Thursday, March 21st, 2019
Webjet was one of the standout results of reporting season. The share price had come under significant pressure in the 4th quarter of 2018 because of concerns around the consumer environment in Australia and weaker travel activity in Europe. For those who are less familiar with the business, Webjet has two main segments, which are the online travel booking website Webjet.com.au and also a global hotel room sourcing business, WebBeds, which directly contracts with close to 30,000 hotels to provide hotel room inventory to travel agents. In the first half result, WebBeds overtook Webjet as the largest contributor to group earnings.
Despite the macro environment, Webjet’s growth continues to be about market penetration and margin expansion. This was demonstrated in the result, which is what drove the share price reaction, up 31% for the month. In Europe, WebBeds achieved 22% organic transaction value growth in an industry that grew 2%.
The company is targeting and achieving 3x industry bookings growth in Webjet.com.au and 5x industry growth in the WebBeds hotel room business. WebBeds is the number 2 player globally with a market share of only 4%, so it’s a highly fragmented market with plenty of opportunity for continued market share growth over the long term. Given breadth of offer in terms of contracted hotels, technology leadership (including a nascent blockchain booking system) and strong customer service, this business is well placed to capitalise on this opportunity.
Margin expansion is a key part of the story for WebBeds as the business is reaching critical mass in each geography, enabling continued revenue growth at lower cost growth. Management has set a target 50% EBITDA margin by FY2022 compared to 24% in FY2018.
Providing a few more details on the recent result itself: 1H19 net profit increased by 61% on the pcp to $38.3m, which included an additional two months of JacTravel and one month of Destinations of the World. Organic growth was resilient in Webjet.com.au and very strong in WebBeds. Webjet.com.au achieved revenue growth of 12% and EBITDA growth of 11%, supported by bookings growth at three times the industry and faster growth in ancillary products. WebBeds produced a particularly strong result, including the 22% organic transaction value growth in Europe mentioned above. Americas Middle East and Africa TTV increased by 32% and Asia increased by 67% as WebBeds continues to add hotels in these less developed regions. Guidance on the Thomas Cook partnership was the one weakness in the result, with management guiding to TTV of only A$300-450m once this agreement becomes revenue generating at the end of FY19, which compares to Thomas Cook’s initial projection of 500m GBP. Clime estimates a $14m EBITDA contribution from this business in FY2020, which translates to a still meaningful 11% uplift to group EBITDA.
FY2020 will be a big year of growth for the company, with the ongoing organic growth, particularly in WebBeds, plus a full year of the Destinations of the World acquisition and attendant synergies, recognising revenue from the Thomas Cook deal and a step up in the number of directly contracted hotels in Asia. Travel activity in Europe last summer was depressed partly as a result of unusually warm weather, which reduced the incentive for UK residents to holiday in the warmer parts of Europe. Webjet has noted that early bookings for the upcoming summer have rebounded strongly, which is a useful early stage indicator.
Despite the significant rally in the share price, the stock is only trading on a forward PE of 18x, which does not appear expensive in the context of WEB’s long-term growth potential.
Figure 1. WEB PER
Clime Group owns shares in WEB.