In our latest video Chief Investment Officer, Steve Johnson, talks to Australian Shares Fund senior analyst Alex Shevelev about tourism stocks. Despite the ongoing disruption, many tourism stocks are trading back at pre-COVID levels. Find out why recreational vehicle owner Tourism Holdings Limited (NZX:THL) and skydive and great barrier reef experience operator Experience Co (ASX:EXP) will come out of the pandemic stronger than they went in.
Hi everyone and welcome, it’s Steve Johnson here, Chief Investment Officer at Forager Funds. Today we’re talking travel stocks with Alex Shevelev from our Australian Fund. We own travel stocks in both of our portfolios, International and Australian and across both of them businesses like SkyWest, Wizz Air, and in our Australian Fund Tourism Holdings and Experience Co. are all trading back to where they were pre-COVID, yet you still see some opportunities in the space.
That’s right. The two stocks that we hold predominantly in the Australian Fund, THL (Tourism Holdings) and Experience Co., had very interesting stock specific factors leading into COVID. So for Experience Co. we had a management team that went on an acquisition spree in far north Queensland. A lot of those investments have had to be curtailed by the current management team, and they’ve really got the business in good shape. For THL one of the issues around their share price collapse, pre-COVID was the US business was unable to sell the vehicles at quite the prices that they wanted because of an oversupply of vehicles.
So for THL COVID has really been a boom in that respect. A lot of people had sought second hand vehicles in the US and that market really cleared up and that should allow them to deliver better earnings than people were expecting prior to this on a recovery. And for Experience Co. new management has really cleaned the business up, and so again, they’ve got a focused plan and a strategy to recover again to earnings that were higher than pre-COVID.
I think one of the things people are not thinking enough about here is the lack of supply as demand starts to recover. We tried to hire a car on the Easter weekend, down in Tasmania, and there was not one available and that’s a global phenomenon at the moment. A lot of the hire car companies have sold all of their stock and now don’t have enough to rent out. So I think the supply side is really important. You’ll see that with airlines in Australia as well. What’s your expectation around demand recovery? It feels to me like Australia being one of the better performing economies in the world through this COVID has the most to lose from international tourism and may be the last to recover.
We’re talking at the moment about domestic having recovered, the first stage is international coming through, so that is the Australian-New Zealand travel bubble. And then the third piece of that is more general international travel. Now that third piece is the one that we’ve sort of oscillated around. Vaccine rollouts will be an impact here. The willingness of travellers to come to Australia will be a factor, but really that should start to restart sometime in 2022 and should give those businesses a cleaner 2023 financial year.
This trans-Tasman bubble, it should be more of a positive for THL being very significant in New Zealand. They’ll get a lot of Aussie tourists. It’s the largest weighting of the travel stocks in our portfolio. Is it your favourite on a valuation basis?
It is, I think THL has a business which has delivered very strong returns on capital. It has an excellent management team. And the business is really primed to actually take share and to recover better to better levels of earnings then it was expected prior because of those factors, because they’ve really taken advantage of the downturn.
We’re expecting you will see a lot of that in the travel space. As demand comes back, the businesses that have been able to right size and strengthen their businesses through this crisis will be making more money than people are currently anticipating. Lots of the share prices are already up, but we’re still anticipating some strong returns out of our tourism holdings over the next couple of years.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.