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Pandemic fears hammer travel and tourism stocks

Hong Kong stocks fell less than 1 per cent, making Australia the worst-performing market in Asia on Wednesday.

Garth Rossler, chief investment officer at Maple-Brown Abbott, said there was no doubt the local sharemarket had room to fall further.

Garth Rossler says valuations are still elevated on a historical basis irrespective of the coronavirus.  Louise Kennerley

“The problem with corona is nobody knows. The numbers in China seem to be through the worst, but cases are picking up outside China. The market’s had a hell of a run.

“It’s not even priced for anywhere near a worst-case corona scenario. When you’ve got the industrial sector trading at 25 times earnings, that’s priced for perfection. I’m not saying it’s going to get dramatically worse, but it could.”

National carrier Qantas expects to take a $100 million to $150 million bottom-line hit from the virus over the second half of financial 2020 based on an assumption that Asian travel capacity will fall by 15 per cent.

It has suspended its Sydney to Shanghai service until the end of May at a minimum, and warned that the government’s ban on international arrivals travelling through China had created flow-on demand weakness for flights from Hong Kong, Singapore, and to a lesser extent Japan.

Rival carrier Virgin Australia plans to axe its Sydney or Melbourne to Hong Kong services indefinitely in response to the fall in demand on account of the virus and civil unrest.

The virus’ spread to South Korea, Italy and the Middle East elevated the chances of inbound travel bans from countries other than China, RBC Capital Markets said.

The analysts had assumed that a 30 per cent drop in tourism revenue from China over 2020 would shave 0.1 per cent off GDP, but now cautioned that those estimates could be too conservative as the virus spread to 35 countries.

Melinda White says the travel, education, and tourism sectors are under particular fire from the coronavirus.  

Virgin also warned that it was reporting more cancellations and reduced bookings on all international routes including the Trans-Tasman. Its budget and leisure-focused carrier, Tigerair, has been most affected by the outbreak and will reduce network capacity to offset the fallout.

On Wednesday, Virgin’s management said it expected the virus to reduce group earnings by $50 million to $75 million over the six months to June 30, 2020. Total group capacity will be reduced by 3 per cent over the second half.

Melinda White, an investment director at IFM Investors, said the airlines had plenty of room to manage costs over the short-term in response to the circumstances.

“They’ve both got OK balance sheets and relative to global airlines they’re considered to be quite strong.”

Ms White also believed the virus would prove a short-term headwind for Sydney Airport after it said February’s passenger numbers would be hit by the travel bans and declined to give dividend guidance for financial 2021.

“It’s an infrastructure asset, so there’s a lot of global demand for direct ownership of infrastructure assets. Pension funds are looking to cashflow match, and it’s a long duration 30-year asset. So that dividend stream out of the asset underpins the valuation.”

Analysts at Credit Suisse expected the airport’s dividends to fall to 37.5¢ a share in 2020, compared with 39¢ a share in 2019.

The management at ASX-listed Far North Queensland-focused tourism company Experience Co described the bushfires and coronavirus as unprecedented and catastrophic events for the local tourism industry. Shares in the Great Barrier Reef and skydiving tour operator are down 28 per cent since October 2019.

SeaLink warned that sales for its Captain Cook tourist cruises on Sydney Harbour had been hit hard by the ban on Chinese tourists. This follows a weak finish to 2019 for the ferry operator as the fires and smoke around Sydney hurt total visitor numbers.

Business travel services provider Corporate Travel said it expected the “unprecedented disruption” from the travel bans to lop between $15 million and $40 million off its underlying financial 2020 EBITDA (earnings before interest, tax, depreciation and amortisation).

It used experience from previous pandemics including SARS, H1N1 swine flu, MERS, Ebola and Zika to assume a peak impact period through February and March during a pandemic that would last four to six months in total.

Flight Centre has already warned that the virus will make it difficult to meet its full-year profit guidance. Its shares are down 28 per cent since October as it also navigates the impact of the bushfire crisis.

Mr Rossler said Flight Centre had an advantage over most other travel and tourism companies because of its fortress-like balance sheet.

“For stocks impacted, you need to worry about what balance sheets look like because you don’t know how hard this plays through. So earnings could be crunched, but those with good balance sheets are not going to run into trouble tomorrow,” he said.

“Normally in these sort of corrections it’s the really expensive stocks that get smacked, those with not much in the way of earnings, and we’ve seen that again.”