The sun is here again for travel companies
After a bad time the sector is getting a welcome break. Jenne Mannion looks for hotspots in the tourist trade
Saturday 07 August 2004
Hotel and other travel-related companies have suffered from a sharp downturn in customer numbers over the past few years, but the picture is starting to look sunnier for this part of the stock market.
Hotel and other travel-related companies have suffered from a sharp downturn in customer numbers over the past few years, but the picture is starting to look sunnier for this part of the stock market.
Overall, the long-term fundamentals for the sector are positive. Changing lifestyles and higher standards of living mean more people are going on holidays more often, so companies that are associated with travel should be the beneficiaries of this increased spending.
However, it has been a choppy ride in recent years. A combination of the global economic downturn and fears of terrorism has put a dampener on international travelling, and leisure companies such as hotels and airlines have borne the brunt.
Stuart Fowler, head of UK equities at Axa Investment Management, says a more recent headwind is the weak dollar, which makes it relatively more expensive for US tourists to visit the UK. This puts pressure on British companies that earn the majority of their profits at home, although UK airlines and tour operators' overseas operations benefit.
The high oil price has also increased costs and put the squeeze on margins for airlines. This has put a big dent in the share prices of airline companies such as British Airways. And there has been a bloodbath among the low-cost airlines due to over-capacity, leading easyJet to issue a profits warning.
Nevertheless, there are some good news stories emerging from travel-oriented companies, led by the hotels sector. Hotel industry profitability has been recovering since the summer of 2003 after two dreadful years. Profits at Intercontinental - the world's largest hotel operator by rooms - doubled in the first quarter of 2004. This has contributed to Intercontinental's share price reaching a record high last week. The company, which runs the Holiday Inn and Crowne Plaza chains, has benefited from a pick-up in US economic growth, Mr Fowler says. The pick-up in US occupancy rates is now starting to be felt in the UK and continental Europe, though it is less advanced.
Another positive factor for Intercontinental is that it has a sizeable asset base, owning the freeholds for many of its hotels. During 2003, the group sold some 30 per cent of these hotels, mostly properties where returns have been weak, raising about £1bn, and there will probably be a return of cash to shareholders before long.
But Mr Fowler thinks the excitement may already have happened at Intercontinental, so it is arguably not the time to buy this stock. He expects that the share price is unlikely to make further significant gains in the near future. He is likely to take profits on the shares if there are further gains.
Other key hotel companies in the UK include Hilton Group, which owns the Hilton name outside the US, and Millennium & Copthorne. Hilton's strong performance has been largely driven by its UK betting shop chain, Ladbrokes.
Mervyn Douglas, a UK fund manager at Morley Fund Management, says he does not feel Hilton has the same quality offering as Intercontinental Group. However he likes Millennium & Copthorne for its strong asset base There is potential to follow the industry trend by selling these assets, and if this did occur some cash could be returned to shareholders.
Millennium & Copthorne announced on Thursday that it was back in the black after posting a second-quarter profit, amid recovery in its New York, London and Asian operations. Net income amounted to £11m, compared to a loss of £7.9m a year earlier.
At current share price levels, Stephen Ford, an analyst at the stockbroker Brewin Dolphin, rates Intercontinental, Hilton and Millennium & Copthorne shares all as holds rather than buy opportunities.
Another bright spot among travel-oriented companies has been Carnival, the global cruise operator, whose share price hit a record high early in July. Carnival owns and operates cruise ships, and has a dominant share of the global market, which is likely to grow strongly due to demographic trends towards an ageing population. Barriers to entry are high, so there is little threat of increased competition. A rival cruise operator, Royal Caribbean, has also released strong second-quarter results.
Mr Ford pointed out that, unlike many other travel operators, cruise ships are largely insulated from threats of global terrorism. He said: "The mobility of cruise ships makes it comparatively easy to redeploy ships away from sensitive regions of the world to more politically equable areas. This insulates cruise ships against many of the problems faced by hotels in the aftermath of the 11 September attacks."
Following its recently strong share price performance, Mr Ford rates Carnival as a hold.
It may pay, therefore, to look at stocks that have not performed so brilliantly. Holiday package operators have been struggling for some time.
Leigh Himsworth, a mid-cap fund manager at the broker Rensburg in Leeds, West Yorkshire, says the rise in popularity of the internet means that a growing number of people now prefer to buy flights and hotels separately, rather than opting for a package. "This is a difficult market to be in for these operators, and the only beneficiary has been the consumer," he says.
MyTravel, based in Manchester, is a casualty of the tougher times, having incurred two years of losses. The company, which now has a £1.3bn debt, bought more than a dozen companies in the years prior to the 11 September terrorist attacks nearly three years ago, but has since suffered from the decline in travel demand. It is winding down its services in a bid to reduce costs, but few investors could find a case for investing in this company.
