Company Overview: Webjet Limited is engaged in the provision of online travel booking. The Company is engaged in digital travel business providing services in regional consumer markets, as well as global wholesale markets via the online channel. It operates through the segments, including Business to Consumer Travel (B2C Travel) and Business to Business Travel (B2B Travel). The Company's B2C division consists of Webjet and online republic brands. Its B2B division consists of Lots of Hotels and Sunhotels brands. Lots of Hotels brand operates in approximately 25 markets, providing coverage across the Middle East and Africa. Sunhotels brand has over 6,000 directly contracted hotels. It offers its services through the Website, www.webjet.com.au. Its products include cheap flights, hotels, holiday packages, car hire, cruises, exclusives, and travel insurance. It offers cruises, such as P&O Cruises, Princess Cruises, Carnival Cruises, Royal Caribbean Cruises, Celebrity Cruises and Norwegian Cruise Line.
 

WEB Details

Significant Increase in TTV in 1H FY19: Webjet Limited (ASX: WEB) is a small-to-mid cap online travel company with the market capitalisation of ~$1.86 Bn as of 29 July 3019. Analysing the financial journey from FY14 to FY18, revenue has grown from $95.18 million to $751.78 million, posting a CAGR growth of 67.6% over the same period. On the same line, net profit also depicted a decent rise from $19.12 million to $41.47 million, almost double during the period. Bottom-line of the group witnessed a CAGR growth of 21.3% during FY14-FY18. The company released its results for 1H FY19 in which its total transactional value (or TTV) encountered a rise of 29%, which represents a 2% increase in B2C and a 65% increase in B2B. The company stated that B2B growth which was witnessed in the first half incorporated 6 months of Jac Travel as compared to the four months in the prior corresponding period (or pcp). However, after adjusting for the impact of acquisitions, the organic growth was 21% even though there was softness in bookings because of the hot European summer. The company witnessed strong 1H performance and there was a 42% rise in EBITDA to $58.0 million. Also, the revenue witnessed a rise of 33% and stood at $175.3 million and net profit after tax rose by 61% and stood at $38.3 million (before acquisition amortisation).

WebBeds’s EBITDA has more than doubled on a YoY basis, from $12.8 million in 1H FY18 to $30.1 million in 1H FY19 at the back robust growth in key European and Middle East markets, and meaningful EBITDA delivered from the Americas. The company’s interest expenses witnessed a rise from the pcp largely because of higher borrowings from Jac Travel and DOTW acquisitions. WEB, in the half-year report, stated that a review of the company’s banking structure has been undertaken, which would be resulting in a decrease in net interest costs in 2H FY19. The company’s RoE in 1H FY19 stood at 4.7%, which can be considered at respectable levels.

Moving forward, there are expectations that focus on deleveraging the balance sheet, sound liquidity levels, and operational capabilities might help the company in achieving growth over the long-term. WEB’s underlying cash conversion stood at 95% in 1H FY19, which reflects an improvement in the working capital management.


Overview of Performance (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader picture of the top 10 shareholders in Webjet Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Improvement in Key Margins in 1H FY19 Strengthens Confidence in Business Activities: The key margins of Webjet Limited witnessed a YoY improvement in 1H FY19 as its net margin witnessed a rise of 15.1% which reflects a rise of 9.9% on a YoY basis and, thus, it can be said that the company’s capability to convert its top line into bottom line has been improved. Also, the company’s EBITDA margin stood at 29.7% in 1H FY 2019 while its operating margin stood at 18.1% during the same period. It can be said that the company has respectable liquidity levels as its current ratio stood at 0.99x, which implies an improvement of 6.4% on a YoY basis and, therefore, it looks like that the company would be able to meet its short-term obligations. Also, the company can make deployments towards the core business activities which can act as long-term growth catalysts.

The company’s Debt/Equity ratio stood at 0.33x in 1H FY 2019 which reflects a fall of 15.3% on the YoY basis and, therefore, it can be assumed that the company has been focusing towards deleveraging its balance sheet. The lesser exposure towards debt indicates that the company’s balance sheet is a bit stabilised.


