Helloworld: Positioning for a Leisure travel recovery

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
08 February 2022, 7:00 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • Helloworld (ASX:HLO) recently announced the sale of its Corporate and Entertainment travel business to Corporate Travel Management (CTD) for A$175m (49% of its mkt cap).
  • The 2H22 will likely be challenging for HLO given the Omicron variant has delayed the travel recovery and there will be no corporate earnings in 4Q22 (sale likely to complete in March). We have removed Corporate from our forecasts.
  • Backing out its investment in CTD from its EV, HLO is materially undervalued, trading on a recovery year EV/EBITDA multiple of only 3.6x. Add maintained.

Sale of Corporate and Entertainment travel business to CTD

HLO is set to sell its Corporate and Entertainment travel businesses to CTD for A$175m.

Consideration consists of A$100m in cash and A$75m (3.57m shares at A$21.00) in CTD scrip. Following ACCC approval, the transaction is expected to be completed during 1Q of 2022 (likely March).

Future earnings will be materially lower but balance sheet will be strong

Based on FY19A Corporate EBITDA of A$22m, the sale price implies an EBITDA multiple of 8x. This multiple appears reasonable and HLO believes it maximises the value of the business. In valuing HLO, we apply 6x in our blended valuation. HLO’s last Corporate acquisition (TravelEdge) was purchased for 6x EBITDA.

The transaction is positive for HLO, albeit future earnings will be materially lower. Corporate travel isn’t its core business. Now the company can now focus on what it does best which is Retail and Leisure travel (higher margin). The cash proceeds (A$100m) from the sale can be used to pay down HLO’s existing debt, giving it funding flexibility to grow its business post COVID-19 (including M&A). Post this transaction, HLO will have liquidity of A$155m and a net cash position of A$85m. 

Through its shareholding in CTD (will own 2.5% and become its seventh largest shareholder), HLO will have exposure to the upside from the merged corporate businesses and the world’s fourth largest corporate travel company.

Given our positive view on CTD’s growth potential post COVID-19, we expect this shareholding to derive significant value for HLO over time. At our CTD valuation of A$29.00, this would increase our HLO valuation to A$3.05.

Trading update and outlook

HLO’s 1Q22 TTV of A$266.5m was up 50.7% on the pcp however it was down 31.2% on the 4Q21 given increased travel restrictions across ANZ. 1Q22 EBITDA loss was A$3.6m, down from A$3.8m in the pcp (despite no JobKeeper), with the September loss of only A$0.6m lower than July/August of ~A$1.5m.

Corporate was EBITDA positive (A$1.6m) in the 1Q22. October TTV was A$109.4m, up 50% on the pcp. Non-Corporate TTV in November was A$94.8m, up 50.5% on October and up 191.7% on the pcp. We expect that December was impacted by Omicron.

Although state borders have now largely been reopened (except WA), we expect the Omicron variant will temporarily delay the travel recovery impacting 3Q22. Its 4Q22 will be impacted by no Corporate earnings (sale completes in March).

New Zealand’s delayed reopening timetable also doesn’t help. However Australian borders reopening to double vaccinated tourists on 17 February is a positive.

We remove Corporate from our forecasts

We have revised our forecasts for a delayed travel recovery due to the Omicron variant and for the material loss of earnings due to the sale of Corporate (~20% of group TTV).

We forecast HLO’s earnings to recover back to proforma FY19 levels in FY24 (or EBITDA of A$57m - new base post Corporate sale).

Investment view

With a strong balance sheet post the sale of Corporate, HLO will be well placed to capitalise on the pent-up demand for Leisure travel and acquisition opportunities. We think that HLO will win market share given travel will be complicated and it will have reduced competition.

Backing out its CTD shareholding from its EV, HLO is materially undervalued trading on a recovery year (FY24) EV/EBITDA multiple of 3.6x. However, it is a late cycle COVID-19 recovery story given its exposure to inbound and outbound travel to and from ANZ and therefore investors will need to be patient.

Share price catalysts include reopening Australian borders to tourists, completion of the sale of Corporate, Omicron subsidies, travel demand rebounds and accretive acquisitions. The key risk is if new COVID-19 variants continue to emerge, further delaying the travel recovery. (login to view target price)

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