What Happened To WEB Travel’s Growth Outlook?

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WEB Travel has downgraded revenue margin guidance for the second time in four months, raising questions of whether there are structural issues in the once buoyant European region.

-WEB Travel downgrades revenue margin guidance, again
-Europe the major culprit
-Forecasts slashed across the board
-Longer term valuation/optimism relies on sustainable margin

By Greg Peel

Late in September, Webjet implemented a demerger of its business-to-business and business-to-consumer divisions into two separate entities. The move was overwhelmingly approved by shareholders.

The B2B division became WEB Travel Group ((WEB)), specialising in the wholesale hotel bed bank market (WebBeds). The B2C division became Webjet Group ((WJL)), the online travel agency (OTA). Brokers applauded the opportunity for the much larger WEB Travel to unlock value and re-rate, while the smaller Webjet would benefit from greater focus.

A majority of brokers rated WEB Travel as a Buy, with the others on Hold. It didn’t take long, nonetheless, for the wheels to start falling off.

At the Margin

In FY23 and FY24, when the two divisions were still part of the one company, the B2B division delivered revenue margins of 8%, which was in line with pre-covid levels. At the company’s March strategy day, management offered FY26-26 revenue margin guidance of 7.0-7.5%.

At the AGM in August, margin guidance of 7.0% was provided. This week, first half FY25 guidance has been lowered to 6.4%.

WebBeds’ total transaction value (TTV) is up 26% year on year, in line with forecasts, yet margins are materially lower at 6.4%, below consensus of 7.1%. Implied first half FY25 revenue of $168m represents -10% downgrade to consensus. A first half FY25 earnings margin of 44%, versus 52% a year ago, implies a -22% miss of consensus.

Operating expenses are up 15% year on year, 2% above consensus with the second half expected to be in line with the first. There was no mention of any change to a goal of $5bn of TTV by FY25.

The deterioration in WEB Travel’s margins in such a short period of time couldn’t make the timing of the demerger worse, says Morgans, especially given it introduces additional costs. Whereas mergers bring about synergy opportunities in administration, demergers imply dis-synergies as administration is replicated.

What’s going on in Europe?

Management pointed to three drivers of lower margins in Europe specifically, with Europe previously the company’s highest margin region. Increased competition is an issue, as are volume rebates paid to customers.

Those rebates, known as “overrides”, are expected to continue through to FY26. Overrides are payments made to WebBeds’ customers (OTA’s, apps etc) once they hit certain volume/TTV thresholds. Shaw and Partners anticipates override agreements with customers are renegotiated every 6-18 months which leaves a revenue drag of rising financial incentive payments to customers as TTV grows.

The other driver was a tough June-July period in Europe when WebBeds was impacted by tour operator FTI filing for insolvency, the European Football Championships and the Olympics.

Morgans struggles to understand the deterioration in the revenue margin in such a short period of time and why Europe has structurally been reset lower.

The step-down in revenue margins is problematic, Shaw suggests, with the region historically offering the highest revenue margins across WebBeds’ key markets. This broker suspects macro weakness in Europe is compounding one-off factors, lowering its TTV mix within the group from the 37% recorded in FY24.

Revenue margins closer to 6.4% imply some -20% of revenue decrease in four months, Citi notes. This appears to be occurring despite positive European hotel RevPar (revenue per available room) data and strong transatlantic airline volumes and pricing. As a result, Citi estimates this implies a more idiosyncratic B2B risk unfolding.

Despite the one-off issues reversing (FTI, Football, Olympics), the new lower revenue margin guidance appears reflective of more structural change. Citi estimates increased competition from two larger industry players, and a new start-up from ex-Webjet employees in the Middle East as drivers. Nevertheless, more importantly is the rapid change in the competitive environment that will probably raise question marks around visibility, Citi warns, and whether there is elevated forecast risk.

[Side note: The IPO of said start-up, Hotelbeds, has been delayed until next year given uncertainty created by both Middle East conflict and the US election.]

UBS understands WEB Travel has now assumed its European revenue margin is structurally lower and more in line with its other regions. This doesn’t completely add up to the broker given Europe is a more fragmented market with a greater number of independent hotels versus the US and Asia which are dominated by the hotel chains and OTAs and are more domestic markets.

Despite this, the FY26 earnings margin (EBITDA) is expected to rise to 50%. However, this would imply, UBS notes, that operating costs only increase by 4% in FY26 versus 13.4% in FY25.

Downgrades

The impact of WEB Travel’s updated guidance has been material downgrades to broker earnings forecasts over FY25-27. The impact on the stock market was a -32% share price crash on the day.

Citi makes material revisions to forecasts following the update and its target price decreases to $5.55 from $8.25. The broker downgrades WEB Travel to Neutral from Buy on account of increased uncertainty and the rapid pace of change.

WEB Travel deserves to trade on a similar multiple to its domestic peers (FY26 PE of 14-15x), says Morgans. Given earnings uncertainty and lacking any near-term catalysts, this broker has downgraded to Hold from Add. To become more positive on the stock, WEB Travel must deliver both strong top line and bottom-line growth, Morgans suggests. Target falls to $5.25 from $8.60.

Longer term, Macquarie expects WEB Travel will successfully grow TTV, however, a lack of visibility concerning revenue margins and opex and capex outlooks makes this broker cautious on the company’s ability to drive operating leverage as it scales.

Management has guided to first half opex growth of 15% (largely from including corporate overheads) and flat half-on-half second half opex. This implies no underlying cost growth in FY25. Macquarie believes this is unsustainable longer term and forecasts cost growth returning to some 10% pa from FY26, in line with management’s prior commentary. Opex growth is required to support staff increases as the company grows volumes in regions where it is less established.

Macquarie retains a Neutral rating, lowering its target to $5.12 from $7.63 and then, upon further consideration, lowering its target to $4.48.

Ord Minnett suggests the first half trading update is likely to be remembered as much for the way in which the downgrade was communicated. The absence of a conference call created disappointment, confusion and selling in the face of a step-change in revenue margins. Despite all this, the investment thesis comes down to one simple question, the broker believes: Is the 6.5% FY25 revenue margin achievable moving forward and if so what levels of earnings (albeit rebased) does this imply?

Ord Minnett has dropped its target to $6.14 from $10.48, but that is complicated by the fact the broker also took the opportunity to remove the B2C division from its model. Ord Minnett nevertheless retains a Buy rating based on a 12-month timeframe.

Morgan Stanley has an Equal-weight rating and a $7.00 target.

Shaw and Partners views FY25 as a rebasing year, with 20% earnings growth to resume in FY26. The broker’s target falls to $6.10 from $9.80, but again has now removed the B2C division. Buy maintained.

UBS’ Buy rating and $10.00 target are now moot, ahead of the broker revising its modeling.

The seven brokers monitored daily by FNArena covering WEB Travel now have three Buy or equivalent and four Hold ratings between them. The consensus target has fallen to $6.36 from $8.82 (still including UBS).

Beyond, Goldman Sachs has cut its target to $6.70 from $8.20 and retains Buy. Jarden has an Overweight rating and target of $7.10, while Wilsons has placed its Overweight rating and target under review.

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