(Lower earnings guidance likely due to poor performance from...

(Lower earnings guidance likely due to poor performance from core business and Zuji acquisition)

Although specific financials related to the core WEB business and the recently-acquired Zuji have not been disclosed, we estimate the downgrade to earnings guidance has come from both of these two areas. Across the group, we believe flight booking volumes remain under pressure, while Hotels are a relatively small contributor to earnings. In addition, Packages are yet to ramp up in a material way.

(Competitive landscape and higher fees require increased marketing spend)

To support the top line, WEB has increased its marketing spend. While we favour investment for long-term growth, we believe the competitive landscape is becoming more intense for the company. For example, Flight Centre’s online offering has emerged as a very serious competitor to online travel agents such as WEB. With increased competitive pressure and WEB’s very high fees, we believe the increase in marketing spend is essential for WEB, but this is likely to only slow what we see as a long-term decline in its airfare booking volumes. We would like to see more material growth in WEB’s non-flight operations (Hotels and Packages). While management is working towards this, we question how significant a contributor to group earnings these areas
could be.

(Maintain Underweight with a lower $2.05ps price target)

We have further lowered our core flight booking volume estimates, while increasing our marketing spend forecasts. Our price target has declined from $3.40 to $2.05ps. With its very high fees and an increasingly competitive market, we believe WEB’s flight booking volumes are in structural decline. In our view, management needs to diversify its offering, but to date growth in noncore flight bookings has been slow. We maintain our Underweight recommendation, as we believe the earnings challenges are
long-term in nature.

Source: Comsec research