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Lost cause or bargain basement: pt 2
In January, we downgraded our estimates 10%, suggested the
sector was priced for only a moderate downturn. We now expect
more share price volatility and see further risk to 2009/10F. We
fear sector share prices could test new lows before any recovery.
Forecasts reflect our heightened macro concerns
In January, we factored in a moderate slowdown in 2008/09; our new estimates
reflect something more severe in 2009/10. We cut our sector EPS for 2009/10F by
16%, and we stand 15% below consensus. Our main EPS downgrades are: RCL,
43%, WTB, 25%, M&B, 23%, and Carnival, 23%, although we lower most by 15% or
more. We leave Compass unchanged, given ongoing efficiency gains, and downgrade
tour operators by only 7% given the gains from industry consolidation.
ABN AMRO view; we could test new lows before the sector troughs
With sector share prices down around 37% since June 2007, several stocks are now,
in theory, starting to look attractive as they stand at a discount to the NPV of our
forecast downturn (2009/10) and subsequent earnings recovery (2011/13).
Nonetheless, this might prove academic for now. While we believe we have seen the
appropriate de-rating of the sector for this point in the cycle (>30%), we still fear
sector share prices could test new lows as consensus earnings, which have barely
changed, begin to fall for 2009/10. As a result, we may be only two-thirds of the way
through the full share price correction despite the more positive academic arguments.
Once the low is reached, it should present the greatest opportunity; stocks on trough
multiples, but on estimates that look more realistic for 2009/10.
Valuation framework; balancing risk and reward
Our valuation ranges capture our concerns of further near-term downside risks (10%
to 20%) as well as upside risks based on the subsequent earnings recovery. Our TPs
are the average of these two scenarios. Our key ideas are: 1) IHG (Buy) - the
business should prove more resilient than appears to be appreciated; 2) Accor (Sell) -
despite beneficial restructuring the stock still looks operationally geared to a
downturn; 3) Tui Travel/Thomas Cook (Buy) - trough multiples, merger synergy, and
tighter supply; 4) Whitbread (Buy) - discounted PE rating and £25m cost savings to
come; 5) RCL (Sell) - high operational/financial gearing could leave it exposed.
Elsewhere in the sector we see either a neutral or negative risk/reward.
Contents
T R A V E L & L E I S U R E 1 8 J U N E 2 0 0 8 2
I N V E S T M E N T V I E W
A darkening outlook for 2009 3
On consensus forecasts, the sector is trading on the same trough PE (9x) as
2001-3. However, given the negative macro data, consensus looks too high to us.
Downside risks may still remain as consensus adjusts downwards.
Sector performance has been dreadful 3
New estimates reflect our macro concerns 4
New fair value ranges and target prices 8
New recommendations 9
Some observations 10
C O M P A N Y P R O F I L E S
Hotels 22
Accor 22
InterContinental Hotels 28
Whitbread 34
Catering 40
Compass Group 40
Travel 46
Carnival plc 46
Royal Caribbean Cruises 52
Thomas Cook 58
TUI Travel PLC 64
Pubs 70
Enterprise Inns 70
Greene King 76
JD Wetherspoon 82
Marstons 88
Mitchells & Butlers 94
Punch Taverns 100
Gambling 106
Ladbrokes 106
Rank Group 112
William Hill 118
I N V E S T M E N T V I E W
T R A V E L & L E I S U R E 1 8 J U N E 2 0 0 8 3
A darkening outlook for 2009
On consensus forecasts, the sector is trading on the same trough PE (9x) as
2001-3. However, given the negative macro data, consensus looks too high
to us. Downside risks may still remain as consensus adjusts downwards.
Sector performance has been dreadful
Since the end of June 2007, the sector has fallen 36% and has underperformed the
market by 26%. Over this time, the worst stock performers in our coverage universe
have been Mitchells & Butlers (-73%), Punch Taverns (-66%), Rank Group (-57%)
and JD Wetherspoon (-56%).
New estimates reflect our macro concerns
In January 2008, we downgraded our sector forecasts for 2008/09/10 by 10% on
average. At the time, we felt this was consistent with our view that a moderate
economic slowdown was likely to unfold progressively during 2008.
Since then, trading for many companies under our coverage has remained reasonably
strong as positive tailwinds from 2007 have spilled into 1H08.
■ Hotel trading (measured by RevPar) has held up well in London, Paris, other
European cities and Asia Pac, all of which have shown good numbers. Even North
America, which has weakened, has not been too bad.
■ The tour operators are seeing above-trend pricing power (5%+) as the benefits of
industry consolidation (from four large players to two) come through.
■ Cruise yields (pricing) at +3% are above recent trend growth (2006-07; +1%).
■ Betting operators are seeing 3-5% lfl gross win growth indicating little sign of
consumer weakness.
■ Contract caterers are reporting at least 3% lfl sales growth (mainly price).
■ Only pub companies are showing trading weakness, but this is complicated by the
affects of the smoking ban in England and Wales. These companies are optimistic
that trading will improve after the first anniversary of the ban in July.
So, the message from most companies under our coverage is that they are not
seeing the impact of a broad-based consumer/business slowdown, yet.
However, it is our view that this might prove a timing issue. We find it hard to believe
that demand (volume or price) from the business and/or leisure consumer will not
reduce over the next 12 months; western GDP trends are slowing, business activity is
softening, the credit cycle has turned, and consumer balance sheets are in many
cases over-leveraged (particularly in the UK). We, therefore, believe that a period of
slower demand is likely. Combine this with above-trend input cost inflation, some
fixed-cost operational gearing and balance-sheet leverage and we feel justified in
being worried about the outlook for sector earnings in 2009/10.
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