe the combination of positive momentum and efficiency gains will continue to drive strong profit growth over the next two years.’’

E&P says Flight Centre is now the fourth largest player in the corporate travel market globally, having captured $7bn in business since 2019, and its leisure division should also benefit from better margins as airfares begin to fall.

The broker’s valuation for Corporate Travel Management has been set at $22.41 against $17.08 on Monday, with E&P saying it had grown by acquisition to command good market share in its four target regions of Australia/NZ, Asia, the European Union and North America.

“Having reached critical mass in each region, organic growth will become the primary driver and acquisitions will largely be aimed at niche market segments,’’ E&P says. “Corporate Travel has been on the end of negative commentary for more than five years, the most significant being a short report from a hedge fund in 2018. Common criticisms have centred on aggressive accounting, growth by acquisition, unusually low interest income on cash, and mismatch of profits and cash flow.

“While some may be valid, any serious issues would have been exposed during Covid, but Corporate Travel actually faired the best and suffered only one year of negative cash flow.’’

E&P values Webjet at $8.64 against $6.70 on Monday.

Webjet’s dominant revenue driver is its trade-focused WebBeds business which is third in the global distribution market behind Expedia with 45 per cent and Hotelbeds with 16 per cent.

“While it is the number three player in the $80bn market … its marketplace model lends itself to rapid growth from consolidating the $28bn still up for grabs.

“We believe WebBeds is signalling plans to cut prices and chase volume (mainly in the US). “Given the same room can be sold by multiple players, lowest price generally wins. Backed up by increased investment in artificial intelligence (to improve speed and conversion rates), WebBeds is well placed to win considerable share from the smaller players who lack the financial capacity and scale.’’

Cameron England
Cameron EnglandBusiness editor

Cameron England has been reporting on business for more than 18 years with a focus on corporate wrongdoing, the wine sector, oil and gas, mining and technology. He is a graduate of the Australian Institute of Company Directors' Company Directors Course and has a keen interest in corporate governance. When he's not writing about business, he's likely to be found trail running in the Adelaide Hills and further afield.

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Original URL: https://www.theaustralian.com.au/business/dataroom/broker-ep-capital-sees-share-price-rerating-for-major-travel-operators/news-story/8f8f08948e84a2d282a07534ce95d3ca