Australia | Oct 26 2010
By Chris Shaw
Online travel and accommodation group Wotif.com ((WTF)) held its annual general meeting yesterday and at the meeting offered an update on trading performance so far in FY11. The update suggests trading has to date been challenging, particularly given the cycling of strong growth delivered in the first half of last year.
As Credit Suisse notes, net profit after tax growth in the first half of 2010 was 34%, reflecting the impact of fiscal stimulus measures, a weak Australian dollar and a pick-up in domestic travel.
The first two factors are no longer in play, while the broker notes current discounting of room inventory is impacting on Wotif's performance at present. Also playing a role is the stronger Australian dollar, which is making overseas rather than domestic travel more attractive.
Earnings guidance for the first half of FY11 is for a result broadly in line with the June half of FY10. This implies a profit of around $25.4 million, which would be 10% below the previous corresponding period and 2.5% below Credit Suisse's previous forecasts. The broker has adjusted its earnings estimates accordingly.
Credit Suisse remains bullish on the outlook beyond the current half year, taking the view the second half of FY11 should see a return to something closer to normal trend rates of growth as some of the existing cyclical headwinds roll off.
UBS agrees the second half of FY11 should deliver stronger performance, reflecting an expectation room rates continue to improve. This sees UBS lift its earnings estimates slightly through FY13, supported by an expectation of growth via acquisitions, particularly in Asia and India.
This contrasts with the view of Deutsche Bank, which is while short-term revenue pressures are coming from factors such as cheap airfares and a stronger Australian dollar, a longer-term issue of increased competition is also emerging. This is likely to put pressures on marketing spend, Deutsche suggesting Wotif is likely to have to pay more in order to win its share of business.
In contrast to UBS, Deutsche Bank has reacted to AGM guidance by trimming its earnings estimates in both FY11 and FY12 by 3%. In earnings per share (EPS) terms Deutsche is now forecasting 25c for FY11 and 29c for FY12, which compares to consensus EPS forecasts according to the FNArena database of 25.7c and 29.7c respectively.
BA Merrill Lynch agrees with the Deutsche Bank concerns on revenue and competition pressures, suggesting increased spending associated with a new marketing campaign has the potential to become a constant contributor to an increase in business capex in a more competitive environment.
This creates a valuation issue, which is causing brokers to have differing views on the investment merits of Wotif.com at current levels. For Credit Suisse, the expectation of improved performance beyond the current half year suggests value.
This is especially the case when FY12 earnings are considered, as on Credit Suisse's numbers Wotif.com is trading on a less than 15 times earnings multiple for that year, which is a near-record low. Given recent share price weakness, Credit Suisse has upgraded to an Outperform rating on valuation grounds.
BA-ML has an opposite view, arguing there is currently a growth and valuation mismatch in the Wotif share price. BA-ML notes the earnings guidance offered at the AGM implies Wotif.com is trading on an 18 times earnings multiple in FY11, falling to just 16 times in FY12 on the broker's estimates.
This puts Wotif.com in a price to earnings growth ratio of 1.2 times, which compares to a peer average of 1.0. This premium cannot be justified in BA-ML's view, so its Underperform rating is retained. Last week Macquarie made a similar argument in downgrading Wotif to a Neutral rating, suggesting tough earnings headwinds are increasing the pressure on what is a high earnings multiple stock at current levels.
Overall the FNArena database shows Wotif is rated as Buy twice, Hold five times and Sell once. The consensus share price target according to the database is $4.87.
Shares in Wotif.com today are stronger and as at 1.30pm the stock was up 19c at $4.79. Over the past year the stock has traded in a range of $4.07 to $8.08 and at current levels there is implied upside to the consensus price target according to the FNArena database of a little more than 4.0%.
