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Emea Consumer Discretionary Travel and Leisure PDF
Emea Consumer Discretionary Travel and Leisure PDF
lena.thakkar@hsbcib.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
2
EMEA Equity Research
Travel & leisure
July 2012
Sector structure
Travel & leisure
Travel*
Hotels
Leisure
Tour Operators
Bookmakers/
Online Gaming
Cruise Companies
Caterers/
Vouchers
Accor Hotels
Holidaybreak
Carnival
888
Enterprise Inns
Compass
IHG
Kuoni
Royal Caribbean
Bwin.Party
Greene King
Edenred
M&C
Thomas Cook
Ladbrokes
JD Wetherspoon
Sodexo
Whitbread
Tui Travel
Paddy Power
Marston's
Playtec h
Rank
Punc h Taverns
Sportingbet
William Hill
abc
80%
2.6
60%
1.8
40%
1.0
20%
0.2
0%
-0.6
-20%
-1.4
-40%
-2.2
-60%
-3.0
June-88
June-90
June-92
June-94
June-96
June-98
June-00
June-02
June-04
80%
June-06
June-08
June-10
June-12
50
40
60%
30
40%
20
20%
10
0%
0
-10
-20%
-20
-40%
-30
-40
-60%
June-88
June-90
June-92
June-94
June-96
June-98
June-00
June-04
June-06
June-08
June-10
June-12
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June-02
4
EMEA Equity Research
Travel & leisure
July 2012
1 .8
C PG
TT
1 .6
TC G
1 .4
SD X
1 .2
JDW
1 .0
0 .8
ACCP
WTB
0 .6
0 .4
IH G
M AB
G NK
CCL
RC L
M ARS
E D EN
0 .2
0 .0
5 .0 %
1 0. 0%
1 5 .0 %
2 0 .0 %
E B I T m a r g i n (% )
2 5 .0 %
30 . 0 %
35 . 0%
abc
0 .0 %
Sector description
The travel and leisure sector comprises numerous diverse sub-sectors including pubs and restaurants,
hotels, cruise and tour operators, bookmakers and gaming companies, and catering companies. In
addition, there are a several smaller esoteric businesses that do not fit neatly into a specific sub-sector,
such as the fast-food delivery company Dominos Pizza and cinema operator Cineworld. Airlines and bus
and rail operators in this report are categorised under transport.
abc
Lena Thakkar *
Analyst
HSBC Bank Plc
+44 20 7991 3448
lena.thakkar@hsbcib.com
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
and is not registered/ qualified
pursuant to FINRA regulations
Key themes
Discretionary spend
In the travel and leisure sector similarities between companies are more subtle than for companies in
other sectors. Broadly speaking, companies in this sector depend on some form of discretionary
expenditure. When confidence and incomes are high, spending on discretionary items (like eating out or
holidays) is also likely to be strong. Alternatively, during a downturn, confidence falls and consumers cut
discretionary spending. This makes the travel and leisure sector more cyclical than many others.
Long-term growth
Despite this cyclicality, all sub-sectors have in the past exhibited real structural growth, and look likely to
continue to do so over the long term. Travel-related companies such as hotels and tour operators benefit
from GDP growth, globalisation, and political change, which can allow freer movement of people.
Meanwhile, as disposable incomes increase in both developed and emerging markets, there is greater
demand for leisure activities such as eating out, holidays, sporting events and gambling.
Sector drivers
Consumer and business confidence
Quite simply, increasing confidence means greater discretionary spend. We have outlined the nature of
that relationship with regard to consumers above, but it is also worth considering business confidence.
Corporate spending on hotels and catering usually fluctuates with the economy, with rooms and services
being upgraded to premium categories in the good times, but travel restrictions quickly being enforced in
tougher economic conditions.
Input costs
Input costs differ between sub-sectors, although labour is usually one of the highest costs. Other key costs
are food and beverages for hoteliers, pubs and restaurants, and fuel for cruise and tour operators. These
costs ultimately depend on commodity markets, although businesses tend to have long-term contracts
with suppliers in order to reduce volatility.
Sub-sector drivers
Each sub-sector has its own unique structure and is subject to different macro and micro drivers. For
example, the barriers to entry in the cruising industry are high since large sums of capital are required to
acquire a new cruise ship compared to opening a new restaurant. Key themes in each sub-sector include:
Pubs and restaurants
Themes: growth of the eating-out market versus the decline of the drinking-out market; changes in taste
and preferences; freehold versus leasehold sites and property values; managed, leased, tenanted or
franchise-based operating models; a fragmented industry with consolidation potential; input cost inflation;
competition from supermarkets and the off-trade; changes in duty and taxes; and changes in regulation.
Share price drivers: We believe the three key drivers of share price performance are:
Top-line resilience: Eating out remains a priority for UK consumers. With value a key driver, pub
restaurants should continue to grow and take share. This trend should intensify as diners trade down
to cheaper alternatives if disposable income falls.
