We have reviewed our investment thesis for Webjet in the context of the first-half FY18 result. The mainstream flights business is still the dominant driver of group earnings – with about 55% of FY18 forecast operating earnings expected to be derived from this source – and we expect it to continue to outperform its peers.
With respect to other areas of the company, we note the following:
- Online Republic – the company’s car, motorhome and cruise consumer offering – was the weak link in the result. It will continue to be affected by the imposition of a new goods and services tax, and the evolution of the cruise market which is becoming increasingly competitive as some suppliers attempt to increase their percentage of direct sales versus those conducted through travel agents and other intermediaries.
- The early results from JacTravel – the UK-based online travel wholesaler purchased by Webjet in 2017 – are in line with forecasts and we consider it a good fit. It appears to us the potential to leverage inventory across both the Webjet and JacTravel businesses, and sell product through each other’s distribution networks, is likely to present obvious revenue synergies. At the same time we see some potential for cost synergies, particularly in technology, but we note these benefits are likely to be limited by the fact that we expect the businesses to be kept separate in the early period of ownership.
- Thomas Cook – which signed a hotel sourcing partnership deal with Webjet in August 2016 – appears to be on track for a major earnings reversal in FY20. We expect Thomas Cook to see earnings losses during the implementation phase, as Webjet receives a management fee in the initial two-year transitional period, which will become a volume-based fee once full implementation is completed by May 2019, and any ‘revenue’ arising from the deal is treated as a loan for accounting purposes.
- Webjet’s online wholesale accommodation platforms, including Lots of Hotels, Sunhotels and FIT Ruums, appear well-positioned to deliver strong growth.
We have reduced our earnings forecasts for FY18 and FY19 to reflect higher depreciation and interest assumptions, leading us to lower our target price to $14.00 from $14.35. We maintain our Buy recommendation as we expect the company to deliver accelerating earnings growth in the coming years.