Setting the scene
Compared to previous decades, it is fair to say that the developed markets are now in a low growth environment, with GDP growth still struggling to reach pre-crisis highs amidst a collapse in productivity. This backdrop therefore places a premium on higher growth structural trends which, as active investors, we look for and try and take advantage of. One of the most common of these in recent years has been finding companies with significant emerging markets exposure, as they are able to benefit from the increasing incomes and growth rates in countries such as China and India. Well-known beneficiaries of this theme include luxury goods companies such as Burberry in the UK, LVMH in Europe and Tiffany & Co in the US. However, many of these stocks have long-traded on premium valuations.
The travel industry
A sub-sector that has not enjoyed the same spotlight has been the global travel industry, yet it is an area that has been delivering substantially above-average growth for some time now. For example, data from the International Air Transport Association (IATA) shows that air travel has grown by 10.7% year-on-year, with India the fastest growing domestic market. However, it is not just an emerging market play. Globally, travel and tourism has outpaced the global economy in each of the last six calendar years whilst, in total, it represents 10.2% of global GDP and is home to 292 million employees. Importantly, it is also forecast to grow 3.9% per year over the next decade.* This compares to overall GDP growth of 2.8% per annum.**
There are a number of factors behind this growth profile, which lead us to believe that it is sustainable for years to come. For example, an ageing population, a change in leisure and working patterns and technological advances all support growth in the travel and leisure industry. Furthermore, there has been a significant increase in consumers preferring ‘experiences’ over ‘things’, with many reports highlighting how content segments of the population are with their material belongings. This has resulted in the consumer demand to travel amongst millennials, baby boomers and the emerging markets to surge. Further, this is being supported by a significant increase in airline capital expenditure. Research from Redburn Partners highlights that airline capacity is forecast to grow by 5.5% over the next ten years for short-haul flights in particular. This is versus the ten-year average capacity growth of 2.4%.***
Demand & supply
We are seeing evidence of this robust demand in the UK, despite some nearer-term concerns over consumer spending. The latest Q2 2017 report from Barclaycard shows that spending on travel has risen by 8.9% over the last year; with online spend up even more at 17.8%. In our view this is further evidence that the travel industry is enjoying supportive demand and supply dynamics, which are combining to provide a sustainable, long-term premium growth story. We also believe we have identified a number of undervalued companies set to benefit from this theme, which are not typically deemed to be ‘travel’ stocks.
One of our favoured picks at present is WH Smith, which many investors consider to be a pure UK high street play. However, it is the travel section of the business that is the most exciting, with 768 units currently operating in airports, railway stations and other locations. Importantly, 2016 saw 29 new international units added, with a further 40 committed contracts in the pipeline. This included big wins in Singapore’s Changi Airport, the retention of their Melbourne operations and further wins in Athens and Helsinki.
The reason we believe that WH Smith have been so successful in the travel space – particularly when compared to competitors such as Relay (a subsidiary of the French group, Lagardere) – is their experience from managing the traditional high street stores with local nous. This enables management to eschew standard retail formats and design stores and layouts to optimise local factors. This saw profit within the travel division rise by 9% last year, with sales increasing by £52m, and we expect continued healthy growth to be reported in the years ahead. In our opinion, the potential of the travel business is being under-appreciated by the market, which has led to WH Smith trading on a highly attractive valuation. At a significant discount to the wider Travel & Leisure sector and with a supportive dividend yield of 2.6%, we believe there is plenty of further upside to come.
Another stock we have exposure to is SSP Group, the global food travel group. SSP own brands such as Upper Crust and Ritazza in the UK and also franchise numerous international brands including Burger King, Starbucks and Yo! Sushi across various international locations. Led by former WH Smith executive Kate Swann, the company have performed strongly in recent years, which has been reflected in their excellent share price appreciation since their IPO in October 2014 at 210p, which we participated in. However, we believe the management team can continue to deliver value, particularly through margin improvement. For example, previously SSP had too many suppliers and different sizes of orange juice alone. Simplifying supply chains can therefore play a big part in improving profitability further in the future.
The wider travel and leisure sector – much like the aforementioned luxury goods sector – has handsomely outperformed the FTSE All-Share Index over the last ten years. Much of this has been down to the hotels sub-sector, which data from Liberum shows has outperformed the wider benchmark by 185% over this timeframe. We believe there is significant investment potential, particularly through stocks like WH Smith, with its under-appreciated travel franchises.
*Source: World Travel & Tourism Council, data correct as at 31 July 2017.
**Source: OECD long-term GDP forecasts, June 2017.
***Source: Redburn Partners, "Airlines: Doors to Manual", 14 October 2016.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. The content of this article is not intended as investment advice.
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