Consolidation and polarisation: The industry has polarised at the fastest rate in history over the past
few years driven by the managed listed companies. Stronger operators have grown and acquired
smaller operators which have struggled or even gone out of business. The successful players have
larger food-led pubs with scale, geographical reach and experienced management.
Cost outlook: Managed operators have successfully grown their top lines through the recession, but
profits have been slower to rise as margins have not expanded in line with operational gearing levels.
There are two reasons for this: discounting to drive volumes and cost inflation.
Hotels
Themes: penetration of branded hotels versus non-branded hotels; lower growth in developed markets
than in emerging markets; asset-light versus owner-operated business models; recovering demand and
limited new hotel capacity; changes in corporate travel budgets; loyalty schemes; and asset values.
Share price drivers: We believe the three key drivers of share price performance are:
Macro lead indicators: Hotel revenues are driven by corporate and consumer spend. The common
indicator used by commentators to assess the current health of hotel stocks tends to be RevPAR
(revenue per available room). There is a high correlation between RevPAR and GDP, but GDP
moves tend to lag share prices.
Brand strength: Strong brands are vital for RevPAR outperformance, resilient growth pipelines and a
shift to an asset-light model. In a strong market, when occupancy rates are high, consumers are travelling
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and businesses are expanding, all hotels can have the confidence to raise prices. However, in a downturn,
when budgets are tight, the strongest and most reliable brands are the first to get booked.
Emerging markets success: With Western hotels growth reliant on RevPAR recovery and slim net
additions, companies are increasingly focused on emerging markets as the true growth driver where GDP
expansion, as well as tourism and business travel is outstripping the West. Areas of expansion for the
companies are China, India, the Middle East, Africa, Brazil and Thailand/Indonesia.
Cruises
Themes: ship capacity, oil price, currency, ageing population, increasing cruise penetration, new source
Net yields: Cruise companies provide forward capacity numbers and always fill their ships over
100%, so the only unknown is net revenue yield. In general, passengers tend to book cruises well in
advance. Therefore, changes in consumer sentiment can have a lagged effect. Yields are affected by
shocks like maritime accidents, natural disasters, terrorist attacks and financial market panic.
Industry supply: With 8-9% pa supply growth over the past decade, cruise companies have struggled
to gain any pricing power. In the next three years, industry supply growth is planned at c3% pa, much
lower than the last decade, and so pricing may show some improvement.
Oil price and currency: Fuel and currency fluctuations are key drivers of earnings volatility for the
cruise companies. Fuel makes up 15-20% of the cost base for the cruise companies.
Tour operators
Themes: changes in aircraft capacity; growth of independent travel, disintermediation caused by the
internet; changes in booking patterns; growth of low-cost carriers; exchange rates; geo-political risk and
climate change; fuel costs; and changes to excise and duty rates.
Share price drivers: We believe the three key drivers of share price performance are:
UK consumer: UK packaged holidays make up a third of tour operators profit. The UK has been the
most challenging and volatile source market. Future performance will ultimately rely on the
consumer environment.
Structural challenges: Independent and internet travel agencies continue to take share. Packaged
holidays are a commodity product leading to price wars and margin loss in the lates market.
Bid speculation: Tour operators have been subject to bid speculation in the press owing to distressed
valuation and poor operational performance. Share price rallies following such takeover speculation
have been short-lived, with the gains nullified soon after the euphoria settles.
Bookmakers and gambling
Themes: high growth in online versus subdued growth in land-based gambling; changes in tastes and
preference, such as growth in football betting and the decline in horse racing betting; changes to global
regulation, taxes and duties; social acceptance and awareness of gambling.
Share price drivers: We believe the three key drivers share price performance are:
Regulation: Changes in regulation affect the profitability of the gambling industry. Regulation is
mostly in the form of taxes applied to the gaming companies or rules around whether certain forms of
gambling are permitted.
Move to digital: Digital revenue growth is driven by a change in consumer behaviour, launch of new
products and increasing marketing efforts. Many European countries are discussing the approval of
online gaming which will provide a boost to online gaming businesses.
Mergers & acquisitions: Companies derive cost synergies from disposals of overlapping facilities
and software. Established gaming companies can make acquisitions to gain the benefit of successful
proprietary gaming platforms/technologies developed by small companies.
Caterers
Themes: size of overall market and potential growth of outsourcing; penetration levels vary across
industry sectors and regions; cyclical or defensive; types of contract; input costs (food and labour); and
opportunities in facilities management. Revenues are driven by price, volume and net new business.
Share price drivers: We believe the three key drivers of share price performance are:
Employment levels: B&I accounts for a major chunk of the catering outsourcing business. When
businesses cut their workforce, this affects the volume of food sold at company cafeterias. Facilities
managements volume of work is less transient, as it is dependent on clients expanding their offices.
