Webjet shares jump on possible demerger and record earnings

Online travel business Webjet saw a 7% share price gain yesterday on the back of its record financial result for the 12 months to the end of March 2024.

Underlying EBITDA grew 40% and NPAT hit a record $128.4 million in the period, up from $69.4 million a year earlier. That was despite a softer result in its consumer-focused segment, where growth undercut expectations due to competitive pressures.

The standout was its B2B business, WebBeds, where growth of its Americas business and high conversions rates – the number of website visits versus sales – across all markets.

The market also responded positively to management’s revelation it is considering splitting out its business- and consumer-facing operations into two separate ASX-listed companies.

WEB 12-month share price (Source: Market Index)

What the brokers think

Of the 10 broker research reports that came across the desk today, these were the most interesting. I'll do more comprehensive pre-post news broker consensus comparison at the end.

Morgan Stanley

• Rating: Retain EQUAL-WEIGHT

• Price target: $9.30, from $8.50

Analysts emphasised several positives and negatives from the result. Positives included:

• Bookings and total transaction volumes of +35% clearly beat expectations. “We expect net positive earnings estimate revisions as a result of tracking [circa] 10% higher than initial guidance,” said Morgan Stanley analysts.

• Potential de-merger – The analysts believe this was the main reason for the share price jump rather than the earnings result or outlook: “We see the potential for a simpler, higher-growth, and higher-quality asset at the end of the process.”

• On the B2C side, they see the attraction of de-merging the low-growth business, with its “structural challenges and market share softness”.

Concerns included:

• A take rate in the mid-7% range on TTVs was indicated by management – which implies a take rate of mid-6% range on the marginal dollar of TTVs. “The question in our mind is whether this implies very low take rates in new business, or decreasing take rates in existing business,” said Morgan Stanley. “Longer-term, if Hotelbeds and the major [online travel agents] OTAs all have a competing offer, are 7%+ take-rates and 50% EBITDA margins sustainable?”

• Operating leverage: “The incremental margins in FY24 were 50%, in line with the long-term target. If the take rate continues to decline, WEB needs to deliver more TTV for every dollar of opex to maintain the margins.”

• Durability – TTV grew 39% across Web Beds and by 33% and 51% against its two largest competitors. With consolidation among competitors expected to continue, “we don't see elevated sales growth at 50% incremental margins with low capital intensity to persist to FY30.”

Citi

• Rating: Retain BUY

• Price target: $10.70 from $9.90

On the FY24 result and trading update: The group NPAT and EBITDA (across both B2B and B2C segments) were as expected, “with strong price action driven by outlook commentary.”

Cyclical factors continue, Citi analysts expecting macro tailwinds to continue, especially in international travel, falling airfares driving spend on accommodation, and the France 2024 Olympics occurring in the continent where WEB has its largest exposure and makes its highest margin.

On the demerger: “While B2B management will be more focused, clearly it only stacks up if there is value creation,” said Citi.

Overall, Citi increased its NPAT forecast for FY25/26 by approx. 2%, while noting its estimates were already ahead of consensus.

Jarden

• Rating: Retain BUY

• Price target: $10.30, from $9.55

“We keep our Buy rating with the view that a demerger could unlock significant value via a rerate of the WebBeds business, which based on global B2B platforms could imply a share price of $10.64‐$12.31,” said Jarden analysts.

“The next catalyst will be an update on plans to proceed with the demerger, with a transaction likely in FY25.”

Three key reasons they see the potential demerger as a positive are:

• The ability for each division to focus on the growth that benefits them – “bolt-on M&A” for the B2C business and a combination of M&A, inventory acquisition and system investment in the B2B segment.

• The prospect for an EBITDA multiple re-rating, “which could trade upwards of 26x” based on comparable figures

• Corporate appeal: “We see the announcement to demerge as flagging scope for any other potential external suitors.”

Webjet broker consensus

Based upon the 10 broker ratings and price targets we received for Webjet, let’s calculate its broker consensus. I like to assign a value of 0 to any rating better equivalent to a HOLD/NEUTRAL, a +1 to any rating better, and a -1 to any ratings worse. If the average rating is +0.5 or greater, I call the consensus rating a BUY, and if the average rating is -0.5 or worse, I call it a sell.

On this basis, Webjet’s average score is +0.8 giving it a consensus rating of BUY.

The price target is a little easier. The average price target for Webjet among the brokers sampled is $10.31, well up from the average price target of $9.71 prior to the results update. If you prefer, Webjet’s median price target rose to $10.55 from $9.73.

Based upon Webjet’s price at the time of writing of $8.90, this implies a 15.9% upside to the brokers’ average price target, and a 18.5% upside to their median price target.