The stocks to buy for when travel opens up again

Roger Montgomery

Montgomery Investment Management

For many of us, the current COVID-19-induced travel clampdown is obviously a downer. But for investors, the associated pullback in the price of travel stocks – like Corporate Travel and Webjet – could be a golden opportunity. Because, looking ahead, these businesses should thrive once travel opens up again.

With Australia in another lockdown, the prospect of restriction-free travel is pushed further towards the increasingly distant horizon. Even hopes of domestic air travel have been dashed and tourism operators are flat out dealing with cancellations rather than bookings. Consequently, and perhaps unsurprisingly, travel stocks are taking a battering at the time of writing. But as we have seen previously, and as many other geographies are experiencing currently, travel bounces back very quickly. The sell-off in travel stocks is, if nothing else, a glaringly obvious investment opportunity.

During August last year the market differentiated the three primary travel stocks: Flight Centre (ASX:FLT), Webjet (ASX:WEB) and Corporate Travel Management (ASX:CTD) across two event axes. The first axis was whether the company was considered ‘broken’ or not, and the second axis was whether the company was leveraged to the first slower phase of the recovery or the second faster phase of the recovery.

During the tentative first phase of the recovery from Australia’s first lockdown it was obvious that Flight Centre was being treated by the market as broken, Webjet marginally less so, and Corporate Travel Management not at all.

Recall in 2020, as cases of COVID-19 rose domestically and overseas, the March 15 order obliging international arrivals to self-isolate for two weeks; this brought international travel and tourism to a grinding halt. From that moment Flight Centre’s CEO and co-founder Graham Turner admitted the company’s survival was on the line.

Several measures to slow cash burn were quickly adopted including suspending the dividend, cutting costs from nearly a quarter of a billion dollars a month to just $65 million, reducing headcount of 22,000 by 6,000 and shuttering 100 of its 944 Australian shop fronts.

By April, a $700 million capital raising, a $200 million debt package and permanently cutting its retail footprint and headcount revealed just how close to collapse the pandemic had brought one of this country’s iconic brands.

Flight Centre’s rescue package quickly placed a floor under the share price from which any phase two recovery would occur.

Similarly, Webjet’s April 2020 deeply discounted capital raising of $231 million from institutions and a further $115 million from retail investors determined the low point from which a second phase recovery would occur.

Corporate Travel Management raised capital, although this was to fund their T&T acquisition. Its August results announcement triggered the beginning of its recovery.

The second phase out of the pandemic defines the rate of recovery for travel stocks and Corporate Travel Management has the greatest opportunity to demonstrate its recovery potential, Webjet slightly less so and Flight Centre of course will be last as it awaits international travel from Australia to recommence.

Importantly, Corporate Travel Management’s share price has only kept pace with the market since the third quarter of CY20. Its share price hasn’t broken out despite taking market share, a 20 per cent-plus accretive deal in the US and despite being in good financial health. We believe this makes it the preferred opportunity in a sector that is otherwise in disarray.

In terms of performance relative to the market, Webjet is back to where it was in November when we learned the good news about vaccine efficacy levels of over 95 per cent. That makes Webjet second on our list of preferred exposure to the reopening trade.

For Flight Centre it’s all about politics. Flight Centre will recover strongly when quarantine-free international travel resumes. For now, there is no political advantage (if there ever is) in permitting COVID-19 to enter Australia. During any election what excuse could the Prime Minister offer for infecting Australians? The answer is none. Today we remain under-vaccinated, and therefore opening international travel would put our health system under unnecessary stress. Long COVID-19 is also a future political football that prevents re-opening early.

The most recent outbreak and lockdowns illustrates there will be bumps along the way for investors in travel stocks. And whilst the latest outbreak is a setback in expectations of a return to normal, eventually the bulls will be right.


Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

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