Inflation: Food and wages make up the bulk of the cost structure of food services companies. Food
and wage inflation therefore have a major impact on contract profitability. Inflation also affects the
pricing of new contracts, as well as renewal of existing contracts.
Outsourcing/penetration rate: Outsourcing rates for facilities management are relatively low in all
sectors aside from B&I (Business and Industry) and remote sites. The opportunity is in sectors such
as healthcare and education where penetration remains low. In food services globally only 45-50% of
the business is outsourced and 50% of new business comes from first-time outsourcers.
Valuation
Understandably there is no one valuation methodology that is appropriate to the whole sector. In fact there
is not one methodology that is relevant to all companies within most sub-sectors. For example the pub
industry is mature, and has relatively predictable cash flows; a DCF valuation is often favoured. However,
a DCF fails to consider the asset backing inherent in the freehold pub companies.
Likewise in the hotel industry there are two models the asset-light model tends to attract a higher
multiple as returns on capital are higher, but the capital-intensive model clearly has support from the asset
values, which can often support more debt. We think the most commonly used methodologies are relative
multiple analysis and DCF, with returns-based measures and asset values providing support.
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Accounting issues
Most operators have fairly predictable cash flows since customers pay for their goods and services when
they receive them. Therefore the conversion ratio of operating profit into free cash flows tend to be high,
and this, in most cases, means accounting standards are fairly straightforward.
One issue to be aware of is operating leases, which can be used for property assets such as real estate and
aircrafts. Since these assets are simply leased, the potential full liabilities are not capitalised on the
balance sheet. To compensate for this, a calculation to capitalise the annual lease cost at 8x is often used
or we can use the fixed cover charge, which takes into consideration both interest costs and rent.
Another area to focus on is working capital, particularly for the tour operators as, owing to the seasonal
nature of their businesses, they can see a large swing in working capital from the time cash comes in over
the summer months as customers pay the balance of their holidays, to the low point, usually at the start of
the calendar year, when they pay hoteliers for their allocation of rooms for the previous year.
Hotels sector: growth and profitability
Growth
Sales
EBITDA
EBIT
Net profit
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity (x)
ROE
2010
2011
2012e
2013e
8.6%
22.5%
11.8%
5.9%
7.1%
10.6%
18.2%
23.4%
3.0%
3.7%
2.4%
11.6%
5.8%
7.6%
8.9%
11.3%
23.6%
16.8%
10.2%
24.5%
18.4%
11.7%
24.8%
18.4%
11.9%
25.3%
18.9%
12.3%
9.9%
0.59
0.48
42.7%
12.5%
0.67
0.42
33.0%
13.2%
0.68
0.24
24.7%
12.7%
0.70
0.12
21.8%
2010
2011
2012e
2013e
5.7%
7.4%
8.1%
13.9%
5.6%
8.3%
9.3%
12.2%
4.4%
7.5%
7.4%
5.9%
5.2%
9.4%
9.9%
12.2%
12.7%
10.8%
6.3%
12.7%
10.9%
6.8%
12.7%
10.9%
6.7%
13.0%
11.2%
7.0%
2.7%
1.41
0.18
14.8%
2.7%
1.40
0.17
13.5%
2.6%
1.43
0.24
13.5%
2.4%
1.47
0.20
13.2%
Growth
Sales
EBITDA
EBIT
Net profit
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity (x)
ROE
Note: based on all HSBC food services coverage
Source: Company data, HSBC estimates
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Sector snapshot
Core industry driver: US and Europe consumer confidence
95
May-12
25
May-11
97
May-10
50
May-09
99
May-08
75
May-07
101
May-06
16.8%
40.0%
100
May-05
630
58,888
103
M ay-04
Trading data
5-yr ADTV (GBPm)
Aggregated market cap (GBPm)
Performance since 1 Jan 2000
Absolute*
Relative to MSCI Europe US
Dollar*
3 largest stocks
Correlation (5-year) with MSCI Europe
US Dollar
125
May-03
May-02
May-01
Stock rank
Stocks
1
2
3
4
5
6
7
Compass
IHG
Sodexo
Carnival
Whitbread
Accor
Tui travel
Index weight*
36.6%
13.1%
12.9%
11.3%
10.9%
8.5%
2.2%
150
20x
100
15x
10x
5x
50
Jun-12
Jun-11
Jun-10
Jun-09
Jun-08
Jun-07
2. 6
10
1. 8
1. 0
Jun-12
3. 4
15
Jun-11
4. 2
20
Jun-10
25
Jun-09
5. 0
Jun-08
30
Jun-05
74.2%
21.4%
2.5%
1.9%
Jun-07
UK
France
Greece
Italy
Weights (%)
Jun-06
Country
Jun-06
Jun-05
10