Few megatrends are more powerful than middle-class consumption in emerging markets – a boom that has huge implications for Australia’s tourism, education and services sectors.
I have written on this trend many times for The Bull this decade, singling out leisure-related companies in the casino, tourism, property and infrastructure sectors. The growth will take years to play out and the market, as it often does, will underestimate the trend’s duration.
Latest data reinforces my view. Nine million people visited Australia in the year to May 2018, up 6.2 per cent on the same period a year earlier. Put another way, there were another half a million international arrivals to this country in just 12 months.
Chinese arrivals leapt 13 per cent on the year to 1.4 million. Arrivals from India soared almost 20 per cent to 330,000. Southern and Central Asian arrivals were up 22 per cent on the year, albeit off a lower base compared to other parts of Asia.
This is big business. International visitors spent $42.3 billion in Australia in the year to March 2018. At this rate, tourism could overtake mining as the country’s largest export industry after 2030, as more international visitors arrive, staying longer and spending more on each trip.
This growth has sparked media headlines, but it’s the detail in the data that interests me. Sydney is easily Australia’s top tourist destination with 4.1 million international visitors annually. Sydney Opera House, Sydney Harbour Bridge the Blue Mountains (about an hour west of Sydney by car) are Australia’s top three tourist attractions.
I was surprised that the Blue Mountains, beautiful as they are, get about 300,000 more international tourists annually than Queensland’s Gold Coast and almost 600,000 more than the Great Barrier Reef, which has been hurt by coral bleaching.
In absolute terms, Sydney is increasing its lead over other tourist destinations. Long-term portfolio investors who want exposure to Australia’s booming tourism sector must focus on companies that are strongly leveraged to growth in Sydney tourism attractions.
Sydney Airport is the obvious play on this trend. I have written favourably about it several times for The Bull over the past five years, principally because of the monopoly asset’s exposure to rising passenger traffic. Sydney Airport had a total return (assuming dividend reinvestment) of almost 20 per cent over five years to July 2018.
Granted, it is not cheap, has plenty of debt and could lose favour with investors amid expectations of rising interest rates. I still believe the stock is a core portfolio holding for long-term investors given future passenger growth from China and the United States.
Chart 1: Sydney AirportSource: The Bull
SeaLink Travel is another preferred tourism stock. The company’s Captain Cook Cruise Line on Sydney Harbour and in Perth contributes over a quarter of revenue. The rest comes from passenger and freight ferry services in Queensland and South Australia.
I wrote favourably about SeaLink for The Bull in February 2015 at $2.39 a share. It now trades at $4.35, having returned 28 per cent annually over three years. The company came to ASX via a 2013 float at $1.10 a share.
I wrote back then: “(SeaLink) appears to be in a sweet spot. The lower Australian dollar is making local tourism more competitive and helping SeaLink’s NSW and South Australian businesses. Having a big chunk of the business operating out of Circular Quay in Sydney is a great position as international tourists to Australia typically head first to Sydney. Higher numbers to South Australian tourism hotspot Kangaroo Island, which SeaLink services, is another positive.”
My core view on SeaLink is unchanged and I am not alone in seeing unlocked value there. The company received an unsolicited takeover bid in late May at $4.75 a share, which the SeaLink board rejected, saying it undervalued the business.
I’m less enthused by SeaLink’s acquisition this year of Kingfisher Bay Resort Group on Queensland’s Fraser Island for $43 million. The business includes two island resorts, a tour operator and a ferry business. The ferries are good fit with SeaLink, but the rest takes the company from its core business and into tourism property and services.
Nevertheless, investors should back management given SeaLink’s success, and the market liked the deal judging by gains in the company’s share price. Fraser Island is a great eco-tourism experience, but I would have preferred SeaLink to bulk up its Sydney exposure and stick to its passenger and freight ferry operations.
SeaLink is moderately undervalued, based on consensus analyst forecasts. A handful of broking firm that cover the stock (too small to rely on) have an average price target of $4.75.
Another takeover bid for SeaLink at a higher price would not surprise. Sadly, Australia’s tourism industry – one of its most attractive sectors – looks like being increasingly foreign owned.
In the absence of a takeover, SeaLink has solid long-term prospects given the tourism tailwinds. Gains might be slower from here, but it is one of the market’s better-run, higher-quality small-cap companies.
Chart 2: SeaLink Travel GroupSource: The Bull
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• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at July 24, 2018.