The slimming down of MyTravel is, beneficial for First Choice Holidays, the key remaining UK-listed British tour operator. But Mr Douglas added that First Choice is not immune from the lack of popularity in traditional packaged holidays. "Nevertheless," he said, "First Choice has been on top of this trend. It has replaced much of its business of traditional holiday packages with more specialist offerings, such as adven- ture holidays, trekking and diving. This accounts for more than half the group's profits."
Internet travel agencies are also feeling the pinch. Take ebookers, Europe's largest internet booking agency: it has seen more than 70 per cent wiped off its share price in the last year. Much of those falls came in recent weeks when the company announced that its annual profits were likely to fall short of expectations.
Ironically, strong growth in online sales has lowered gross margins for ebookers. The forecast of lower profits is primarily due to the rapid growth of online sales, which yield lower gross margins than those earned by selling travel offline. Online sales currently earn lower gross margins as they mainly relate to air travel.
The key quoted rival to ebookers is lastminute.com, whose share price has fallen by around 35 per cent over the past year. In May, lastminute.com announced a second-quarter loss of £21.3m due to acquisitions such as Med Hotels and First Option. Lastminute.com has a different business mix to ebookers, by operating right across Europe and also selling car hire and theatre and concert tickets over the internet.
Mr Douglas says he is not a fan of such companies. "I don't believe they have any pricing power. Their role is to sell holidays and flights that are left over, and margins will continue to be squeezed," he says.
Leigh Himsworth, a UK mid-cap fund manager at Rensburg, says that although this company has listed on the market recently, it is a relatively established brand in the UK for adult and children's holiday breaks, offering activities and water sports. He says main activities are covered by transparent domes, so bad weather is not a threat to a good weekend. "Because these weekends are not priced cheaply, the type of person that goes there generally does not mind spending further money," says Mr Himsworth. The one drawback is that with just four parks and 90 per cent occupancy there is little room for growth unless further parks are opened, which is a possibility.
Mr Himsworth says Holidaybreak has taken advantage of the changing nature of holidays. "The Superbreak part of the business has adapted to the fact that people are taking a lot more short breaks," he adds. The company has reduced the length of its hotel vacations to meet customer demand and boost sales.
Meanwhile the camping operation, which has struggled in recent years, is starting to improve. He says camping is a difficult business because people tend to book at the last minute. Last year, amid the heatwave in the UK, people tended to stay at home rather than go to Europe, which hurt the business. Cooler weather until recently this summer means this is less likely to have been an issue this year.
James Rollo, an analyst at Morgan Stanley, says in a research note: "Carnival is the dominant player in a duopoly with high entry barriers, strong demand drivers and high cash generation. We forecast a more favourable balance of supply and demand, leading to an improvement in yields, returns and valuation. "We think 2005 will see historically low capacity growth and a greater focus on cost efficiencies and slowing capital expenditure. These should allow Carnival to generate rapid earnings per share growth, as well as return some of its prodigious cashflow to shareholders. Carnival is our top pick in the sector."
Mervyn Douglas, a UK fund manager at Morley Fund Management, says British Airways offers potential as a holiday recovery story. The share price has been hit due to the high oil price and decline in international travel over recent years, but will rebound when the oil price falls. "The recovery in travel has further to go but there is more potential in those stocks that do not already reflect the optimism," he says.
FIRST CHOICE HOLIDAYS
Jeffrey Harwood, an analyst at Oriel Securities, says in a research note: "Since the end of the Euro 2004 football competition, bookings for the summer 2004 season have increased significantly. The shape of the group has changed significantly in recent years, and the specialist business now accounts for around half of profits. The shares offer a high and increasing dividend yield. Set against the encouraging trend in recent bookings, the share price under-performance looks anomalous, and we have recently upgraded our recommendation to a buy."
Stuart Fowler, head of UK equities at Axa Investment Managers, believes a good way to capture growth in increased travel is through investing in the UK airports operator BAA. "It is difficult to know which airline will be thriving, but you can be pretty sure that they will be using a BAA airport, so this should be beneficial," Mr Fowler says. BAA last week reported that passenger numbers are indeed picking up. The number travelling through Heathrow, Stansted and Gatwick in London, and BAA's other UK regional airports, rose by 9.7 per cent to 36 million in the three months to 30 June. This led to a first-quarter profit increase of 28 per cent.
- 1 Isis 'jihadi bride' claims forced sex with Yazidi girls is never rape because Koran condones it
- 2 Woman accidentally shoots herself in the head while posing for a selfie
- 3 Art Garfunkel: Paul Simon is a 'monster' with a Napoleon complex
- 4 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
- 5 Puerto Rico, island of lost dreams: People are leaving the debt-hit territory in droves as near neighbour Cuba's star rises
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
The day that Britain resigned as a global power
Almost a third of school pupils believe 'Muslims are taking over our country', study claims
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
Gay marriage 'Bert and Ernie' cake bakery found guilty of discrimination in Northern Ireland
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof