Thematic investing is a forward-looking investment approach that seeks to capitalise on megatrends or strong short-term tailwinds.
We believe playing thematics creates another opportunity for outperformance. The key benefits of short-term thematics are typically:
- Significant growth tailwinds.
- Earnings upgrades as the market underappreciates growth.
- Reasonable valuations as the market underappreciated the opportunity.
In the Focus Portfolio, we are exposed to a few thematics at present, such as New Infrastructure: NXT, CWY, TLS, HCW; the Energy Transition: AKE, OZL, STO/WDS; and the one we will discuss in this note, the Global Reopening: QAN, TAH, ALL, and CSL.
The global reopening thematic is 17.5% of the Focus Portfolio.
The World Is Still Reopening
Australians have moved on from lockdowns and border closures. However, life is still not “normal” post-COVID.
Even though the ASX 200 hit its COVID trough more than 2 years ago, many post-COVID recovery stocks have yet to reach their full potential. We think this creates a significant opportunity that is still not fully appreciated by the market.
Reopening stocks have discounted further in 2022 in response to the general market malaise.
Recovery outlook looks too slow
We think the current market forecasts for the travel recovery are still too conservative.
The International Air Transport Association (IATA) expects overall traveller numbers to reach 4.0bn in 2024 (counting multi-sector connecting trips as 1 passenger), exceeding pre-COVID-19 levels (103% of the 2019 total).
The IATA forecasts still suggest international travel will not recover to CY19 levels until CY25.
Considering that COVID restrictions are a thing of the past for most countries (especially Australia) and the level of pent-up demand for travel, we think travel will recover quicker than forecast.
Pent-up demand still to unwind
Pent-up demand for travel should lead to an acceleration in the recovery but also support higher pricing.
Following the lifting of restrictions and the success of vaccinations against Omicron, travel appears to be on the fast track to recovery. We believe that passenger numbers could go above 2019 levels as households rotate their spending away from goods and towards travel and other services.
We have seen an increase in airfares and hotel prices in the US as consumers look to scratch the travel itch over the past few months. We think prices and demand can remain elevated as consumers continue to spend disproportionally (relative to history) on services.
Reopening stocks yet to reach their full potential
Our earnings expectations for the next 12-24 months do not reflect the share prices of the stocks we are considering for the reopening trade. The share price of a company such as Qantas is still lower than it was in October 2021.
The fundamentals of these stocks have improved, so we believe they are at a good price point for investors.
Qantas (QAN) 4% – Reopening tailwinds with a chance for turbulence
COVID-related lockdowns, border closures, and traveller hesitancy caused severe disruptions to flight volumes across the industry.
Operating conditions have started to normalise, although Australian domestic and international revenue passenger volumes still remain -12% and -45% below their pre-COVID PCP (July 2022).
Qantas is also emerging from COVID in a structurally stronger position with more resilient earnings than past cycles, given:
- Improved market position, with 68% domestic market share and 33% international market share, compared to 62% and 25% respectively, pre-COVID.
- A weaker domestic competitive environment with Virgin Australia going into voluntary administration and being acquired by private equity firm Bain Capital in 2020. In our view, the high likelihood of a Virgin IPO over the medium-term should create a supportive pricing environment in the domestic market, with Bain’s primary focus likely to be profitability not market share.
- More diversified earnings mix than in past cycles, with a much larger contribution coming from Loyalty and Jetstar, which are both more defensive than the core business.
- A structurally lower cost-base, supporting improved profitability. Qantas has delivered $920m of cost-outs to date, and is on track for $1bn by FY23 (this should offset higher oil prices).
- It has a stronger balance sheet. As of 30 June 2022, net debt was $3.9bn, down $2.0bn vs PCP, and below the current target range of $4.2bn-5.2bn. QAN's balance sheet capacity has underpinned its $400m share buyback, which we also view as a sign of confidence in the business.
We see upside from both an EPS and PE multiple perspective. Historically, QAN (and industry peers globally) have traded around 8-10x of earnings (EPS). Putting QAN’s FY24 consensus EPS on a 9x PE multiple, implies a fair value per share of $6.55. Plus, we see upside risk to EPS forecasts, and we believe QAN deserves a higher multiple than it has in the past, given it is now a more resilient business in a structurally stronger position.
