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Webjet has been riding the pandemic wave well, shifting the focus of its WebBeds business towards localized travel while investing in the online service.
-WebBeds wins new customers as focus on domestic travel
-Webjet is gaining market share due to a structural shift towards the Web
-Lots of capital to deploy growth opportunities
By Eva Brocklehurst
Has the pandemic helped Webjet ((WEB))? There has been an acceleration in the shift to online travel bookings and in this area Webjet has made significant market share gains. Ord Minnett considers that a good part of these gains should be permanent because they are structural in nature.
The company’s AGM update is also a timely reminder that travel stocks exposed to Europe and the Americas will experience the fastest recovery in earnings. WebBeds, which was around 50% of operating profit (EBITDA) before the pandemic, is now profitable on a monthly basis.
The recovery was supported by strong travel demand in North America and Europe, where travel restrictions have already been relaxed. The company reported that WebBeds was profitable in July and August and is on track to do so in September.
Ord Minnett expects this trend to continue, although the June quarter is a peak period, with January through March being the quietest months. WebBeds is very dependent on the summer vacation season in the northern hemisphere.
Recognizing that domestic or internal travel would be the first segment to reopen, Webjet shifted the WebBeds strategy to domestic opportunities and these now account for 46% of total deal value compared to 10% before the pandemic.
This move towards domestic travel may have resulted in a drop in the average value of bookings, but this was more than offset by the increase in activity.. Morgans sees the backbone of domestic travel as key to diversifying the business, and WebBeds has gained new customers and increased market share as a result.
Given border restrictions, overseas travel agency Webjet experienced a drop in bookings in August, to 14.5% from pre-pandemic levels. Online Republic also fell, with bookings in August just 9.5% of pre-pandemic levels.
These two companies should return to profitability when Australia and New Zealand reopen. In addition, UBS believes that increased momentum around Australia’s vaccination will create better prospects in the medium term.
Webjet is expected to benefit from strong pent-up demand over the next 18-24 months and has the potential to gain significant stakes in the business-to-business (B2B) and business-to-consumer (B2C) markets, in the future. view of the broker.
Webjet estimates a market value of $ 70 billion in B2B transactions, of which it currently holds a 4% share. Its target is 14% share, which involves $ 10 billion, but Morgan Stanley is skeptical, believing that this would require Webjet to take leadership from the lead actor who is around five times its size, and also make margins. industry record.
Webjet expects to gain market share due to the structural transition to the Internet and the significant decline in the number of traditional travel agents. The company also attributes its success to a wide range of payment options and superior technology.
Morgans expects a net loss in FY22 for Webjet as cost cuts should push FY24 operating profit to 2019 levels. Broker expects Online Republic to post a loss modest in the first half of FY22, followed by a breakeven point in the second half.
Yet Morgans recognizes forecast accuracy is low and likely to be dictated by the success of global immunization programs and government decisions on reopening borders.
Morgans considers the current assessment to be fair, given the prolonged recovery in the travel markets. It is important to note that there is a lot of liquidity following the recent offer of convertible notes of $ 250 million.
Macquarie reports the capacity of the balance sheet with cash reserves of $ 406 million as of March 2021, which makes Webjet a good candidate for consolidation. According to the broker’s estimates, Webjet could deploy $ 270 million of capital by FY25 on growth opportunities.
Importantly, Ord Minnett believes that Webjet used the pandemic downtime and the proceeds of capital raising to invest for the future and the decision to integrate and improve IT systems into a single platform will be. crucial.
This should allow the company to achieve the expected reduction in operating costs of -20%, once the balance has returned. The savings will be realized through the use of blockchain, data analysis and process simplification. By the end of FY22, the platforms are expected to be fully rationalized.
Webjet will also invest additional resources in a growing share of the US B2B market at a time when most of its competitors are probably doing it hard. While this should be positive in terms of operating cash flow in the first half of FY22, the exclusion of the capital expenditure forecast leaves Morgan Stanley with suspicion that this investment could be marginal.
The broker also raises concerns about capital management, which has led to a stock count that has tripled in the past four years. Either way, Morgan Stanley considers a rebound in working capital and operating leverage to be the main positive as the stock has suffered severe dilution during the pandemic.
The FNArena database has four buy ratings and three keep ratings. The consensus target is $ 5.84, suggesting a rise of 3.0% from the last share price. Targets range from $ 4.30 (Morgan Stanley) to $ 7.12 (Ord Minnett).
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