Key Metrics (Source: Thomson Reuters)

Rezchain – a Key Driver for Delivering Scale Benefits: Webjet Limited stated that Rezchain happens to be a critical component when it comes to moving from “8/5/3” structure to “8/4/4” in WebBeds business by FY 2022 (i.e., 8% revenue/TTV and 4% costs/TTV to drive 4% EBITDA/TTV). The company stated that Rezpayments help in reducing compliance costs and improves control. Rezchain is a part of WebBeds, which is the B2B division of WEB.In the presentation, the company threw light on Blockchain and stated that robustness, geographical hardiness, and zero transaction costs are some of the factors which make Blockchain great. With respect to Rezpayments, the company stated that it is their in-house PCI or (Payment Card Industry) compliance solution. Coming to the need for PCI compliance, WEB stated that all the companies which are accepting credit card payments need to comply with PCI Data Security Standard. The company further added that credit cards are widely being used in B2C businesses, and within certain parts of WebBeds operations. Rezpayments is implemented in Webjet OTA and Online Republic businesses.  

Key Takeaways from J.P. Morgan Emerging Companies Conference Presentation: As per the presentation, WebBeds happens to be a number 2 global B2B player and has still less than 4% market share. The company stated that the B2B market is a US$50 Bn+ TTV market, which is having significant opportunities for growth. The company’s WebBeds business is possessing highly competitive inventory pricing and market-leading technology, which could help the company in the long-term. Also, WebBeds business has a balanced client portfolio. The following picture gives an idea of the B2B market size and WebBeds’ balanced client portfolio:


B2B Market Size and WebBeds Balanced Client Portfolio (Source: Company Reports)

We would now be having brief information about the Umrah Holidays International. The company stated that it takes pride in being the first truly online B2B provider of religious travel services. Additionally, WEB leverages WebBeds global distribution network and strong partnership with the hotels in the Kingdom of Saudi Arabia to offer numerous religious travel offerings and packages. There are expectations that Umrah Holidays International would be making the meaningful EBITDA contribution to the WebBeds AMEA by FY 2022.

Understanding Balance Sheet and Cash Flow Position of Webjet: Webjet Limited has a respectable balance sheet position which could help it in achieving growth opportunities in the addressable market.  The company’s cash and short-term investments witnessed a CAGR growth of 39.22% in the time frame of FY14- FY18, which reflects that the company’s cash base might support the long-term growth objectives. Also, the company’s total current assets base witnessed a CAGR growth of 56.62% between FY14- FY18. The company’s cash from operating activities witnessed a CAGR growth of 50.59% between FY15- FY18, which implies that the company is possessing robust operational capabilities. It looks like that the company 's respectable base of total current assets and sound operational capabilities might help it in achieving unhindered growth moving forward.

What To Expect From WEB Moving Forward: Webjet Limited stated that it remains on track to deliver at least $120 million of EBITDA (excluding the one-offs which are associated with the acquisition of DOTW), including all the start-up costs that are associated with Umrah Holidays International. It was also added that Rezpayments has significant new market opportunities as it has applicability for the other companies that accept the credit cards online and it enables secure storage as well as handling of the credit card data. With respect to WebBeds, the company stated that it is focused on maximising customer connectivity and reducing the operating costs. The company also added that Rezchain has been delivering the cost efficiencies and improving the customer experience within all B2B businesses and is implemented in all the platforms in all the geographies. It was stated that DOTW is connected and there are expectations that Thomas Cook would be connected later in 2019.

In each of WebBeds markets, the company has been targeting the bookings growth of more than 5 times the underlying market. Additionally, there are expectations that the company’s focus towards deleveraging the balance sheet (as can been seen from its 1H FY19 Debt/Equity ratio) and robust operational capabilities might act as tailwinds for the long-term growth. At the time of announcing results for 1H FY19, WEB stated that it is targeting the underlying FY19 cash conversion to be within the 95-110% range.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: PE Multiple Approach (NTM):

PE Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: Webjet Limited’s stock has delivered the return of 2.70% in the span of previous one month, while in the time frame of past six months, the stock’s return stood at 8.31% which can be considered at decent levels. It was mentioned that Webjet OTA has been growing the market share with the flight bookings growing at around 3 times the market. The OTA’s increased size and scale continued to deliver value to airlines and other partners, and TTV margins improved throughout flights as well as ancillary products. Additionally, the company has been focusing towards growing B2C business organically and expects to build B2B business via a combination of organic and inorganic growth. Based on the foregoing, we have valued the stock using a Relative valuation method, Price/Earnings multiple and have arrived at the target price upside of lower double-digit growth (in %). Hence, considering the aforesaid facts and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $13.860 per share, up 1.242% on July 29, 2019; and ahead of the earnings results due in August 2019.


WEB Daily Chart (Source: Thomson Reuters)

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