Webjet is recommended buy by Intersuisse Morning Notes October 17 2006 per below:
Webjet (WEB) An excellent FY06 continues strongly into FY07 Buy $0.34
Event ** FY06 Summary
FY06 was an excellent year for WEB. It is now seeing the emergence of ongoing value in its business model.
Key results were:
* Total Transaction Value (’TTV’) $172.3m, up 125%.
* Net profit before tax $3.5m, up from $745,000, NPAT slid to $2.38m from $2.74m with an income tax expense of $1.1m compared with a benefit of $2.0m in FY05.
* Cash flow from operations $4.3m compared with $1.4m in FY05.
* Cash on hand $23.1m, an increase of $19.5m over FY05’s $3.5m balance, due to operations and a $15.6m capital raising by option exercise.
WEB sees the general travel market for FY07 as challenging and has given no formal guidance for FY07. But cost pressures on the consumer can also provoke a desire for travel. Currently lower fuel costs will assist. WEB now has its best-ever market footprint following its strong growth in Total Transaction Value (TTV), or bookings in FY06. WEB aims to be a leader in market transparency and continues to report major figures each quarter.
** FY07 To Date
On 10 October WEB reported for the September quarter an unaudited NPAT of approx. $1.1m. Compared with the pcp, marketing costs increased from $400,000 to $1.2m. However, NPAT rose by 15% from $950,000 in 1Q06 to $1.1m in 1Q07.
Marketing costs are controlled at about 2% of TTV, which reached a record $60.2m in the quarter compared with $39.5m in 1Q06 – up 52.4%. TTV exceeded $1m in one day for the first time ever, on 29 August. Announcing this on 30 August, WEB added that it had been rated the No 1 internet travel agency, ahead of Flight Centre, for the previous three weeks, with the help of its marketing campaign with the National Seven Network.
MD David Clarke says this substantial momentum and increased market footprint is extending into the October-December quarter with all indicators currently strong.
Cash flow remains very strong with $25.2m cash on hand at 30 September, a $2.1m increase from the $23.1m at 30 June 2006. Further guidance will be provided at the AGM on 2 November.
The TTV figures for the last seven quarters indicate the rate of growth, in $m successively: 23.5, 23.6, 39.5, 37.4, 45.4, 49.6 and 60.2.
Impact ** Background
David Clarke notes in the annual report that during the twelve-month period over 500,000 airline passengers have booked through Webjet. Total Transaction Value has grown from around $5m a quarter in FY04 and shows six half-years of consecutive growth. Annual TTV has shown exponential growth, recently: $20.5m in FY03, $20.8m in FY04, $76.5m in FY05 and $172.3m in FY06, the last up 125% year-on-year. This ‘gross revenue’ produced ‘income’ of $1.4m in FY03, $1.5m in FY04, $5.3m in FY05 and $10.8m in FY06, the last up 104% year-on-year.
Turnover growth has thus not been at the expense of margin despite major reductions in airline commissions during the year, as was expected. WEB is enjoying increasing economy of scale of its cost base, allowing increased marketing spend (minimal in early years), which in turn appears to be enhancing TTV growth, at least at current levels. WEB is a strong generator of cash and operating cash flow is tracking profit growth, giving capacity for WEB to fund its ongoing development needs for capital expenditure and working capital. The Board is considering options for capital management, strategic opportunities and dividend policies.
Rapid changes in the travel industry pose challenges to traditional travel agencies as airlines cut back commission payments. This has created extra opportunities for WEB, which has an ongoing programme of development of its website and systems to improve customer experience and keep it in the forefront of changes. An example of recent challenges is the myriad of changing fuel and other surcharges that make true airline fare comparisons difficult.
