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.
- 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.
WHAT SORT OF INVESTMENT IS WEB?
In any other time, WEB would be a growth play. More travel and an increasingly efficient business connecting those travellers with the best deals. Right now, this is a recovery play. What anyone who buys this stock now is banking on is the following;
- 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.
One seems almost a certainty, whilst two requires a little bit of faith. But, as Marcus has been writing about in his strategy pieces, there is plenty of evidence that the world (if not Australia) is getting on with business and doing its best to manage through COVID with varying degrees of success.
One thing that is certain however, is that human beings won’t be tied down forever. It’s not how we are programmed. Almost as certain, is that this pandemic will pass.
Morgans consider the company fairly valued, pleased by the EUR100m convertible note offering to strengthen its balance sheet. Observes bookings are now improving as interstate borders reopen although, a greater leverage to international travel leads the broker to forecast a FY21 loss. UBS holds the most bullish price target of the group, implying ~56% update to the current price. It believes the outlook has improved materially since April, facilitating a faster recovery in leisure travel. Anticipates additional market share gains in its estimates. Credit Suisse also notes acquisition opportunities, calculating the EUR100m convertible note offering wasn’t necessary from a liquidity perspective. Morgan Stanley on the other side, suspect it had more to do with balance sheet issues than the company looking out for M&A opportunities. Adds meaningful M&A opportunities will be hard to source. Anticipates leisure to lead the recovery rather than corporate. Implying the company’s biggest earnings contributor – B2B – will be a late-cycle story. Ord Minnett considers the business well-positioned for the inevitable recovery in the business-to-business segment post the pandemic.
The stock is up ~55% from its April low and is 27% off its most recent high in early June. There is a pretty obvious resistance level at 350c, surprise, another round number. Momentum is just starting to wane after a 30% lift in five days. The travel sector is coming alive as the Victorian case numbers peak. There is a rotation out of technology into the beaten-up Energy, industrials, travel and consumer discretionary sectors. The sectors that would perform if the virus went away. To become more bullish, we would have to see WEB break through 350c. Despite the recent run, RSI is still not in overbought territory.
TOP 20 INVESTORS
First observation, that’s a lot of blue. Since late April (roughly the stock’s bottom) 15m shares have been purchased by the major investors. Notably, Macquarie and Vanguard picking up ~5m shares each. A very encouraging sign for the bulls.
Short interest in WEB has increased significantly since COVID-19 outbreak fears hit at the start of the year, understandably. Interest peaked early April after stock fell 26% the day after coming back online from its trading halt. What is discouraging to see is short interest picking back up near its previous highs, currently at 11.06% indicating a significant degree of bearishness towards the company.
However, this does present an opportunity for the bulls. The higher the short interest, the greater the risk that short covering may occur in a disorderly fashion. What happened in April following the resumption of trade was a ‘short squeeze’, a jump in a share price that forced a number of short sellers to close their positions, which pushed the share price even higher as they were forced to buy back the shares sold short.
Overall the trend isn’t good, but the short squeeze in April shows how quickly that can change.
We have already added WEB to the MT Growth Portfolio. We have taken some it this on faith, as everyone does with every investment. The faith is not so much in the business, but in the evidence which support the likelihood that the global economy will recover, things will return to normal and that now is an opportune time to buy a good stock at a very good price. The other thing to remember is that if you sit around and wait for those things mentioned above to happen, the time to buy such a stock will have well and truly passed
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