Webjet: WebBeds recovery is well underway

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

01 September 2022, 9:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• Webjet’s (ASX:WEB) trading update was better than expected reflecting the strong recovery in its WebBeds business (bookings ahead of pre-COVID levels). Importantly, its EBITDA margin was also stronger than expected and gives confidence in the company’s "8/3/5" target. We have made large upgrades to our FY23 forecasts.
• Pleasingly, WEB’s 1H23 operating cashflow guidance was materially stronger than expected and will further strengthen its already strong balance sheet.
• In line with our expectations, WEB expects to exceed its pre-COVID level of earnings in FY24.
• In our view, WEB hasn’t wasted a crisis and will come out of COVID with a materially lower cost base, consolidated systems and a large business in the US. With plenty of market share still to win, we maintain an Add rating on WEB.

Event: AGM trading update was stronger than expected

As at August 2022, 1H23 group bookings are tracking at 95% of pre-COVID levels with all three business units profitable. WEB expects to generate in excess of A$100m of operating cashflow in the 1H23.

Analysis: WebBeds recovery is leading the charge (EBITDA margin is >50%)

WebBeds recovery has accelerated in the 1H23 reflecting an "exceptional" Northern Hemisphere summer period. WebBeds has experienced significant organic growth. Impressively, APAC is already ahead of pre-COVID levels despite its two biggest markets (China and Japan) affected by travel restrictions.

WebBeds is outperforming the market, with bookings exceeding pre-COVID since May (1Q23 was 106%, 2Q23 is 116%) and TTV (constant currency) is now above pre-COVID in the 2Q23 at 105% (was 93% in the 1Q23).

In July, it delivered the highest TTV on record and August will surpass July. WebBeds 1H23 EBITDA margin is expected to be greater than 50% (MorgansF was 48%) and pleasingly it achieved its "8/3/5" target (EBITDA margin of 62.5%) during the seasonal peak (Jul/Aug).

WEB said that macro-economic indications suggest a slowing of the travel market, however it expects WebBeds growth to continue in FY23 given market share gains, new customer acquisitions and technological improvements.

WebBeds proposition is more relevant than ever as hotels need its global reach to fill their rooms. WEB also said that competition has decreased compared to pre-COVID.

Webjet OTA is experiencing significant demand, but booking levels are being impacted by lower airline capacity, higher ticket prices and widespread flight cancellations. Despite this, the OTA's FY23 EBITDA margin is tracking above 35% which was above our previous forecast in the 1H.

2Q23 domestic bookings are at 80% of pre-COVID (vs 88% in the 1Q23; fall reflects the airlines cutting capacity) and 2Q23 international bookings are at 57% of pre-COVID (vs 52% in the 1Q23). Many flight credit transactions are not included in this data. The OTA's return to pre COVID earnings will be driven by the return of international capacity to Australia.

GoSee is now generating positive EBITDA (likely minimal) given borders are open. WEB said it expects this business to return to pre-COVID earnings when inbound tourism into Australia and New Zealand returns to historical levels.

1H23 operating cashflow is expected to be over A$100m. This was materially stronger than expected. While cashflow is seasonally skewed to the 1H, 2H cashflow is still expected to be positive. WEB’s balance sheet is strong.

FY24 EBITDA is forecast to exceed pre-COVID of A$157.8m given the business is now more efficient and is winning market share (assuming constant currency for WebBeds – AUDEUR was 62.5c in FY19). Our FY24 forecast is A$171.2m.

We have made material upgrades to our FY23 EBITDA forecast

Given the stronger than expected trading update and margin guidance for WebBeds, we have upgraded our FY23 EBITDA forecast by 24% to A$101.1m.

The upgrade at the NPAT level is 39%. We have revised our FY24 and FY25 EBITDA forecasts marginally reflecting the appreciation in the AUDEUR.

Investment view

Following forecast revisions, our blended valuation has fallen to (login to view). Based on our forecasts, WEB is trading on a FY24 recovery year PE of 19.1x, which is at a discount to its five-year average PE (pre-COVID) of 20.6x.

With plenty of market share to take over coming years which should underpin a strong earnings growth profile, we maintain an Add rating on WEB.

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