Famed US investor Peter Lynch said the best investment research tools were one’s eyes and ears. On that basis, it is hard to miss the scores of Chinese tourists in Sydney’s Circular Quay or Melbourne’s CBD, or the growing number of Chinese bidders at auctions in capital cities.
The coming boom in Asian consumption is more evident by the day. Another 2 billion Asians are expected to join the global middle class by 2030, a sixfold increase on 2009, the OECD forecasts. This brilliant trend will reshape global industries and markets.
Australian tourism should be a big winner. There were 7.1 million visitor arrivals in Australia in the year to May 2015, a 6.3 per cent rise on the previous year, Tourism Australia data shows. Chinese visitors rose almost 21 per cent this calendar year alone.
Visitor arrivals from India jumped 21 per cent in the year to May, and there was strong growth from several South East Asian countries. The data shows a clear trend: visitations from stgeloped countries are mostly low or negative; those from emerging market are booming.
Imagine what will happen if our dollar falls to US60 cents in the next 18 months as China slows and commodity prices find new lows. Australian tourism will become more competitive against many rival destinations, and capitalise on the boom in Asian arrivals.
The trend, of course, is well known in the market and several tourism stocks have rallied in the past two years in anticipation of stronger Asian demand. The trick is buying high-quality tourism companies during sell-offs, or when unexpected events, such as a bad patch of weather, crunch earnings and a nervous market dumps the stock.
Passenger ferry and travel cruise operator SeaLink Travel Group is an example. I analysed SeaLink for The Bull in February at $2.39 a share. It rallied to a 52-week high of $2.66, but has fallen to $2.15 amid market concerns that bad weather in New South Wales in April and May affected SeaLink services and will dampen its full-year earnings.
SeaLink did not provide earnings guidance in its interim result in February and has not released details on the effect of the weather to the market.
Chart 1: Sea Link Travel Group
Source: Yahoo Finance
Four analysts that cover the company have a buy or strong buy recommendation, according to consensus analysts forecast, and the median share-price target is $2.52. Expect those targets to edge lower if SeaLink’s full-year earnings disappoint, but at $2.15 there is upside over 12 months.
SeaLink would look a lot more interesting below $2. Unusual weather events, an occupational hazard in tourism, can crunch earnings, but at least they are (reasonably) non-recurring. They are better than significant operational or performance issues from poor management and strategy, or rising competition and falling margins.
Longer term, SeaLink is among the higher-quality small-cap companies and a standout beneficiary of the Asian tourism trend, given its operations are centred on Sydney Harbour – a magnet for international visitors and often their first destination in Australia.
Another favoured tourism stock, Ardent Leisure Group, has also fallen. A $2.34 share price compares with a 52-week high of $3.49.
Chart 2: Ardent Leisure Group
Source: Yahoo Finance
Ardent owns the Main Event family entertainment business in the US, an increasingly larger part of the business; health clubs; bowling alleys; Gold Coast theme parks; and marinas. More than 17 million visitors use its products annually.
The Main Event business is booming and the bowling alley earnings were slightly higher in the third quarter. The marina and theme park earnings fell slightly and the health clubs were crunched, amid rising competition and falling profit margins in the gym sector.
The unexpected retirement of longstanding CEO Greg Shaw in March and appointment of Deborah Thomas, a publishing executive, shocked the market and triggered heavy selling. Thomas might prove to be an excellent CEO, but Ardent’s communication of succession planning annoyed some institutional investors who do not like sudden management change, or left-field CEO appointments.
The key question, of course, is price. Three analysts who cover Ardent have a buy recommendation and seven have a hold. The median price target of $2.36 is in line with the share price. Ardent looks fairly valued, for now.
I like the prospects for Main Event, a terrific concept that combines casual dining with entertainment concepts and is catching on with US families. More store openings and higher revenue per store bode well for Main Event’s long-term growth.
Most other divisions are lacklustre, and until clearer signs of earning growth emerge, it is hard to see a sustained share-price rally. A recovery will take time and Ardent needs to restore market confidence after management changes. Nevertheless, Ardent is getting closer to a buy; Macquarie Equities Research and Morningstar value it around $2.40 a share.
Ardent deserves a spot on portfolio watchlists in anticipation of continued strong growth from Main Event, a pick-up in the theme parks as Asian tourism increases, and in the medium term, an improved performance from the health clubs as the 24/7 gym opening-hour concept attracts more members and reduces churn. A lower Australian dollar would be another tailwind.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at July 30, 2014.