Australia | Sep 24 2019
Webjet has assured the market the impact from its partner Thomas Cook's liquidation is minimal and there are plenty of other earnings drivers.
-Most of the 3000 direct hotel contracts acquired from Thomas Cook are being sold at full margin
-The partnership did position Webjet for expansion
-Webjet retains structural and market share benefits
By Eva Brocklehurst
An era in holiday packages is coming to an end as Thomas Cook has announced it is shutting shop. Webjet ((WEB)), which entered a sourcing partnership with Thomas Cook for sun-and-beach hotel inventory three years ago, has felt some of the impact.
Thomas Cook, a customer of the WebBeds B2B (business-to-business) operations, has entered compulsory liquidation and Webjet expects the collapse will reduce its FY20 operating earnings (EBITDA) by up to -$7m. There will be a -$150-200m total transaction value loss in B2B. This was the forecast provided by the company at the FY19 results, downgraded at the time from $300-450m because of weakness at Thomas Cook.
Thomas Cook also owes Webjet EUR27m in receivables which will be impaired. Webjet does not expect a material adverse impact on liquidity from the impairment, nor does it expect other FY20 earnings drivers to be affected.
There are more than 3000 direct hotel contracts acquired from Thomas Cook which remain under Webjet's ownership and the company does not expect any impact on these. Most of the contracts are currently sold at full margin and have been a driver of profit growth for the European business over the last three years.
Nevertheless, Morgans is among the brokers which assumed an incremental improvement in earnings when the agreement with Thomas Cook shifted to a volume-based model from June 1, 2019 and marks down estimates substantially.
Ord Minnett asserts the decision to enter the partnership was controversial from the beginning, although the transaction was a critical building block to Webjet becoming the number two player in the global B2B hotels segment.
The original upfront payment of GBP21m to Thomas Cook was originally intended to cover a two-year transition period – pushed out by six months – over which Webjet would be paid a fixed management fee. A volume-based service fee arrangement was expected to follow from June 1, 2019.
Issues also arose when the company elected to treat the upfront payment as an asset and the management fees as income. Auditors disagreed and Webjet was forced to record the upfront payment as a loan and the management fees as capital repayments relating to this loan.
However, the transfer of the 3000 direct hotel contracts to Sunhotels at the time of the deal provided credibility and scale, Ord Minnett acknowledges, which ultimately led to Webjet's acquisition of JacTravel and Destinations of the World (DOTW).
Webjet has indicated that the WebBeds business transaction value is up over 50% for the first 10 weeks of the year to date, although Morgans points out the previous corresponding period did not include the contribution from the DOTW acquisition.
No information was provided regarding the B2C (business-to-consumer) business and guidance is expected at the AGM on November 20. Ord Minnett assesses the investment thesis around the company's growth profile in the B2B segment from market share gains is unchanged, as others lack scale and the ability to invest in technology.
UBS agrees Webjet has structural and market share benefits as well as synergies from DOTW and these features differentiate the company relative to other travel-related peers.
FNArena's database has three Buy and two Hold ratings for Webjet. The consensus target is $15.08, suggesting 35.7% upside to the last share price. Targets range from $12.18 (Morgans) to $18.65 (UBS).
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