With every day that passes the Olympic frenzy only increases in size and scale. However, increasingly the newsflow has been more negative than previously believed. Earnings estimates for the period have been lowered as reality sets in as to what the true potential impact of the Games could be. In this longer note we look at the potential benefits of the Games and outline who we believe will be the beneficiaries from increased footfall within the Travel & Leisure sector.
Over the last few months a steady flow of reports have tried to estimate the impact of the Games. Of course the Olympics were always going to displace a number of ‘normal’ visitors to London who were going to be put off by concerns regarding travel chaos and the potential terrorist threat but, with the Games close approaching, operators now have to consider what that actually means as far as trading (and therefore stock-ordering, staffing etc.) is concerned.
A study by the European Tour Operators Association found that hosting the Olympics did not have a positive effect on tourism in either Greece or Sydney, in fact it had the opposite effect. This could significantly hurt the Travel & Leisure companies which rely on consistent tourism flows. For example, the Lake District complained earlier in the year that the Games were going to cost it ‘millions’ in lost sales. Also, STR Global downgraded its estimates of the positive impact on London.
The Games have already turned people’s attention to holiday plans for 2012. More than one in ten Londoners surveyed by PWC plan to go on holiday during the Games to avoid them completely. 9% of Londoners plan to bring forward their holidays or delay them until after and 16% plan to stay in the UK instead of going on holiday specifically because of the Games, as they do not wish to miss any part of them.
We believe the main beneficiaries of the Olympics will be the hotel industry (due to short term increased prices), London-exposed pubs and southern train and bus operators.
Edmund Salvesen, Deputy Head of Equity Research at Brewin Dolphin, looks at three UK orientated sub-sectors and how they are expected to fare.
When looking at Atlanta (1996), Sydney (2000), Athens (2004) and Beijing (2008), none of the cities achieved occupancy higher than 90% during the Olympics. The UK is experiencing a surge in its hotel development pipeline, all with the anticipation of increasing global travel. London, at the end of July, was leading the European hotel industry with 4,638 rooms under construction. The majority of rooms under construction in the UK (11,617 rooms under construction adding to an existing supply of 495,015 rooms) are in London.
In the report we take a look at the UK hotel industry and we see Whitbread as a potential beneficiary from the Olympics and InterContinental Hotels Group as a global winner.
The effect of the Olympics on the UK pub operators is somewhat uncertain; having spoken to the majority of UK listed companies about the implications there is a wide-ranging view from excited optimism to worried concern. Wet led pubs are often beneficiaries from sports events; however, the effects from the Olympics are unknown, at present. We believe those operators which have strong exposure to London and the South East could be beneficiaries. Also those companies with ‘British brands’ could perform strongly as national pride surges with both the Queen’s jubilee and Olympics pushing sales of brands such as Shepherd Neame’s ‘Spitfire’ and Greene King’s IPA.
We anticipate those companies with high London exposure should be beneficiaries: especially Greene King, Mitchells & Butlers, Young’s and Fuller, Smith & Turner.
3. Bus and Train operators
The Bus and Train operators will also be beneficiaries of the increased demand within London. Those companies with high exposure to London and the South East should see increased revenue trends over the few weeks, which may offset the slightly lower commuter trends over the period as individuals avoid overcrowding. Recent trends within the sub-sector have been positive and despite expecting positive like-for-like sales due to the Olympics; we believe the more important upcoming catalyst is the franchise-bidding season. The UK White Paper dampened expectations that foreign competitors would have the upper hand going forward as it explained that capital expenditure requirements will be similar in the future. Franchises are expected to be longer which is agreeable to the Train Operating Companies.
We expect Go-Ahead to be the biggest beneficiary – as London’s largest bus and rail operator it will play a significant role in providing transport services for the Olympic Games. In particular its high-speed ‘Javelin’ rail services will transport spectators in seven minutes from St Pancras International to the Olympic Park. There is therefore a high risk/reward situation for Go-Ahead as although there is a lot to benefit from; delays or disruptions could hurt both its reputation and its future franchise opportunities.
Current estimates of the impact on the sector from the Olympics are low and rightly so, in our view, as despite expected increases in revenue over the period, it is important to note that it is a short term uplift. We expect it to impact trading but continue to prefer those companies with global exposure and efficient balance sheets. We anticipate the hotel companies to be the biggest beneficiaries with increased RevPAR driving short term valuations. However, our preference remains for the longer term winners from global growth (InterContinental Hotels, Buy), capacity increases (Whitbread, Buy) or improving trends (Greene King, Buy).
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