Webjet operates in a localized travel market

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Webjet weathered the pandemic well, shifting the focus of its WebBeds business to localized travel while investing in online services

-WebBeds wins new customers as the focus shifts to domestic travel
-Webjet gains market share through structural change towards online
-Much capital to take advantage of the growth opportunities

By Eva Brocklehurst

Did the pandemic help Webjet ((WEB))? The move to online travel booking has accelerated, and Webjet has made significant gains in the process. Ord Minnett believes that a good portion of these gains should be permanent because they are structural in nature.

The company’s AGM update is also a timely reminder that travel stocks with exposure to Europe and America will see the fastest rebound in earnings. WebBeds, which accounted for around 50% of operating income (EBITDA) prior to the pandemic, is now profitable on a monthly basis.

The recovery was supported by strong travel demand in North America and Europe, where travel restrictions have already been eased. The company has stated that WebBeds was profitable in July and August and will be profitable in September.

Ord Minnett believes this trend will continue, although the June quarter is admittedly a peak season, with January through March being the quietest months. WebBeds relies heavily on the Northern Hemisphere summer vacation.

Realizing that domestic or domestic travel would be the first segment to reopen, Webjet shifted its WebBeds strategy to domestic offers, which now represent 46% of total transaction value, up from 10% before the pandemic.

This shift towards domestic travel may have resulted in a decrease in the average booking value, but this was more than offset by the increase in activity. Morgans believes that the focus on domestic travel has been critical to diversifying the business and this has helped WebBeds gain new customers and increase its market share.

Given the border restrictions, overseas travel agent Webjet saw bookings drop to 14.5% from pre-pandemic levels in August. Online Republic also fell, with August bookings just 9.5% of pre-pandemic levels.

Both companies are expected to return to profitability when Australia and New Zealand reopen. In addition, UBS believes that the increased momentum of Australian vaccination creates better prospects in the medium term.

Webjet is expected to benefit from strong pent-up demand in the next 18-24 months and has the potential to gain significant shares in both the business-to-business (B2B) and business-to-consumer (B2C) markets Broker.

Webjet estimates a $ 70 billion transaction market value in the B2B space, of which it currently has a 4% stake. His goal is a share of 14%, which is 10 billion

Online shift

Webjet assumes that it will gain market share due to the structural change to the online market and the significant decline in the number of stationary travel agencies. The company also attributes its success to a wide range of payment options and superior technology.

Morgans expects Webjet to make a net loss in FY22, while cost reductions should allow FY24 operating profits to exceed 2019 levels. The broker expects Online Republic to record a modest loss in the first half of FY22, followed by a breakeven point in the second half.

But Morgans admits Prediction accuracy is poor and is likely to be determined by the success of global vaccine programs and government decisions to reopen borders.

capital city

Morgans believes the current valuation is appropriate given the protracted recovery in the travel markets. The important thing is that there is ample liquidity with the recent $ 250 million convertible bond offering.

Macquarie shows balance sheet performance with cash reserves of $ 406 million as of March 2021, making Webjet a good candidate for consolidation. The broker estimates that Webjet could put $ 270 million in capital into growth opportunities by FY25.

Ord Minnett believes Webjet has used the pandemic downtime and fundraising proceeds to invest in the future, and the decision to integrate and improve IT systems into a single platform will be critical.

This should allow the company to achieve the planned -20% reduction in operating costs once the scales return. The savings are achieved through the use of blockchain, data analysis and simplification of processes. The platforms should be completely streamlined by the end of FY22.

Webjet will also invest additional resources in the growing share of the US B2B market, while the majority of its competitors are likely to have a tough time. While this should be positive in terms of operating cash flow for the first half of FY22, Morgan Stanley is suspicious that this investment could be minor due to the exclusion of the investment projections.

The broker also has concerns about capital management, which has resulted in the number of stocks tripling over the past four years. In any case, Morgan Stanley thinks a rebound in working capital and operating leverage is its biggest selling point as the stock has been severely watered down during the pandemic.

The FNArena database contains four buy and three hold ratings. The consensus target is $ 5.84, an increase of 3.0% from the last share price. Targets range from $ 4.30 (Morgan Stanley) to $ 7.12 (Ord Minnett).

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