Whilst you might think that I’m mad to even be looking at the travel sector at the current time, I believe that often the fear of what might happen outweighs the actual reality, and often things don’t turn out as badly as people thought they might – the commodities sector during the first half of 2020 being a good example! Unless you are of the opinion that overseas holidays have gone for good and will never return to anywhere close to pre-pandemic levels, then I would argue that as long as these companies are able to avoid going bust - many have already refinanced their balance sheets - then many of them will once again do well in the future, if they had business models that previously performed well. The markets have recently taken a bit of a slide over concerns that we may not be exiting the pandemic as quickly as we thought, as well as that the vaccines possibly won’t provide as much protection against some Covid-19 strains as was previously expected but at the same time many countries have really stepped up their vaccination rates and are starting to see the benefits of that, certainly when you look at hospitalisations and deaths, as compared to what we have previously seen when cases have reached current levels. We are also starting to see cooperation between countries in terms of allowing fully vaccinated travellers in, often without any need to isolate or even produce a negative test, in some cases. That should certainly help persuade people to resume travelling, and although many are still wary due to the constant changing of the rules, as long as this continues to head in the right direction, I believe that we will gradually start to see people travelling again – especially once the novelty of a holiday in their home country wears off.
A lot of this comes down to personal opinion and future expectations for foreign travel, and if you don’t believe in it then it probably isn’t worth reading further, and you should really be heavily shorting any airline or travel stocks, as in that scenario they would all eventually go bust anyway. If you share my view though, and also think that governments still see the industry as being important - some countries are almost totally reliant on foreign tourists - then it could well be worth taking advantage of the recent big drops we’ve seen on these stocks, even if guessing the actual bottom, where fear turns to greed, is almost impossible to predict. As is the future when it comes to Covid, and it is worth remembering that there is still a risk of a strain coming along that the vaccines aren’t effective against – but as we saw this week, that would likely cause the whole market to meltdown anyway, not just the travel sector, and the only way to avoid that is to sit on cash. One company which I still believe will emerge from Covid and will perform well in the coming years is Saga (SAGA), and which was trading at around the 450p level less than a month ago before collapsing to its current share price of below 340p and a market cap of circa £450 million.
It is worth remembering with this one that although it has a large holiday business and has been badly hit – the travel business made a loss of £78.5 million in 2020, compared to a profit of £19.8 million the previous year – it is also involved with insurance broking and underwriting. That part of the business was actually pretty robust last year and was even slightly up on the previous year, generating revenue of over £134 million and helping the company to an underlying pre-tax profit of £17.1 million. Impairments and one-off restructuring costs resulted in a net post-tax loss of £67.8 million though. There is little point worrying too much about the 2020 financial performance though (or even that during 2021) as it is not reflective of what we would see during a normal years and doesn’t really give a good idea of where the business might go in future years, if and when everything returns to normal, or near normal. What is important though is knowing that the business is actually able to survive until we hopefully reach that return to normality. In the case of Saga, it has just issued £250 million worth of 5.5% 2026 bonds, with the proceeds from that being used to repay a £70 million term loan, as well as the early settlement of £100 million worth of 2024 3.375% notes. Now obviously I understand that it isn’t great that the debt of the company has just become more expensive as a result of this, but what it has done is to buy the company more time with a longer due date, as well as also providing the working capital it needs and which ensures that it remains within its banking covenants (also relaxed earlier this year, with the proviso that the company maintains minimum liquidity of £40 million) up until July 2022 when it expects to return to a more reasonable 3x leverage ratio.
That debt excludes the money owed on its cruise ships, Spirit of Discovery and Spirit of Adventure, which totalled £515 million at the end of 2020 and payments on which are currently being deferred under an industry wide scheme to help cruise providers. Around £280 million of that was drawn down last September to finance Spirit of Adventure, which is its new ship, and whilst you could argue that maybe wasn’t the wisest thing to do at the time, the company was probably looking towards the future and the fact that the loan is repayable over 12 years. Obviously debt here is high, and has risen during Covid, but I’ve no reason to believe that the company won’t be able to deal with that once things return to normality and I see the potential for a strong business in the future. I also find it encouraging that the last year the son of the founder, Sir Roger De Haan, invested £100 million into the company, so that is a lot of incentive for him to make the business a success, in his role as chairman. Even allowing for the rise in the shares since I started penning this article, I can still see plenty of value here longer term and suspect that a few per cent either way on your buy in price ultimately won’t make a lot of difference, and suspect that it will remain volatile. There is every chance that with patience you may well get in a bit cheaper, but you do run the risk of the market deciding that the recent drop across the travel sector was overdone and at least some sort of bounce back is justified. In the shorter term the share price here will be very much driven by the virus and sentiment, and will swing around as news emerges – be that positive news on travel becoming easier, or something negative such as talk of lockdowns or the vaccines not being as effective as first thought. But that is the gamble here - and with the market in general at the moment - and there is far more uncertainty about the future than we usually encounter, so all you can do is buy (or sell) on the basis of the currently available information, and be prepared to react if there are any major changes to your expectations.
Filed under: Saga, Frontera, Ron Pilbeam, Predator Oil & Gas, LoopUp, [email protected] Capital, IDE Group
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