Is now the time to be brave on UK small caps?
This article first appeared in moneymarketing.co.uk on 17th November 2022 Battered by Brexit,...
When the news of successful vaccines first broke just before Christmas, travel and leisure- related companies enjoyed a much-needed boost as it looked likely economies would reopen. But subsequent new variants of the virus, further lockdowns and ‘quarantine hotels’ have seen the share prices of these companies fall again.
While it is too early to lift restrictions, the UK government for one is “optimistic” that people will be able to take summer holidays this year. And, even if the summer is too early, some autumn or winter sun seems not to be entirely unrealistic. So is now the time for investors to look for opportunities in the travel and leisure sector and potentially cash in on a potential recovery?
Simon Brazier, manager of Elite Rated Ninety One UK Alpha fund, says that “travel will be interesting when we come out of this”. He doesn’t see how low cost airlines can’t survive but says transatlantic carriers may struggle if we travel less and business trips are cut as more meetings take place on Zoom in future.
“A European leisure airline is going to recover much faster than one which relies on premium business travel such as IAG (the owner of British Airways, Aer Lingus and Iberia amongst other brands) once lockdowns and travel restrictions are lifted,” he said.
“Families will want their annual holiday, to visit family living abroad. You can’t do those things on Zoom.”
GAM Star Continental European Equity manager Niall Gallagher holds RyanAir, as he believes there will be a strong bounceback in travel demand, and yet a lot of supply has fallen out of the industry and this differential will lead to high margins.
Henry Dixon, manager of Man GLG Income, has similar views. He pointed out that the sector dynamics in 2019 were that you if you had some 100 planes in the air there were 96 people on them and they made £10 per person.
In 2021 this will go to 70 planes with around 86 passengers and therefore much more profit. RynaAir’s new planes are also 30% more efficient because the company has managed the situation well and will therefore have a cost advantage over its peers.
Peter Meany, manager of First Sentier Global Listed Infrastructure, told us this week that international air traffic is down more than 90%. But when it comes to airports, it’s these long-haul passengers that are really valuable.
“They tend to pay a lot more to land at an airport, in terms of passenger charges,” he said. “They also spend a lot more time and money at the airport and that retail component makes a lot of money. So we really need them to return for airports really to recover their earnings in a significant way.”
He told us more about this, as well as railways and roads, in this podcast:
FundCalibre’s Darius McDermott, is cautious about travel shares. “At the moment I’d say many travel and leisure companies should be treated as speculative investments,” he said.
“But share prices won’t wait for everything to be hunky-dory again – they will move early – so some decent money could be made. You just need to pick the right stock.
“On the positive side it is estimated that around 20% of airline capacity will be lost due to COVID long term – potentially forever. And you can’t ‘just’ put planes back in the air. Pilots will need to be reassessed before flying again if they have been furloughed for a long time and planes can’t be built overnight. So supply will be lower and initially pent-up demand could be strong. This will give some companies pricing power.”
“It’s not just travel companies that would get a boost from economies reopening and people moving more freely,” Darius continued. “There are pubs, restaurants, leisure centres, gyms etc which want to reopen. I, for one, will want to go out as soon as I am allowed. So there will be pent up demand here too – it’s just a matter of what will still be there.”
Paul Marriage, co-manager of TM Tellworth UK Smaller Companies owns Gym Group and Hollywood Bowl. He told us, “Anything in the hospitality and leisure industry, as we well know, has been totally taken out by the pandemic and remains in a really horrible place. But both Gym Group and Hollywood Bowl have raised enough capital to secure their balance sheets well into to this year.
“We think that Hollywood Bowl and Gym Group are the strongest players in their industries. So they should come out of this with market share gain, the ability to get the best sites and the best balance sheets.”