Is Webjet ((WEB)) primed for acquisitions in a stressed travel industry or will the latest capital raising simply help to weather the storm as access to international travel destinations becomes a more distant prospect?
The decision to issue convertible notes, which comes after $345.8m was raised in April, may suggest financial stress but Ord Minnett believes the company is being cautious and ensuring it is positioned for an inevitable recovery in the B2B (business-to-business) segment after the pandemic.
This should also enable Webjet to pursue opportunities that may arise with the changes to the competitive landscape post the pandemic. Management has emphasised the latest raising is for M&A because of the attractive opportunities in the market, and not required to ease balance-sheet stress.
However, Morgans does not believe the balance sheet has the capacity to make a material acquisition, although recognises the convertible note is a cheaper source of funds. UBS, on the other hand, believes Webjet should be able to fund its operations for 14 months even with no revenue, while paying down the working capital unwind and writing off the majority of receivables.
With debt facilities to begin maturing in late 2021, Credit Suisse argues liquidity may still be required if the recovery takes longer and the summer of 2021 in the northern hemisphere remains materially affected by the pandemic.
Some booking activity has commenced in Australia but the Middle East is shut, and this is around one quarter of bed transaction value and more profitable. Meanwhile, the Americas have been set back and Asia and Europe are just starting to reopen.
The recovery has so far been mainly coming from domestic flights. Normalised international travel has been pushed back to reflect the fact the virus seems to be accelerating its spread in developing countries and remains a serious problem for developed countries.
Hence, Ord Minnett anticipates a full return to international travel will not begin until the second half of 2022. Morgan Stanley, too, expects domestic travel will dominate the recovery for some time, which implies Webjet’s biggest earnings contributor and growth engine, B2B, will be a late-cycle event.
UBS is more positive, believing well capitalised operators such as Webjet will continue to take share and acquire good businesses at discounted prices. The skew to leisure enables substitution of domestic for international, such as Noosa versus Bali or, a little further down the track, New Zealand/Fiji versus more distant destinations.
The broker also considers the exposure to Australasia creates a dilemma, as by opening up faster domestically it may sap Australians’ desire to travel internationally. While acknowledging uncertainty is heightened, UBS assesses the business outlook has improved since April.
Liquidity
The company has raised EUR100m in convertible notes, due 2027, with a 2.5% coupon and a conversion price of $4.09. The proceeds will be used to repay $50m in existing term debt, for potential acquisitions and capital management.
The notes will be listed on the Singapore exchange. Debtor write-downs to date are not as bad as initially feared but Morgans notes little detail was provided on the collecting of $150m in outstanding receivables. Liquidity was $307m as of May 31.
Morgans now expects Webjet to be loss-making in FY21 at the operating earnings (EBITDA) level and a full recovery is pushed out to FY23. The impact on profitability and the delay the recovery is now greater than previously anticipated.
Acquisitions?
Credit Suisse considers there are plenty of acquisition opportunities as a number of travel assets are looking for recapitalisation. Webjet is not in dialogue with any business at this stage but will explore the proposition with more vigour over the next several months.
An acquisition in the B2B space is considered unlikely as competitors are significantly weakened and market share can be gained organically. Morgan Stanley asserts talk of M&A is optimistic and the main issues to focus on are risks around receivables, unwinding of working capital and prolonged disruption.
Therefore protecting the balance sheet is a priority. With the business burning cash and the share price more than -80% from its all-time highs M&A could be challenging. The broker assesses the two capital raisings are highly dilutive and negatively affect long-term shareholder value.
Credit Suisse suspects acquisitions are more likely in the B2C (business-to-consumer) space, or where the company can leverage its global footprint, yet remains cautious about consumer-facing opportunities. Technology or ancillary products could be of interest and the broker acknowledges the company would require a high degree of conviction before pursuing a transaction.
Morgans also notes WebBeds has greater exposure to international travel and Webjet has largely dismissed bolstering this segment through acquiring another competitor such as JacTravel.
The B2C business should benefit from a structural shift of holiday bookings to online, and despite growth opportunities being on hold they will return. Hence, UBS asserts Webjet is well-placed to accelerate share gains once the market reopens and an overly negative outlook has been priced into the stock.
In contrast, CLSA believes the travel restrictions have left the business in a “perilous state”. Cancellations have been high and booking activity low. If it were not for the equity raising in April the business would not have survived.
The broker also asserts it is “remarkable” that the acquisition strategy has been reignited, believing this was the “folly” that only recently threatened Webjet’s survival. CLSA, not one of the seven stockbrokers monitored daily on the FNArena database, has a target of $2.75 and a Sell rating.
The database has two Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is $4.07, suggesting 19.4% upside to the last share price.
