Costs Cloud Webjet’s Outlook

This story features WEBJET LIMITED. For more info SHARE ANALYSIS: WEB

Webjet's guidance to operating earnings of $80m is below most forecasts and includes a number of one-off costs. Brokers vary on their preparedness to look past these items.

-Price slump highlights risks in high PE ratio companies which do not deliver on expectations
-Restructure of B2B should entail a lift to FY19 margins as a pay-off
-Still targeting cost efficiencies and revenue improvement
 

By Eva Brocklehurst

Webjet ((WEB)) has disappointed the market, which was hoping for some clear air following significant acquisition activity in the past year or so. Guidance to operating earnings of $80m in FY18 has been undermined by one-off items.

The company has flagged a total of $5.6m in one-of costs including the JacTravel integration at $1.2m, a Netflix tax in relation to Online Republic of $1.7m and Thomas Cook costs of $2.7m. As well, FIT Ruums losses are now expected to be in line with FY17, versus previous commentary that losses should narrow in FY18.

Morgans suggests there is the usual degree of conservatism in the guidance, as well as some additional caution regarding currency volatility because of the large exposure to Europe/UK. Moreover, given the strong earnings growth forecast for the years ahead is considered oversold and the broker retains an Add rating.

The share price reaction to the guidance – it slumped -11.6% – highlights the risks inherent in high PE ratio companies that do not deliver on expectations, yet Morgans still considers the valuation metrics attractive relative to peers.

Credit Suisse downgrades to Neutral from Outperform, suggesting the need for clarity on various matters such as B2B costs, tax changes, the Thomas Cook investment and JacTravel is likely to mean the stock is range bound in the near term. The company did not have JacTravel in July and August, which are strongest months seasonally, so first half cash flow is expected to be negative with the usual rebound in the second half.

However, Credit Suisse is not that concerned about the cash flow outlook because of that seasonality in the business in recent years but finds the large number of extraordinary items adds confusion to an already complicated outlook. The broker is still a believer in the value proposition of the B2B offering but believes this is unlikely to play out until FY19-20.

Credit Suisse views the stock as a cost and service-led penetrator of the global hotel inventory market and remains comfortable applying a premium to the small industrials average of 11.2x FY18 operating earnings, even against the enlarged base. However, the broker reduces the premium to 25% from 50% in light of the short-term uncertainty.

Morgan Stanley is less considerate, noting that even if one-off costs are added back guidance is materially lower than consensus expectations. The broker also points out that the negative cash flow, as a result of the timing of the JacTravel acquisition, means a strong recovery in the second half is required.

In the B2B restructure the shift to a geographic rather than brand management structure should entail a lift in FY19 margins as a pay-off for successful execution, in the broker's opinion. Given the heightened risk, Morgan Stanley steps away from the material premium that was previously applied to this valuation and assumes a market multiple.

Targets

UBS is more confident that negative first half cash flow will reverse in the second half, noting both B2C and WebBeds B2B are currently exceeding targeted growth rates.

Although the level of synergies for JacTravel were not quantified, the company is still targeting cost efficiencies and revenue improvements. Management has reiterated its three-year bookings growth targets. In B2C Webjet is targeting growth over FY18-20 of more than three times the underlying market growth rate. B2B bookings growth of more than five times underlying market growth rates is targeted.

FNArena's database shows two Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is $12.45, suggesting 20.3% upside to the last share price. This compares with $13.08 ahead of the announcement. Targets range from $11.35 (Morgan Stanley) to $15.00 (Ord Minnett, yet to comment on the update).
 

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