ab3 January 2024Global Research and Evidence LabPowered byUBS Evidence LabYESEuropean Leisure SectorOutlook 2024 - Likely more of the same just at a slower pace...While positive momentum to slow we think profit growth will continue…2023 saw positive share price performance in the European travel space although share price performance in the leisure space was more mixed. While we think earnings momentum will slow in 2024 (a more normal year with base impact recovered in 2023), we remain selectively positive on opportunities in the travel and leisure space. We think certain themes from 2023 such as inflation will likely become lower concerns for investors in the travel and leisure space as the year progresses while others such as consumer health will remain a topic of debate. On balance sheets we see strength with the focus on capital returns through special dividends and buybacks. If the environment becomes more certain and interest rates fall we could see momentum return to accretive M&A in the T&L sector which will accelerate earnings. The sector in general is below long term average multiples and Eurostoxx. Hotels - Europe RevPAR benefiting from international recovery/eventsWe continue to see buoyant ADR above the pre-pandemic level (past 28-day moving average ADR growth vs 2019 +23% in Europe, +31% in the UK, +23% in Ireland). However, with an economic backdrop of recession concerns, there is some concern on continuance of ADR growth due to its negative correlation with unemployment which may rise (UBS economist have benign unemployment levels in key travel markets). However, low level of construction activity and pipeline support pricing/ADR growth (here). We expect net unit growth of +2-5% in FY24E for the different operators but with the potential for falling interest rates, we could see developers commit to new hotel projects. Conversions are expected to continue to aid the brand portfolios.Catering - best positioned to pass on inflationWe think catering/concessions should continue to deliver mid to high single digit organic growth on the back of inflation, net contract wins and in the case of concessions travel recovery (We have bottom up European airlines delivering 7% traffic growth in 2024). We continue to think in leisure that contract catering is best positioned to manage inflation on way up and down based on the nature of the contracts and managing past inflation. Inflationary trends seem on the downside and we continue to believe that contract catering companies could see a margin boost for a limited period of time until pricing resets.Gambling - continued significant growth in the USMuch of the debates in gambling continue to be on the US where we continue to see strong growth (+c50% Jan-Oct'23 in online sports betting and +23% in iGaming). We estimate the US market size to reach $25bn by 2025 (here). Fa...
