BUY HOLD SELL – Webjet Limited (ASX: WEB)
Webjet Limited (ASX: WEB) provides online travel bookings. WEB provides services in regional consumer markets, as well as global wholesale markets via the online channel. It operates through two 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. The Online Republic specialises in bookings of cars, cruises and motorhomes. Its B2B division consists of JacTravel, Sunhotels, Lots of Hotels, FIT Ruums and Totalstay. JacTravel is the B2B suppliers of hotel accommodation, offering application program interface (API) connectivity and a travel agent Website. Unsurprisingly, Webjet has been smashed by the coronavirus pandemic. Closed borders and lockdowns are not good news for a travel company. In response, WEB raised $346m in April via an oversubscribed institutional and retail placement. Bain Capital as a big player, tipping in $25m and agreeing to a potential economic commitment of up to an additional $65m. Whilst these commitments were significant, Webjet itself was quick to point out the risks, with the company’s own investment documentation outlining risks from brand damage to debtors collapsing and the uncertainty of how long travel bans will remain in place. The business also tightened up on expenses, retrenching 440 staff including 30 in Australia, whilst remaining staff were reduced to four-day weeks. No money has been spent on marketing, and the MD took a 60% pay cut. The $12.2 million half-year dividend has been deferred and will be reviewed in October. All of those things were necessary to ensure the business survives and investors seemed to like the moves. It has allowed them to focus on the upside, which seems cautious but positive. Whilst this analysis is being written from Melbourne, where we are in stage 4 lockdowns and can’t travel more than 5km from our homes, let alone get on a plane, there are strong signs the rest of the country is doing well, whilst a host of international airlines have begun ramping up flights, such as Emirates, and multiple Chinese and US carriers. Just this week the NY Times reported that The Transportation Security Administration (TSA) said it screened 831,789 people last Sunday -- the first time it screened more than 800,000 people since March 17. Slowly, slowly, things are returning to normal. Main Observations:
- ROE awful at 1% and forecast to bottom out in FY21 at -3.9%. Expectations are for improvement following FY21, although nothing spectacular.
- Revenue and EPS growth are both expected to go backwards for the foreseeable future. Keep in mind that these are broker estimates and can be updated, so in a few months, it could look quite different depending on global/economic optimism. There is also potential for both metrics to improve on M&A activity which was flagged by WEB following its entitlement offer.
- Of the 8 brokers surveyed by Thomson Reuters half have a BUY or STRONG BUY recommendation.
- It is trading at a 12.6% discount to the average broker target price. Weekly volatility is also elevated, moving ~18% in either direction each week.
- Overall, it’s difficult to paint a positive picture from the fundamentals, not something a traditional value investor would consider.
- The business has done what it must in order to survive and;
- That this is about as bad as it will get for travel and that the only way is up.