Australia | Sep 02 2021
This story features WEBJET LIMITED. For more info SHARE ANALYSIS: WEB
Webjet has ridden the pandemic wave well, shifting the focus of its WebBeds business to localised travel while also investing in online service
-WebBeds wins new customers as focus moves to domestic travel
-Webjet winning market share because of structural shift to online
-Plenty of capital to deploy the growth opportunities
By Eva Brocklehurst
Has the pandemic helped Webjet ((WEB))? There has been an acceleration the shift to online travel bookings and in this Webjet has achieved material share gains. Ord Minnett considers a good proportion of these gains should be permanent as they are structural in nature.
The company's AGM update is also a timely reminder that those travel stocks with exposure to Europe and the Americas will experience the quickest recovery in earnings. WebBeds, which was around 50% of operating earnings (EBITDA) pre-pandemic, is now profitable on a monthly basis.
Recovery has been supported by strong travel demand in North America and Europe where travel restrictions have already eased. The company has indicated WebBeds was profitable in July and August and is on track to be profitable in September.
Ord Minnett expects this trend will continue, although admittedly the June quarter is a peak period, with January to March the quietest months. WebBeds is very dependent on the northern hemisphere summer holiday season.
Recognising that domestic or internal travel would be the first segment to reopen, Webjet shifted the WebBeds strategy to domestic opportunities and these now represent 46% of total transaction value versus 10% before the pandemic.
That shift towards domestic travel may have meant a decline in average booking value yet this has been more than offset by the uplift in activity. Morgans considers the pivot to domestic travel has been critical in diversifying the business, and WebBeds has won new customers and increased its market share as a result.
Given border restrictions, the Webjet overseas travel agency experienced a decline in bookings in August, to 14.5% of pre-pandemic levels. Online Republic also went backwards, with August bookings at just 9.5% of pre-pandemic levels.
Both these two businesses are expected to return to profitability when Australia and New Zealand reopen. Moreover, UBS believes increased momentum around Australian vaccination will create a better medium-term outlook.
Webjet is expected to benefit from strong pent-up demand over the next 18-24 months and has the scope to take material share in both the business-to-business (B2B) and business-to-consumer (B2C) markets, in the broker's view.
Webjet estimates a $70bn transaction market value in B2B of which it currently has a 4% share. Its target is 14% share, which implies $10bn, yet Morgan Stanley is sceptical, assessing this would require Webjet to take leadership from the main player which is around five times its size, and also achieve record industry margins.
Webjet believes it is winning market share because of the structural shift to online and the material decline in the number of bricks & mortar travel agents. The company also attributes success to a broad range of payment options and superior technology.
Morgans anticipates a net loss in FY22 for Webjet while cost reductions should allow FY24 operating earnings to exceed 2019 levels. The broker expects Online Republic to post a modest loss in the first half of FY22 followed by break-even in the second half.
Yet Morgans acknowledges forecasting accuracy is low and likely to be dictated by the success of global vaccine programs and government decisions on re-opening borders.
Morgans considers current valuation fair, given the protracted recovery in travel markets. Importantly, there is plenty of liquidity following the recent $250m convertible note offering.
Macquarie flags the capability of the balance sheet with cash reserves of $406m as of March 2021, which makes Webjet a good candidate for consolidation. On the broker's estimates, Webjet could deploy $270m in capital by FY25 on growth opportunities.
Importantly, Ord Minnett believes Webjet has used the pandemic downtime and the proceeds of capital raisings to invest for the future and the decision to integrate and enhance IT systems into a single platform will be critical.
This should allow the company to achieve the planned reduction in operating costs of -20%, once scale returns. The savings will be achieved from using blockchain, data analytics and simplifying processes. By the end of FY22 the platforms should be fully streamlined.
Webjet will also invest additional resources in growing share of the US B2B market at a time when the bulk of its competitors are probably doing it tough. While this should be positive in terms of operating cash flow in the first half of FY22, the exclusion of capital expenditure guidance makes Morgan Stanley suspicious this investment could be marginal.
The broker also raises concerns about the stewardship of capital, which has led to a share count that has increased by three times over the last four years. In any case, Morgan Stanley considers a rebound in working capital and operating leverage will be the main positive as the stock has suffered severe dilution during the pandemic.
FNArena's database has four Buy and three Hold ratings. The consensus target is $5.84, suggesting 3.0% upside to the last share price. Targets range from $4.30 (Morgan Stanley) to $7.12 (Ord Minnett).
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