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

Increased Global Profitability and Record Performance: Webjet Limited (ASX: WEB) provides a full range of online travel booking services for flights, hotels, car hire, cruises, and tours. The group’s business consists of a B2C division - Webjet OTA and the Online Republic and a B2B division namely WebBeds. As on 13 January 2020, the market capitalization of the company stood at ~$1.83 billion. In the recently held Annual General Meeting, the top management addressed its shareholders and stated that the company witnessed record performance and demonstrated profitable global growth. During FY19, the company implemented a new strategy focused on growth in profitable bookings with increased margins and lower acquisition costs. This resulted in an increase of 26% in revenue to $366.4 million and a higher TTV (Total Transaction Value) of $3.8 billion, representing a rise of 27%. Webjet Limited also reported a rise of 43% in EBITDA (Earnings before Interest Tax Depreciation and Amortization) to $124.6 million that more than doubled in two years, with EBITDA margin soaring to 34%. This was mainly due to increased profitability from WebBeds as well as scale advantages coming through Webjet OTA (online travel agency). The continued growth in size and scale helped the company to deliver greater value to airlines and its other partners. NPAT for the year (before acquisition amortisation) came in at $81.3 million, up by 46% from $55.7 million in FY18. The profitable growth and improving financial performance have enabled the Board to declare a final dividend of 13.5 cents per share, bringing the total dividend for FY19 to 22 cents. WebBeds has shown continued growth and has become the company’s largest business with increasing TTV, revenue, and EBITDA in all regions. The business is mounting and has both an international footprint and an intrinsic value that is recognized by a group of customers, suppliers, and partners.

The company expects a positive outlook despite the uncertainties due to global trade war, Brexit, climactic events and perceptions of over-tourism. The company sees substantial areas for profitable growth across the WebBeds and B2C businesses. Webjet Limited has continued to strengthen and has gained a significant share in the market as the Number 1 online travel agency with 50% of the entire OTA flight market in Australia. WEB also accounts for more than 5% of all domestic flight bookings and approximately 4% of all international flight bookings.


3-Year Financial Performance (Source: Company Reports)

Business Performance of WebBeds: WebBeds has become the fastest-growing accommodation supplier to the wholesale travel industry with global coverage in 3 regions – Europe; Americas, Middle East & Africa (AMEA); and the Asia Pacific. The business has acquired and integrated Destinations of the World (DOTW) on top of its strong organic growth during the year, resulting in a material increase in WebBeds’ scale. In the time span of 6 years to FY19, it has become Webjet’s largest business and accounts for ~56% of Group TTV of $2,154 million, ~50% of Group revenue of $184.5 million and ~48% of Group EBITDA (before corporate costs) of $67.3 million. The acquisition of DOTW expanded the company’s presence in Europe and MEA. This resulted in a higher than expected contribution to FY19 results with revenue and cost synergies.


WebBeds Financial Performance (Source: Company Reports)

Strong Balance Sheet: During FY19, the company reported a strong balance sheet with increasing net assets of $201.4 million. At the end of the year, cash balance of the company stood at $211.4 million as compared to $190.8 million as at 30 June 2018. This was inclusive of $29.2 million of client funds. WEB also repaid $17.4 million of its debt during the year. However, borrowings increased by $83.2 million to $205.9 million, which included $100 million in debt funding for the DOTW acquisition. Gearing on a net debt to EBITDA basis remains conservative and stood at 0.19x. 

Launch of Umrah Holidays International: During the year, the company launched Umrah Holidays International, which was the first online B2B provider of religious travel services. It is focused on servicing the anticipated growth in travelers from the Kingdom of Saudi Arabia’s vision to welcome 30 million religious visitors a year by 2030. As per the company, the business possesses the potential to deliver decent EBITDA by FY22. 

Impact of Liquidation of Thomas Cook: Thomas Cook, a customer of Webjet Limited’s WebBeds B2B business has entered compulsory liquidation. This has resulted in a loss of TTV as the company expected to earn $150 to $200 million from Thomas Cook in FY20. Thomas Cook also owed Webjet approximately EUR 27 million in outstanding receivables. However, there will be no effect on over 3,000 hotel contracts with Webjet since August 2016, since a majority of these contracts have been sold to non-Thomas Cook customers and have been a major driver of the profitable growth of the European business. Also, the company expects no change to the expected FY20 earnings driver except EBITDA, which was earlier expected to reflect $27 - $33 million in benefits from a range of drivers including Thomas Cook. As per the revised guidance, the expected benefit has now been reduced by up to $7 million. 

Top 10 Shareholders: The following table provides an overview of the top 10 shareholders in Webjet Limited.

Top 10 Shareholders (Source: Thomson Reuters)

Significant Improvement in Gross Margin: During FY19, the company witnessed an improvement in gross margin and EBITDA margin, which stood at 100% and 34%, up from 37.5% and 10.8%, respectively. This indicates that the company can retain each dollar of its sales to service its other costs and obligations. Net margin of the company has also increased to 16.5% in FY19 from 5.5% in FY18. This indicates that the company can convert its revenue into profits. The current ratio also showed a slight improvement and stood at 0.94x as compared to 0.93x in FY18, indicating improved liquidity.


Key Metrics (Source: Thomson Reuters)

What to Expect from WEB Going Forward: The company expects considerable prospects for profitable growth in all regions for WebBeds. It is also anticipating appealing acquisition opportunities to supplement its existing businesses. Owing to its increasing profitability and growth in scale of operations, it is targeting profitability of “8/4/4” (8% revenue/TTV and 4% costs/TTV to deliver 4% EBITDA/TTV) in the WebBeds business. This equates to a 50% EBITDA margin. With respect to WebBeds, the company expects to have the largest market by TTV in Europe and expects significant growth in the Asia Pacific. Webjet Limited is also penetrating deeper with strong bookings growth in the Americas and will continue to take share as the number one player in the Middle East and Africa.

The company has recently launched Rezchain, which is expected to deliver efficiencies. WEB also expects Webjet OTA to outperform the market with higher bookings growth than the market. It will continue to deliver enhancements and will increase personalization by adding Apple pay/android pay to Webjet apps. The company has hired a new leadership team which will help in delivering scalable global growth across all 3 divisions. The company also expects that there will be a rise in costs at a lower rate than that of revenue, primarily driven by optimisation of IT platforms and the ongoing impact of Rezchain.

Underlying EBITDA for FY20 is expected to be in the range of $157 million to $167 million, representing an increase of 26-34% over FY19. It also anticipates that 1H20 EBITDA would be approximately $80 million, driven by continued momentum from WebBeds and 1-5% EBITDA growth from Webjet OTA. WEB also expects an increase of 5-10% in corporate costs and is on track to significantly reduce the receivables over 180 days.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price/Earnings Multiple Approach

Price/Earnings based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of WEB gave a return of 3.06% on a YTD basis and a return of 15.52% in the last one month. Over a period of 4 years from FY15 to FY19, the company witnessed a CAGR of 32.75% in revenue. Webjet OTA has continued to gain market share and has outperformed the market in terms of bookings growth. WebBeds is also well positioned to capture the upswing and offers a decent opportunity for accumulation. Considering the improvement in financial performance, increasing returns, modest outlook and increased gross margin and EBITDA margin, we have valued the stock using a relative valuation method, i.e., Price/Earnings multiple, and arrived at a target of lower double-digit upside (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $13.410, down by 0.445% on January 13, 2020. 
 
 
WEB Daily Technical Chart (Source: Thomson Reuters)

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