Travel & Leisure - Looking for anomalies V – Cream always rises
10 August 2020
It is a world of haves and have-nots. Companies that have put in place the liquidity to trade through Covid-19 will benefit from the problems of those that have not. There is a cluster of winning share prices, mainly gambling companies, and a long tail of laggards. In this note we try to identify winners with further to go and grains of wheat currently languishing with the chaff.
Will online share prices give ground to land-based? Share price performance has been strongest where business is wholly online (Gamesys and 888) or, in the case of Flutter, mainly online and materially exposed to the fledgling US online betting and gaming market. Laggards include William Hill and Rank which have material exposure to venues which have only recently reopened (or, in the case of Rank’s casinos, are yet to reopen). Our top pick is 888 which is trading well, has an attractive geographic diversity and has yet to deliver on its promise of finding a US partner to help release its US potential.
Stop start burns cash
The apparent resurgence in Covid-19 and the removal of Spain from the list of “air bridge” countries will result in further financial pressure on the travel industry, which will increase the number of, and accelerate the timing of, financial failures.
Is it different this time?
Hotel shares have bounced off the bottom. Is this going to be a “normal” hotel cycle, which implies several years to get back to previous profitability? In this case, share price outperformance from here requires either a faster-than-expected recovery or the potential for a higher-than-expected next profit peak in prospect.
Still waiting for the main feature
Cineworld languishes further from its 52 week high than any other of the companies we follow and on that basis it has the most scope to recover and is an option for the “high-risk/high-potential-reward” bucket.
Recovering, but with a terrible hangover
The pub, restaurant, bowling and gym sub-sectors are deeply unloved by investors at present. This is despite returning to operation and profitability, aided by cost reduction and significant Government support. Trading is building and cash flow is improving, competition is falling away, and negotiating power with landlords is stronger than ever. The greatest uncertainty is the potential depth and length of the recession, as this will be heavily dependent on defeating Covid19 and scale and length of Government support.