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Are Investors Happy to have Travel Stocks Back in Portfolio; Glance at REX, VAH, QAN

  • May 15, 2020 09:55 PM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2356 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Are Investors Happy to have Travel Stocks Back in Portfolio; Glance at REX, VAH, QAN

Income from the travel and tourism sector plays a significant role in the development of an economy. Over the span of last few years, the sector experienced a decent growth and made significant contributions, owing to factors such as growing business travel, overseas education programs, and tourism deemed to be more of a need than a want.

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Currently, the COVID-19 pandemic has severely disrupted the industry, owing to government-led restrictions on non-essential activities in order to contain the spread of virus. As normalcy is awaited in the upcoming period, with Prime Minister Scott John Morrison announcing a three-step plan to gradually re-open a COVID-safe Australia and the economy, travel sector players are also expected to re-pick up the momentum.

In this backdrop, let us now discuss three travel sector companies with their recent updates.

Regional Express (ASX:REX)

Australia’s largest independent regional airline, Regional Express (ASX:REX) recently stated that a number of parties have approached the Company to provide equity required for commencing domestic operations in the country. The preliminary estimate of equity required is in the ambit of $200 million.

The Board is in discussions with potential equity partners while exploring the feasibility of this endeavour, targeted towards extending operations to establish regional services and domestic operations. A decision regarding whether to proceed is antiicpated within the next 8-week period, and if executed, domestic operations would commence on 1 March 2021.

The Company, in April 2020, inked a Commonwealth Grant Agreement under the Australian Government’s COVID-19 Regional Airline Network Support (RANS) program, designed to provide assistance to regional airline carriers to maintain a minimal weekly schedule to regional and remote ports.

A strong airline with no debt, REX is perhaps only one of five airlines worldwide, that managed to maintain uninterrupted profits since 2003 despite global economic and environmental shocks such as wars and drought, according to a Company statement in mid-March 2020.

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At the close of trading session on 15th May 2020, stock of REX settled at $1.100 per share, indicating a rise of 0.457% against its previous closing price. The market capitalisation of Regional Express stood at $120.62 million while the stock has provided shareholders with a return of 58.70% in the last one-month period.

Virgin Australia Holdings Limited (ASX:VAH)

For domestic and international airline business, Virgin Australia Holdings Limited (ASX:VAH), S&P Global Ratings recently slashed its issuer credit rating from 'CC' to 'D'. This indicates the moratorium on all creditor payments while the Company is in voluntary administration. S&P has also lowered its related issue ratings on the unsecured debt to 'D' from 'C'.

At the end of April 2020, the Company’s administrator, Deloitte Restructuring Services held the first virtual meeting of creditors, leading to the appointment of a Committee of Inspection. The administrator is working towards plan to restructure and refinance the business to retain jobs and the airline’s contribution to Australia and its economy while seeking interested parties for a sale, following its appointment in April.

While a large number of parties have expressed their interest, VAH continues to operate during the voluntary administration process undertaking federal government-supported international flights and contracted domestic charter flights.

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Response to COVID-19: The Company, in March 2020, announced to have rolled out several steps in response to the COVID-19 impacts, including

  • VAH extended domestic capacity reductions to 90% from 50% and temporarily grounded 125 aircraft.
  • It has retained 10% domestic capacity for transportation of critical freight, logistics and essential services.
  • The Company reviewed its cost base, as there was weakness in travel demand due to COVID-19. VAH has undertaken initiatives for reducing its expenses, which include pausing key supplier agreements and further reducing its domestic and short-haul businesses.

Decline in First Half Profit: During 1H FY20, VAH reported underlying profit before tax amounting to $14.5 million, reflecting a drop of 87% over pcp due to higher costs for fuel, enterprise agreement labour, airports, and depreciation and rental costs. In spite of weak market conditions, revenue for the period went up by $46.8 million compared to pcp with 2.5% RASK improvement.

Stock of VAH last traded at $0.086 per share on 9th April 2020, providing shareholders with a return of 7.50% and -40.69% within the time span of one month and three months, respectively.

Qantas Airways Limited (ASX: QAN)

International and domestic air transportation services provider, Qantas Airways Limited (ASX: QAN) is also engaged in providing sales and support services concerning worldwide and domestic holiday tours. The Company recently announced continuing the practice of cementing its ability to address sshort-term impacts as well as expected impacts in the long run due to COVID-19.

Sufficient liquidity to respond to a range of recovery scenarios -

  • The Company has secured additional funding of $550 million by pledging its 3 Boeing 787-9 aircraft (wholly owned). In March, $1.05 was billion raised against 7 aircraft.
  • Net debt position stood at $5.8 billion, which is currently within the middle of the target range.
  • QAN has no financial covenants on any debt facilities whether existing or new.
  • Moreover, there are no debt maturities till June 2021.
  • $3.5 billion short-term liquidity entails an undrawn facility of $1 billion, as at 4th May 2020.
  • Unencumbered aircraft assets worth $2.7 billion

At the close of trading session on 14th May 2020, stock of QAN settled at $3.350 per share, indicating an increase of 0.601% against its previous closing price. The market capitalisation of Qantas stood at $4.96 billion with the stock providing shareholders with a return of -9.51% and -48.21% within the time span of one month and three months, respectively.

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