Investment firm Forsyth Barr has picked the tourism business it believes will do best from the sector’s recovery. The firm also identifies the business tipped to underperform.
In an outlook report, analysts say tourism is slowly rebuilding following the pandemic, the industry’s biggest black swan event since WWII.
They say there will be a full recovery, probably in 2024, despite cyclical headwinds that are affecting key markets where New Zealand’s tourists come from.
Visitor arrivals are now back to about 75 per cent of 2019 levels and will reach 100 per cent next year as airline capacity constraints ease.
The analysts - Andy Bowley, Mark Robertson and Paul Koraua - say the tourism industry’s profitability remains below pre-Covid levels, but financial outcomes differ between operators. Tourism Holdings (THL) appears to be the best-placed.
When Forsyth Barr published its last Tourism Outlook report in early March 2020, the industry was falling away rapidly.
“Our worst-case scenario at the time played out,” the firm says. “It’s been a tough few years.”
Most operators survived, but about a third of the pre-pandemic workforce left the industry.
Since New Zealand’s borders reopened in 2022, the recovery for some has been boosted by a big change in pricing and yields, particularly in segments with constrained capacity, including aviation and RV rentals.
“While some of this will ultimately be competed away as capacity normalises, inflationary pressure suggests not all.”
At the trough in late March 2020, tourism-exposed companies covered by Forsyth Barr (Air NZ, Auckland International Airport, SkyCity Entertainment Group and Tourism Holdings) had lost more than $9b of combined value from their pre-pandemic peak.
Most of that has since been recovered - with some help from two very large equity raises by the airport and the airline, they say.
“Investor behaviour has been heavily influenced by both sentiment and fundamentals to varying degrees through this period. Registers have been rewritten, industry structures redrawn, and investment cases revisited.”
Emerging from the pandemic, the firm’s top pick in the sector is THL.
It stands out thanks to the way in which it consolidated its position through mergers and acquisitions during the pandemic, with “meaningful integration benefits still to come”. Its balance sheet hasn’t required an equity raise, constrained RV numbers will help rental yields stay higher for longer, and the company’s likely earnings per share are attractive (sub-11 times) for the next year.
In picking Tourism Holdings, the analysts also cite potential upside from the integration of Australia’s Apollo Tourism and Leisure, which was merged with THL last year.
They say increasing air connections will continue to drive a recovery in the earnings of tourism stocks, with the exception of Air NZ, which faces increasing competition on what are currently high-yielding routes.
Both Air NZ and Auckland Airport are held back by their respective equity issuance to support their balance sheets during Covid.
The analysts say SkyCity has exhibited the most defensive characteristics.
Overall, the tourism sector’s aggregate enterprise value is now just around 4 per cent lower than its peak in November 2019, having fallen by 42 per cent at the depths of Covid.
The analysts identify Tourism Holdings as the star performer, helped by its industry consolidation move in acquiring Apollo. At the other end of the spectrum, they say, are Air NZ (its capital employed has fallen by a similar amount) and SkyCity - facing regulatory challenges in South Australia which could potentially spill over to New Zealand.
Auckland Airport: Underperform
It has endured a slower profit recovery than other tourism-exposed companies given its reliance on volume rather than value. However, an anticipated significant uplift in aeronautical pricing from the next financial year and a single operator duty-free concession in the following year leaves the medium-term earnings outlook very favourable in comparison with pre-Covid levels. “We believe this is more than priced into the current share price.”
Air NZ: Neutral
Elevated passenger yields have more than compensated for constrained capacity. In recent months, the airline’s passenger revenue has been “consistently higher” than before the pandemic. This is partly offset by lower cargo revenue, given weaker airfreight volumes and rates. Notwithstanding cyclical challenges (negatively impacting demand but which may help oil prices continue to trend lower) the analysts expect revenue to remain above pre-Covid levels for the foreseeable future, given the cost inflation affecting the wider industry.
SkyCity: Neutral
Among the companies reviewed, this is the least-exposed to tourism. But domestic and international tourism (VIP players) will probably remain an important part of casino operations in future, particularly later on as flight connections with Asia improve and the Auckland convention centre finally opens in early 2025.
Tourism Holdings: Outperform
Record rental yields and vehicle sales margins have more than compensated for a significantly smaller fleet to drive a rapid recovery in earnings to pre-Covid levels in the current financial year. Management has suggested that rental yields are still likely to climb further over the near term, particularly in New Zealand, while vehicle sales margins are now softening in all markets.
The report stresses that any recommendations or opinions don’t take account of an individual’s financial situation and says personal advice is available.
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