From OC Funds Management (September 2019 Letter) Online consumer...

From OC Funds Management (September 2019 Letter)

Online consumer (B2C) and wholesaler (B2B) travel company Webjet Limited (WEB, -18.8%) came under pressure during the quarter following news that UKbased Thomas Cook (TC), a significant customer of WEB’s WebBeds B2B business, had entered into liquidation. The impact on WEB’s B2B business is material, including: a. the loss of $150-$200m in Total Transaction Value (TTV) from TC in FY20; b. a resultant FY20 EBITDA impact of approximately $7m; and c. an expected bad debt impact of EUR27m (approximately $44m) from TC. The latter will be treated as a one-off expense to the income statement and can be absorbed by the company’s cash reserves and undrawn facilities. There will be no impact from the liquidation on the 3,000 hotel contracts WEB acquired from TC in August 2016 and these remain available for sale to WebBeds customers. Whilst the TC business had been under pressure for some time, the dire state of the TC business and its ultimate liquidation was a surprise to us given that the TC business was widely expected to be recapitalised by third party investors. Aside from the financial impact (quantified above) WEB share price has further suffered as the failure of TC brings into focus challenges facing the B2B hotel industry and serves as a reminder of the credit risk in the B2B space. Furthermore, WEB is suffering from general negative market sentiment toward travel stocks due to headwinds from specific events such as Brexit and the political turmoil in Hong Kong. Despite these issues, the WEB business remains fundamentally solid and continues to generate strong double-digit organic growth. We expect a trading update from management at the company’s AGM in late November, where it will release earnings guidance for FY20. This ought to refocus the market’s attention back to what is a fundamentally undervalued growth story