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Webjet (ASX: WEB) was hurt badly in trading this morning, falling 5.6% before recovering most of their losses later in the day. The main catalyst was the collapse of Thomas Cook, a British travel company. Thomas Cook was a major business partner and owed Webjet A$43.7m when it collapsed. Thomas Cook has defaulted on liabilities to customers, saying flights booked through them will not be rescheduled. Customers are paid out first in a bankruptcy, so the fact that customers who booked flights through them have still not been paid back means makes the chance Webjet will recover its debt slim at best.
WebBeds Segment Business Model (Credit: Webjet)
A further problem for Webjet is the impact of the collapse on future revenue. The company had expected to obtain $150-200m of transactions from Thomas Cook, so the bankruptcy may lead to another earnings downgrade.
Webjet’s share price already sold off heavily on their FY19 results, when the company announced $27-33m of additional EBITDA for FY20. This was down substantially from prior guidance and was due to reduced TTV expectations from Thomas Cook, in addition to expected cost synergies from growth opportunities across APAC being realised in the prior period. This prices the company on around 23.5x trailing earnings for FY19, positioning the business on an attractive PEG ratio of 0.51. As a PEG of less than one is generally used to demarcate cheap and expensive growth businesses, Webjet looks very attractive by this multiple.
Nevertheless, as past results are not indicative of future performance, it is important to delve deeper into these results. EBITDA grew by $37.2m this year, so the lower end of the $27-33m FY20 guidance for EBITDA growth would represent a sharp slowdown from current growth levels.
Webjet has expanded significantly beyond the firm’s original market of online flight bookings. They also have a strong B2B (business to business) segment called WebBeds, which is less well known amongst retail investors. Nevertheless, it is still a very important part of the company, delivering attractive organic EBITDA growth of 30% and now accounting for around half of the company’s EBITDA. The company is the second largest global B2B player and is growing much faster than the company which is slightly bigger. This business unit will be an important part of Webjet’s strategy going forward, and investors would do well to monitor this segment closely to see if the company will re-rate going forward.
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