** New Initiatives
WEB has major initiatives to launch in FY07, starting with the introduction of effectively one click online packaging to simplify and extend the ways in which travel product can be simply and economically purchased. Around December 2006 WEB expects to release a ‘transformational component’ of its travel service aggregator,called Planit. Planit will allow users to construction, budget and build both leisure and business itineraries, in an environment that can be shared with friends or colleagues to assist in travel planning in a secure framework. WEB expects it will add a dimension and depth to customers unavailable from any other travel provider in Australia and be a key component in its positioning and strategy.
WEB is also reviewing the extension of its market entry points in North America, New Zealand, the United Kingdom and Asia. It has launched Webjet.com as its North American site to provide a special focus on Australia, as a destination, to the North American market. Others will follow. These market entry points take advantage of the technology platform and leverage its cost base and product range.
Additional initiatives already under way include a Trans-Tasman matrix display and Webmatch advertising of city pairs, both to assist users choose from selections of flights, the online booking of travel insurance, and Lotsof Hotels, embodying Travelport content. In April 2006 WEB entered a major supply and distribution alliance with Travelport, assisting it to materially accelerating the sale of hotel and accommodation products in the Australian market. Travelport is a global entity incorporating Cendant Travel Distribution Services, Galileo, Hotel Club, GTA, Orbitz, Ebookers and others. It supplies WEB with access to its global hotel database of some 60,000 properties.
** History and Shareholdings
WEB worked with global travel booking services group Galileo, Microsoft and others in developing its latest booking engine. It has had close relationships with Galileo and Harvey World Travel Group (HWT) in its development phases. During the last year, HWT was acquired by S8 (SEL). HWT had taken up various share issues in WEB and S8 sold the total 19% shareholding of 46.4m in February 2006. It continued to hold 56m options. In June 2006 these were exercised at 27.2¢ with a payment to WEB of $15.24m. The shares issued on exercise represented some 17% of capital and were subsequently placed, with the approval of WEB, with institutional and professional investors.
S8 operates a substantial number of apartment and resort properties and has maintained the working relationship with WEB, despite having no remaining shareholding. S8 has acquired Gullivers Travel and Transonic Travel, a division of which, Bestflights.com.au, has just expanded its deal with ninemsn, with a new booking engine.
David Clarke and substantially the same Board and management team have guided the growth of WEB from the outset. WEB has built depth into its management team as it has grown. Operations, Marketing, Technology, Service, Finance and Programming. Indicating its growing maturity, WEB recently appointed a new CFO after an initial contractual engagement early this year.
Thorney Holding P/L holds 14.6% of the shares. Galileo, through GIW Holdings CV, holds 8.5%. Director Steven Scheuer holds 7.7% and the Board together hold 11.6% of the shares and 13.7% of total shares and options. Shares currently on issue total 322.1m and options 21.5m.
** The Future and Recommendation
There is a clear trend to online booking of airline flights, hotel rooms, car hire and other travel needs. This will continue and in due course the strongest will grow fastest. WEB has competitors, notably the airlines themselves, a handful of major global players such as Travelocity, locally Zuji, flight centre and others, apart from traditional travel agents. Despite the competition though, WEB has attained critical mass and appears well placed to become one of those which grow fastest, or perhaps get taken over.
WEB first reached its current price in August 2005. We believe the uncertainties of ownership and share structure obscured the progress being made over the last year. Now that these are all cleared, the company has moved into a tax-paying mode, has substantial cash and has extended its excellent FY06 growth further in 1Q07, the shares are due for a re-rating. We have reviewed WEB as a Buy in Morning Notes last October, in April 2006 and on 7 August. Not only has the share formed a strong base but it now appears poised for take-off.
Based on four times the last quarter, WEB should earn $4.4m NPAT and generate $8.4m of cash this year. We of course expect the next three quarters to be far better than this. The earnings estimates shown in the table are thus seen as very cautious. The cost of a 1.5¢ dividend would be just $4.8m and WEB might well distribute more or use other capital management for shareholders.
The P/E of this internet growth stock could thus be well below 20x for FY07 and the distribution over 5%. Check it out at www.webjet.com.au and Buy - a ticket, a holding or both!
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