Australia | Feb 21 2008
By Greg Peel
When the balloon starts losing altitude precariously it’s time to start throwing all those unnecessary accoutrements and trimmings overboard quickly in order to stall the drop. You wouldn’t throw the engine overboard of course, as you’ll need that to take you back up again.
So it is with equity portfolios in weak markets, particularly weak markets that happen rather fast. And particularly in weak markets which feature a lot of margin lending. I need cash now, so what can I ditch? BHP? No, better hang on to that. Westpac? No, might be able to use that again. A high-risk, high-PE, small cap? Over she goes.
And it’s probably an easier decision if that small cap’s an internet-based company, which derives income from concepts a lot of people still don’t understand. They remember 2001 though. So it’s no great surprise that internet travel success story Wotif ((WTF)) has seen its share price slashed from $6.25 at its peak mid last year to about $4.00 now, following the fortunes of the broader market. There are a lot of small caps out there who must be thinking: what have I done to deserve this? In many cases, probably nothing at all.
Wotif burst on to the scene a couple of years ago as a listed company that turned its co-creators into instant multimillionaires. It’s premise was one of those annoyingly simple concepts that has you shaking your head in disbelief. Through the power of the internet, Wotif matched discount or last-minute travellers with oddly vacant or late cancellation rooms in hotels, at a knock-down rate that suited both parties. Wotif came on in mid-2006 at a substantial premium and preceded to double to mid-2007, before the you know what began.
Excuse me while I go and do some more work on my new YouTube.
The comforting thing about Wotif as an investment is the company has established a robust internet platform, supplier deals, and economies of scale that provide barriers to entry into what might otherwise be an open slather game. On that basis, notes Merrill Lynch, Wotif has been able to grow market share. It didn’t help the company’s share price when management decided to issue new capital to fund acquisitions at a time when stock markets were wobbly. But under normal circumstances investors would be keen on future accretion.
Wotif has acquired online booking agent travel.com.au and, more recently, Asia Web Direct. The former has now been incorporated and due diligence on the latter is close to completion. The company reported a first half result that was seen as “solid” and “quality” and ahead of broker forecasts. Profit grew by 43%, and a 6c dividend was declared – not bad for an internet company. Group volumes were up 22%, average room rates up 5%, revenues up 32% and margins continued to rise, which UBS suggests demonstrates those ongoing economies of scale.
Yet the current B/H/S ratio in the FNArena database is only 1/4/0. It would be easy to immediately assume the share price had run up well ahead of valuation on general internet exuberance, but that’s not really the case. The share price has tanked. Indeed, the average target today fell from $5.24 to $4.70 (last trade $4.08) but still four brokers are stuck on Neutral.
The main reason is that Wotif is a small cap on a PE of about 18x – just what you don’t want in this current market environment. Weak markets are a time to stick to tried and true large caps with plenty of balance sheet scale and strong cashflows. For the most part, brokers are wary of ongoing volatility, and what it can do to small companies. Hence the Holds.
There is a consideration that if the world economy recedes then less travel plans will be made, but then that ignores two factors. Firstly, anything offering discount opportunities is more immune to a drop in consumer spending and secondly, Wotif is a beneficiary of a general trend of migration to the internet for all sorts of things.
But in general, brokers have increased earnings forecasts and believe, as ABN Amro suggests, Wotif deserves to trade at some PE premium reflecting business quality, market leadership, and technical superiority. That’s the reason the average target is still at a healthy level. For the less risk averse, Wotif represents one to watch for the quick market turnaround.
