Why Webjet (ASX: WEB) is a Stock to Buy

This article was originally published at MF & Co. Asset Management.

Webjet shares (ASX WEB) is a relatively strong performer compared to its peers Flight Centre Group Limited (ASX FLT) and Helloworld Travel Limited (HLO) thanks to its focus on a global online business.

As a result, at the end of FY17, Webjet’s B2B division has grown more than 6 times the underlying market with WebBeds becoming the second largest player in the global B2B market.

Its B2C division has also seen a growth of 50.3% in its EBITDA with bookings hitting 1.85 million a year, up 43.6%.

However, high capital expenditure to an aggressive acquisition plan this year could weaken the company’s financial position. Additionally, an economic downturn could post threats to Webjet due to the high correlation between the travel industry, economic conditions and foreign exchange.

About Webjet Limited (ASX WEB)

As a lodging company, Webjet (ASX WEB) provides online travel booking services in Australia, New Zealand and internationally through two segmentations, B2B and B2C. Its business spans both global consumer markets through B2C division comprising Webjet and Online Republic, and wholesale markets through B2B division including WebBeds, Lots of Hotels, Sunhotels, Fit Rumms and JacTravel. Webjet has a market capitalization of AU$1.57B at the time of writing and Webjet share price.

The company enables its customers to compare, combine, and book travel flights, hotel accommodation, holiday package deals, car hire, travel insurance, motorhomes, and cruises, as well as offers digital marketing consultancy services.

As a result of such a wide range of services, Webjet has to deal with a range of competition such as with Flight Center (ASX FLT) domestically and powerful global competitors including Expedia, Priceline, Wotif and TripAdvisor.

Strong Growth in B2B Market

The global B2B market is more than US$50 billion in Total Transaction Value (TTV), with the majority of participants having specialized, local offerings and relatively small market share. Players who have a global presence, such as Webjet, has the potential to take advantage of market fragmentation and capture market share in this space.

Webjet’s current B2B division operates with a multi-supply aggregation strategy through WebBeds. The strategy involves both directly contracting room allocations with key hotels as well as using a wide range of third-party providers.  Webjet’s B2B division has successfully acquired Lots of hotels (Dubai), Sunhotels (Europe), FIT Ruums (Asia) and JacTravel (the United State) since 2003.

With a global expansion strategy, WebBeds has now become the second largest B2B player globally. ‘Lots of Hotels’ is the third largest player in the Middle East and Africa market. Sunhotel operates as the market leader in Nordic countries and FIT Ruums in the Asian market has over 200 direct contracts established in key Asian cities so far.

WebBeds is now offering more than 250,000 hotels, of which over 17,000 are directly contracted, over 170 destination countries in more than 130 markets worldwide.

WebBeds’ management team has significant expertise. The team has worked at senior levels in the B2B market across the world.  Furthermore, As the fastest growing B2B business in the world, the management team’s networks and expertise will help drive growth both by increasing direct contracting, as well as expanding their client base in key markets.

International Tourism Boom A Boon For Webjet

Tourism in Australia is a significant component of the economy, represented 11% of its GDP in 2017. According to the Australian Bureau of Statistics, 925,000 Australians returned from short stays overseas during the month of May. This was a 1.1% increase compared to the prior month and 5.5% higher than in May 2017. The most popular destination countries are Indonesia, the United States, New Zealand, China and the United Kingdom. The statistic also indicates a high growth rate of the number of Australians heading to China (16.3% ) in May 2018 compared to the same period last year, which is slightly behind the highest percentage increase for Japan (20.9%).

During the same period, 763,700 short-term visitors arrived in Australia, up 3.7% compared to May 2017. The biggest driver of this growth was from New Zealand, China and the USA.

Considering the sustainable growth of inbound and outbound tourism, the tourism industry, Webjet is well position to take advantage of the fast-growing tourism industry.

Customer Retention Problems in B2C Division– Misleading Advertisements, Critical Reviews

Webjet has claimed that its B2C division’s phone-based customer service ranked number one among its peers in its FY2017 financial report. However, customer reviews on productview.com.au indicate an opposite point of view.

Only 47 out of 869 reviews think that webjet.com.au is doing good or excellent, while 810 reviews have pointed out that Webjet is bad or terrible at their customer services.

The poor reviews seem to come from customers that need to adjust their bookings. Any changes need to be made through Webjet and most of the issues need to be solved via email. Webjet would need to increase their non-automated after-sale customer service to a higher level to reduce the number of complaints.

Furthermore, Webjet has being accused of using misleading advertising (low fare promotions) to lure customers, where customers eventually pay a lot more than advertised due to hidden fees including the mandatory booking fee, as well as the price-guaranteed fees.

Weak customer support and additional fees are obstacles for Webjet in retaining a loyal customer base and is an area that needs to be addressed by Webjet.

Webjet a Leader Amongst its Peers

Comparing Webjet shares with the other two listed travel agents, Flight Centre Travel Group Limited (ASX FLT) and Helloworld Travel Limited (ASX HLO), Webjet has outperformed its peers and is a leader in the lodging industry.

WEB’s TTV was nearly doubled during the past two years and reached AU$1,443M in H1 2018, up 54.9% on the previous corresponding period (PCP). On a like-for-like basis, revenue increased nearly sixfold from the AU $62.1M (H1 2016) to $359.8M (H1 2018).

Webjet shares (ASX WEB) TTV

Over the past five years, Webjet shares EPS has seen strong year on year growth. Compared to its peers, Webjet’s 11.72% growth in EPS outstrips Flight Centre’s more modest 7.71%.

Webjet shares (ASX WEB) EPS

Webjet shares operating cost increased 22.8% due to the JacTravel acquisition, which lowered Webjet’s margin from 17.23% (H1 2017) to 5.56% (H1 2018). Compared to FLT and HLO however, Webjet shares had much stronger NPAT margin’s in 2016 and 2017. Even though the margin shrunk after the JacTravel acquisition, the margins should bounce back as it was a once off transaction.

Webjet Shares (ASX WEB) NPAT Margin

At the current Webjet share price, WEB trades at a PE of 37x, which is higher than its peers FLT (33x) and HLO (15x). Even though Webjet is currently trading at a relatively high multiple, Web’s stronger and more diversified revenue lines and higher potential growth justifies its more expensive price.

Having said that, any shocks such as its inability to meet market expectations could result in a sharp correction in the Webjet share price.

Webjet Share Price Has Strong Potential Upside

Webjet’s B2B division (WebBeds) has successfully taken advantage of the global growth in tourism. The acquisition and launch of B2B businesses in APAC, Middle East, Europe and the Americas mean Webjet now has a global business with unlimited growth potential.

Even though the JacTravel acquisition has had a significant impact on the NPAT margin, the acquisition has increased the depth and breadth of WebBeds’ service offering in terms of geography, product and wholesale/retail mix. Therefore, we believe JacTravel will strengthen the business in the long run, especially in the B2B market.

Even though there are some issues relating to after customer care and misleading advertising, we see these issues as minor and fixable. With the overall strength in the growing tourism economy across the world and Webjet’s global position, we see relatively strong upside for the Webjet share price as they are well positioned to take advantage of the growing industry.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.

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