SunHotels Key To Webjet’s Future Growth

This story features WEB TRAVEL GROUP LIMITED. For more info SHARE ANALYSIS: WEB

-Growth difficult in mature market
-Need for dilution of Oz flight exposure
-Consumer resistance to high fees
 

by Eva Brocklehurst

Webjet ((WEB)) has acquired SunHotels, a European accommodation wholesaler. The acquisition, for around $31m, is an important one for Webjet as brokers believe the company increasingly faces competition in a maturing Australasian flight booking business where growth is likely to be minimal or absent.

JP Morgan observes the price paid for SunHotels was solid, as global online travel agents trade at 24.3 times 2013 earnings compared with Webjet on 13.8 times. SunHotels has 6,000 directly contracted hotels which grow the company's inventory base significantly in a resort and beaches market that is difficult to penetrate. This complements Webjet's other businesses given they are more city based. However, while Webjet expects SunHotels earnings to be "significantly higher" in 2014, the broker suspects the outcome is more likely to be flat. The upside risk to Webjet's earnings in FY14, in JP Morgan's opinion, is predicated on the re-launched ZUJI brand and the Lots of Hotels business contributing more than the forecast $4.0m, with the core flights business being flat. Thus, surprise potential rests on growth in Asian and Middle Eastern travel markets. Webjet's ambition is for these business to contribute $10m each to earnings in 2-3 years time.

The European deal binds the network and agents using Webjet's products but in order to add value, Morgan Stanley believes Webjet need to put more volume through the acquired network. Current management has delivered a strong improvement in organic performance and traction in Lots of Hotels but the ZUJI brand has so far disappointed the broker. Morgan Stanley retains an Equal Weight rating and $3.10 target but needs conviction in the growth opportunity in order to upgrade the recommendation.

SunHotels specialises in European resorts and sells primarily into the Scandinavian and UK business-to-business markets. It will remain a standalone entity. Strategically the acquisition is important, in Goldman Sachs' view. Initial analysis suggests the acquisition could be 13% earnings accretive on an annualised basis, excluding any potential synergies, and is necessary to dilute Webjet's exposure to the Australian domestic air market where booking fees still account for 40% of revenue. The broker retains a Neutral rating and $2.90 target.

Credit Suisse echoes Goldman's view, noting the accretive nature of SunHotels earnings is expected to be 10-15% in FY15 based on conservative assumptions around cost of debt and total-transaction-value growth. The broker has downgraded underlying volume assumptions for Australasia, which means the net result is a downgrade of around 5% to outer year forecasts. Credit Suisse also believes the core business is under pressure from increased competition and to become more positive would need to see signs of stabilisation in flight volumes. A Neutral rating and $2.85 target are retained.

JP Morgan is more positive from the outset, upgrading the rating to Overweight from Neutral. The broker envisages near and medium-term upside to earnings forecasts if the company is successful with ZUJI and Lots of Hotels. Still, the longer term structural risks regarding the sustainability of the business model cannot be overlooked. Webjet deserves a discount. Just not such a large discount.

Many investors have raised concerns that consumers will eventually resist the high service fees associated with Webjet's bookings, especially with new entrants providing an alternative. The broker observes the stock price is trading as if the valuation has no terminal value beyond the next 10 years. Despite this, JP Morgan does not think the stock deserves the 48% discount that it currently endures. The broker's price target of $3.00 envisages Webjet trading at 12.9 times 2015 earnings, which is still 40% below the average for online travel agent peers. The broker's valuation factors in declines in the core Webjet branded business as well as only a 10% probability of the current entity surviving past 10 years.
 

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