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Tour operators, airlines and transport hub retailers are looking sharp
Thursday 15 Dec 2016 Author: Daniel Coatsworth

Travel-related stocks are starting to look interesting as nearly all UK-listed tour operators and package holiday groups have reported good financial results over the past few months, despite tough market conditions.

The outlook is also good with favourable comments on trading from many parts of the sector.

Our top picks are online booking platform On The Beach (OTB) and low-cost airline Wizz Air (WIZZ).

From a valuation perspective, we are attracted to Thomas Cook (TCG) and International Consolidated Airlines (IAG). The former has a price to earnings (PE) ratio of 8.8 and the latter trades on a PE of 6.4, both based on current financial year earnings forecasts.

Cocktails and sun loungers

On The Beach achieved 47% pre-tax profit growth in the year to September 2016 to £21.3m. Numis forecasts this will rise to £27m in 2017 and £35.2m in 2018.

Earnings growth over the past 10 years has been almost exclusively organic.

Having made its first move into international markets with the launch of operations in Sweden in 2015, On The Beach is now expanding into Norway.

Positive signs

Thomas Cook is 61% sold for its winter season with bookings from UK customers up 2% and average selling prices up 1%. Jet2-owner Dart (DTG:AIM) and TUI (TUI) both say winter sales are in line with expectations. Early indications for summer 2017 sales are good from both Thomas Cook and TUI.

Wizz Air trades on a slight discount to EasyJet (EZJ) and Ryanair (RYA) yet it has proved that it can make a profit on low-fare flights. Pre-tax profit is forecast to double between 2015 and 2019.

It has less UK exposure than peers and more exposure to Central and Eastern European markets. Panmure Gordon analyst Mark Irvine-Fortescue says Wizz Air’s low-cost model is an ideal fit for the latter territory.

‘The market is fragmented and often poorly served by (sometimes state backed) legacy carriers; the point-to-point network enables multiple connections; and there is a strong consumer culture of value.’

The analyst has ‘sell’ ratings on EasyJet, TUI and Thomas Cook, saying the market is underestimating a more challenging outlook for these companies.

Ryanair recently launched a package holiday service to directly compete against tour operators. It is likely to undercut rivals by offering rooms at hotels across Europe with the cheapest flight seats. EasyJet has tried this tactic in the past with limited success.

Market beneficiaries

Two stocks to benefit from strong activity in the travel market are WH Smith (SMWH) and SSP (SSPG). Shares has ‘buy’ ratings on both stocks.

Magazines-to-snacks seller WH Smith enjoys higher margins in its shops situated in airports and train stations than it does on the high street. SSP has multiple franchises to run food and drink outlets in travel hubs under such brands as Starbucks, Burger King and Yo! Sushi. (DC)

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