It’s an odd recession isn’t it. It’s an economic downturn that’s so bleak, yet in practice quite unique given that we’re all evidently still going on holiday.
Post-pandemic peculiarity sees City analysts bullish on travel and leisure stocks despite the apparent plight of the British consumer.
Today’s latest example is an upgrade for package holiday firm Jet2 PLC (AIM:JET2) with analysts at Jefferies repeating a ‘buy’ recommendation for the London-listed share.
easyJet PLC (LSE:EZJ) recently surprised the City as its January trading update revealed it is expecting its full-year results will beat market expectations driven by “high demand and strong bookings”.
Last week, meanwhile, TUI AG (LSE:TUI) told investors its business was back to “pre-pandemic levels” and said it had enjoyed ‘record days’ for online booking in both the UK and Germany.
Pent-up demand is one common reason given by analysts.
“The shift to experience” is another phrase, used today by Jefferies, to describe another factor driving tourism.
It’s a curious almost euphemism of a term, which could be spun slightly differently to say something like: “you only live now”.
Two years of pandemic-induced isolation and limitation left consumers to re-evaluate what they value in their lives. This is now evidently compounded by a seemingly endless news cycle of doom, gloom and commentary depicting Britain's societal demise.
The result, it seems, is a consumer that’s living for the moment.
A more industrial and less zen interpretation could be phrased along the lines of “Blow it, let’s do it anyway”.
Soaring inflation, ballooning energy bills, food poverty, redundancies, national strike action, and war in Europe – after digesting that lot everyday, don’t we all fancy at least a week of sun, sand and sangria.
In theory, the recession should eventually catch up with holiday-making consumers and in turn the fortunes of tour operators.
Analysts at Jefferies, however, reckon UK package-holiday travel operator Jet2 is a ‘Buy’ with a newly upgraded target of 1,600p per share suggesting some 23% upside to the current price of around 1,300p.
“While demand for travel remains strong, driven by the shift to experiences and pent-up demand, investor debate focuses on macro,” Jefferies analyst Jana Mistry said in a note.
“If unemployment increases, we expect to see pressure on pricing, load and operating deleverage.
“We see Jet2 as a relatively resilient play within tour operators, benefitting from market share gains following Covid, down-trading to shorter holidays and a bias towards higher income and older cohorts.”
Jefferies notes that at the current price Jet2 remains valued at a discount of around 13% from pre-COVID levels.
The broker meanwhile upgraded its 2023 forecast for pre-tax profit by 22% to £373mln due to strong trading over Christmas and the January sales, while its estimate for next year rises by 33%.
Based on the broker’s proprietary data, it anticipates Jet2 saw a 78% jump in website visits and app downloads soared some 128% in January, as such Jefferies sees Jet2 taking market share from larger European rival TUI.
“Jet2 has the brand perception, operational flex and balance sheet to win share, with a potential tailwind from regulatory reform, in our view,” Mistry added.
Anyone that’s shopped for or booked a trip in recent months will have their own anecdotal evidence regarding the ever-escalating cost of a holiday as a multitude of inflationary pressures are handed off to the consumer.
Jefferies notes inflationary factors in travel such as fuel costs (+35%), hotel pricing (+5%), ‘elevated’ wage inflation and rising resort maintenance costs – plus the impacts resulting from European carbon credits, which are used by transport operators to meet ESG related quotas and are up around 20%.
The broker’s base case model for Jet2 (upon which its 1,600p target is pinned) sees some 230% growth in passenger numbers to drive revenue up 300%, levelling off into a medium-term growth rate of 5%.
In a upside scenario, envisaging a more aggressive expansion leading to 8% medium term growth the broker pitches the possibility of Jet2 shares reaching 2,000p per share.
Meanwhile, a downside model picturing stiffer competition and further pressure on the air travel in particular the broker sees medium term growth of around 3%, leading to a 50% reduction in Jet2’s valuation down to around 650p per share.
Making the ‘buy’ argument, it concludes: “We continue to view Jet2 as the most attractively positioned vertically-integrated operator, based on: Robust airline foundations; business model flexibility (more limited capital commitment and no retail footprint); balance sheet health; and more positive brand perception.”
“We think it is well-positioned to gradually re-build capacity and continue to take (market) share.”