Upside For The New Webjet(s)

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Analysts are positive on Webjet’s demerger of its B2B and B2C businesses into separate listed entities, allowing each to focus more specifically.

-Webjet splits into B2B and B2C
-Benefits greatest for the larger B2B entity
-Overlooked B2C will enjoy better focus
-Analysts positive on the split

By Greg Peel

Last week, Webjet demerged its business-to-business (B2B) and business-to-consumer (B2C) divisions into separate ASX-listed entities. Shareholders voted overwhelmingly to approve the demerger last month, hoping it would help to unlock value for the little-understood B2B business. Webjet has become a global wholesaler of hotel rooms to other online travel and corporate travel companies.

Webjet’s customer-facing business includes its online travel agency (OTA), which holds about 8% of online flight and hotel bookings across Australia and New Zealand, as well as GoSee, a motorhome and car rental group, and the Trip Ninja smart travel technology.

The B2B entity continues to trade as Webjet Travel Group under the existing ticker ((WEB)), while the B2C entity trades simply as Webjet Group under the new ticker ((WJL)). Not the least bit confusing. The B2B entity owns WebBeds.

There is a clear valuation difference in the B2B entity, trading around $7.29, with the B2C, trading around 99c.

Good Idea?

Morgan Stanley views the demerger as a positive, unlocking assets which enjoy the sole synergy of shared overheads. Specific focus might improve business performance, the broker suggests, but primary upside is in the potential re-rating for Webjet Travel (B2B).

Morgan Stanley feels both businesses will be cleaner single business unit stories with greater management focus and accountability. The broker sees scope for a WEbjet Travel (circa 90% of value) re-rating without Webjet Group (10%). The new structure is more tax effective for highest growth and highest multiple business.

On the negative side, the resultant -$8.1m overhead dis-synergy was larger than Morgan Stanley had expected. Also, one-off costs of -$12.2m seem high. The broker also sees potential adverse impacts to index relevance, and sees little additional capital structure flexibility post transaction, and given the covid experience, expects both businesses to keep plenty of balance sheet capacity.

Regarding index inclusion, Wilsons believes Webjet Travel will stay in the ASX200 but there is a risk Webjet group will not make the ASX300 threshold.

In reaching a valuation for Webjet Travel, Wilsons believes the strongest comparables are the likes of Expedia, Booking Holdings and Airbnb, noting there are no listed pure-play bed banks. For Webjet Group, Wilsons draws upon eDreams, lastminute.com and Despegar as the strongest comparable OTAs with a single-region focus and a high proportion of flight bookings. Despite differences in model, Wilsons does also see relevance in Corporate Travel Management ((CTD)), Flight Centre ((FLT)) and Helloworld Travel ((HLO)).

Post-demerger, Webjet Travel will become a high growth, pure-play, global B2B marketplace for hotels through its ownership of WebBeds, RBC Capital Markets notes. The marketplace connects over 500k hotels in more than 190 countries to over 50k buyers through API (application programming interface) connectivity or trade-only booking websites.

RBC suggests Webjet Travel has a demonstrated track record of growing market share in the global hotel wholesale market which is forecast by Euromonitor to grow at a 7.7% compound annual growth rate over 2023-27.

Strong growth outside of Europe has meant that WebBeds is now a more globally diverse business, RBC points out. FY24 total transaction value (TTV) of $4bn is up 59% on pre-covid levels with the Americas up 342% and Asia-Pacific up 87% over the same period. The company is targeting $10bn of TTV in FY30 with an evolution towards an equal share of TTV from its top three regions.

Webjet Travel (B2B)

The company’s trading update at the AGM implies that for the period between 19th May and 25th Aug TTV slowed from 35% to 20% growth year on year. However, Citi notes this also happened a year ago and may not be totally unusual, and August TTV appears to have accelerated to 30%, implying a sequential uplift/re-acceleration.

As a result, Citi is cautiously optimistic about Webjet Travel’s performance.

Following the demerger/trading update, Citi launches new financials for the stand alone B2B business, leading to a new target price of $8.25. Looking forward, Citi has been cautious for some time around a mean reversion in hotel average daily rates and occupancy. However, the broker concludes this hasn’t happened, and to date is yet to see it in the data. As a result, Citi estimates the AGM update was not representative of a broader industry slowdown and is optimistic about August’s re-acceleration.

Citi has a Buy rating on Webjet Travel.

Management recently downgraded its longer term expectations for revenue margins to 7.0-7.5% from prior guidance for 7.5%. Macquarie forecasts FY30 revenue margins of 7.0% and expects revenue margin contractions will be driven by targeting volume growth in lower margin regions, continued investments by hotels into direct channels, growth in existing customers volumes reducing take-rates, albeit likely increasing volume rebates, and the rise of exclusive contracts.

Macquarie expects Webjet Travel to successfully scale, however, in the broker’s view this is already factored into consensus, while guidance is for broadly flat underlying earnings margins. Macquarie is thus Neutral on the stock, cutting its target to $7.63 from $8.72 to reflect the demerger.

Webjet Travel shares trade on a higher multiple relative to Australian travel names. RBC Capital believes this is justified by higher earnings growth expectations. RBC has an Outperform rating, cutting its target to $8.50 from $10.00 without Webjet Group.

Given Morgan Stanley (Equal-weight) and Wilsons (Overweight) updated their outlooks before the actual demerger, they are yet to adjust their targets for the split.

Webjet Group (B2C)

Morgans is first cab off the rank to initiate coverage of Webjet Group.

The company should benefit from renewed focus and targeted investment, Morgans suggests. It is fair to say that when Webjet Group was part of Webjet, it wasn’t management’s main focus or area of investment. Now that Webjet Group has a management team and board solely focused on this business and its strategic priorities and growth agenda, the broker notes it can make more targeted capital allocation decisions and hopefully the earnings trajectory of the business can improve over time.

The cmpany’s recent trading update showed a deterioration in the top line (bookings down -5% and TTV down 1-0%) reflecting cost of living pressures, Rex Airlines going into administration and lower airfares. However, earnings went up slightly from selling more higher margin international airfares and strong cost control.

While the Webjet OTA (now part of Webjet Group) is a mature business which is currently being impacted by cyclical headwinds, with a focused management team and strong balance sheet, Morgans believes there is the potential to rejuvenate the brand and its outlook.

Morgans initiated with an Add rating and 95c target.

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