Australia | Dec 19 2013
-Market share loss accelerates
-Increased marketing investment needed
-Seen struggling for some years
By Eva Brocklehurst
Online accommodation booking service,Wotif.com ((WTF)), is finding some aggressive competitors have their sights firmly set on Australasia. The company has downgraded profit expectations, having been hit by a perfect storm of increased competition, lower transaction volumes and higher costs. Wotif.com was generating more than one third of all online accommodation sales in Australia. That may not be the case in future.
Morgan Stanley has been bearish on the value of the company's position relative to the product superiority, global networks and marketing strength of global online travel agents. This view is seen supported by the fact that Booking.com chose Australia as the first market outside the US to roll out its offline marketing campaign and, according to Morgan Stanley, this company is prepared to spend. Lower sales, higher costs and competitors with scale make up an unattractive investment case for Wotif, in Morgan Stanley's opinion, and the Underweight rating stays firmly in place. What could change this view? Cyclical shifts towards domestic holidays and short breaks, improved conditions in Asian markets and price rises.
It's the same case for Citi. The broker notes the company's response has been to ramp up marketing spending but then there's been a jump in costs, largely attributed to increased IT development spending. Annualising the fist half wage guidance adds $7m to the company's operating costs and this falls straight to the bottom line. None of this is expected to reverse any time soon. If anything, Citi thinks marketing spending will have to increase further and compares the fact that Expedia spends 40% of revenue on marketing and Booking.com spends 30% with Wotif's 19% expenditure, on FY14 estimates.
Citi has a Sell rating, seeing a high probability of further market share loss. Macquarie notes room night declines are a major concern. While this reflects the soft market conditions, the broker suspects leakage to Hotels Direct remains the key issue for the company's business model. Initiatives are underway to arrest the declines but, with the exception of commission rate increases, none appear likely to make a material difference, in the broker's view.
Earnings margins are expected to fall to 45% from 54% in JP Morgan's estimates, and may go further. Wotif is trading at half the 2014 market cap-weighted, average price earnings of its travel agent peers. JP Morgan considers the company is structurally challenged. Wotif has attributed some of the downgrade to first half profit forecasts – expected to be around 19% below the prior corresponding half – to a soft market. Domestic visitor nights decreased 3.7% in the September quarter and the company thinks this has worsened in the December quarter. JP Morgan believes there could still be value in the domestic accommodation market, with revenue growth of around 5% and a step down in margins, but it's the competition that's taken a toll and this can only be met with more marketing.
The fact that market share loss is accelerating and marketing costs are rising makes CIMB concerned about the longer term growth profile. The broker finds upside potential exists from incremental revenue streams but a positive stance is premised on the company retaining market share. This hasn't happened. Hence the broker has downgraded to a Hold rating. Only some evidence that conditions have stabilised or that new revenue streams are offsetting market share losses, would make CIMB feel any differently. Deutsche Bank has been encouraged by the strong growth in the flights segments and sees the risk-reward profile as balanced. Having said that, the broker also considers that, until there is a volume recovery in the core business, it's hard to be much more positive.
The company is going to struggle to deliver any earnings growth over the next three years, according to BA-Merrill Lynch. The consumer backdrop is tough and Australians were substituting domestic travel for overseas travel while market share erosion has hampered top line growth. Domestic transaction value is down 5% in the first half against being down 1% in the second half. The outlook is fragile and the broker notes management was unable to provide guidance. Merrills sees a structural decline towards 40% margins, given the need to invest in sales and marketing to shore up market share against the overseas competitors. Moreover, the broker suspects the company was under-investing in marketing previously, over-earning on earnings margins of 50%. The only supporting factor, in Merrills' view, is the balance sheet retains a net cash position.
On the FNArena database the stock has no Buy rating. There are five Hold and three Sell. The consensus price target has fallen to $3.45 from $4.80 previously, but this could decline further as more broker reviews are received. The target is currently showing 30% upside to the last share price. The dividend yield on FY14 earnings forecasts is 7.7% and on FY15 it's 8.4%.
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