Key risks include the potential for weaker discretionary expenditure as cost of living pressures intensify (i.e. cancelling holiday plans), and the threat of higher fuel costs squeezing airline margins. However, we believe that QAN will be reasonably resilient in a slowdown period.
| PE Multiple | FY24 Consensus EPS (-10%) | FY24 Consensus EPS | FY24 Consensus EPS (+10%) |
| 8x | 5.24 (1%) | 5.82 (12%) | 6.41 (23%) |
| 9x | 5.90 (13%) | 6.55 (26%) | 7.21 (39%) |
| 10x | 6.55 (26%) | 7.28 (40%) | 8.01 (54%) |
Source: Refinitiv, Wilsons.
Aristocrat Leisure (ALL) 4% – Land-based gaming, the forgotten recovery story
Lockdowns and social distancing measures have materially disrupted Aristocrat’s land-based business, which both sells and leases electronic gaming machines (EGMs) to casinos and other venues, partially offset by strong growth across its digital product suite.
We think current medium-term consensus estimates for ALL’s land-based earnings are too conservative relative to the historical pre-COVID trend, particularly given recent positive industry trends (US slot gross gaming revenue is 20% higher than pre-COVID levels) and the market share gains the business has achieved. We expect land-based EGMs to remain a significant part of the gaming industry for many years to come. Therefore, we expect earnings upgrades in the land-based business in the coming periods.
We still expect digital to be the key structural growth driver for Aristocrat over the medium to long-term, as the business keeps increasing share in both its existing mobile games portfolio while also expanding into new verticals.
In terms of valuation, ALL trades at a forward EV/EBITDA multiple of 11.8x, which is 1 standard deviation below its 5-year average. This is attractive relative to consensus estimates of ~9% EBITDA growth to FY24 (where we see upside risk). We think ALL deserves to trade at a premium multiple given its dominant market position and the significant runway for growth in digital over the long-term.
Tabcorp (TAH) 1% – Retail channel, a clear FY23
Mandated venue closures and social distancing requirements impacted TAB’s retail (on-premise) wagering operations as well as its gaming services division, which services EGMs.
Currently, ~35% of TAH’s wagering turnover is still through the retail channel, while ~65% is digital. Therefore, as the only licensed retail bookmaker in most Australian states (excluding Western Australia), TAH was most severely impacted by lockdowns compared to digital-only bookmarkers. FY22 retail turnover was still down 45% vs FY19.
As COVID-related restrictions on venues, as well as racing/sports, have now eased, we anticipate a strong earnings recovery in FY23 as operating conditions return to normal.
We see upside risk to consensus earnings forecasts given:
- The potential for stronger-than-expected patronage at licensed venues post-lockdown.
- Regulatory reforms which could level the playing field on wagering fees/taxes.
- Structural cost-base reforms – target of 3-4% cost growth in FY23.
- Potential upside in the digital supported by the new TAB app, new features etc.
Previous M&A interest in TAH points to significant valuation upside for TAH. Apollo’s $4bn bid for the TAH business in its current form (i.e. excluding lotteries) in 2021 translates to an implied value of $1.80 per share.
CSL (CSL) 8.5% – Plasma collections regaining momentum
The core business (CSL Behring) collects plasma from donors, primarily in the US, to make treatments for immune efficiency and neurological disorders.
COVID caused a lot of problems with collections as donors feared infection and were cashed up after bumper stimulus cheques.
As stimulus has been withdrawn and with cost of living pressures increasing more donors are coming to donation centres, and collection volumes are ramping back up again. We have already seen an improvement in plasma collected in 2H22.
CSL were paying donors more for plasma in the US during the COVID to incentivise collections. However, as supply issues fade, CSL can collect more plasma at a lower cost.
This is a volume story but also a margin improvement story. This is coupled with new technological advances in collection centre capacity, which should drive more plasma per donor—leading to even better margin outcomes.
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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