Brokers heaved a collective sigh of relief as Webjet ((WEB)) chose to adopt its auditor’s view of the treatment of the Thomas Cook management fees. This means the payment in FY17 is not treated as revenue and instead transferred to financing cash flow and was the main issue in the FY17 results, as it reduced operating earnings (EBITDA) by -$11.5m.
Outside of the Thomas Cook issue, the result showed 40.7% total transaction value (TTV) growth in B2B (wholesale), in constant currency. This segment includes SunHotels, Lots of Hotels, FIT Ruums and JacTravel. TTV growth was 34.5% in B2C, retail, which includes Webjet and Online Republic.
Results were marginally stronger than UBS expected when taking into account the JacTravel acquisition, associated equity raising and the change in accounting treatment for Thomas Cook.
Management has flagged bookings in the year to date are up 25% for B2C and up 78% for B2B, excluding JacTravel. The company has also reiterated a three-year target for bookings growth of three times the underlying market rate for B2C and five times the rate for B2B.
Unhelpful accounting adjustments aside, Credit Suisse finds the fundamentals of the business underpinned by accelerating TTV trends across all divisions.
The removal of Thomas Cook has an immediate negative -$11-12m impact on FY18 estimates. With Thomas Cook going live in late FY19, FY20 becomes the first year with no accounting ambiguity. To this end, Credit Suisse leaves FY20 forecasts unchanged.
The company has also re-stated B2C revenue relative to the August disclosure. Originally it had suggested $166m in revenue, implying a large contribution. Webjet has now disclosed this includes $16m in revenue earned by its Exclusives, which is effectively grossed up transaction value and not revenue in the truest sense. As a result, the second half trends are more reconcilable to Credit Suisse.
The decision to accept the auditor’s treatment will allow management to focus on integrating the JacTravel acquisition and, hence, Morgans suggests the company is off to a solid start for FY18. The underlying economics of the Thomas Cook agreement remain strong and the significant expenditure that SunHotels is investing to support this agreement will be completed by 2019, enabling a material contribution to earnings from FY20.
Accounting Issue Temporary
While the revised audit treatment has resulted in earnings downgrades, the appreciation in the share price subsequently suggests to the broker that the market recognises the temporary nature of the issue, which has no impact on cash flow. Importantly, both the B2C and the B2B businesses won market share. Morgans believes the foundations are in place for double-digit growth across FY18-20.
Ord Minnett considers the decision to accept the auditor’s view of Thomas Cook a positive outcome, as the company has avoided the consequences associated with a qualified set of accounts. The highlight for the broker was the performance of the B2C division and Online Republic.
Nevertheless, successful integration of the JacTravel and Thomas Cook acquisitions will have a bearing on future share price performance, as Ord Minnett observes both have the potential to provide a step change in earnings.
Prior to the Online Republic acquisition, Ord Minnett highlights concerns regarding the company’s track record on acquisitions, given the Zuji transaction was a material underperformer, save for an excellent sale price. However, the strong performance of the Online Republic business since acquisition is expected to provide more confidence in the company’s ability to successfully integrate acquisitions.
Lack Of Clarity?
The stock tends to polarise investors, in Morgan Stanley’s view. The broker retains an Underweight rating because of an aggressive acquisition strategy, a lack of transparency and a step-up in capital intensity. Acknowledging early FY18 growth was impressive, albeit slowing materially in August versus July, the broker remains cautious on extrapolating further.
Morgan Stanley considers B2B overly complex, while there is little clarity on how bookings or transaction value translate to revenue and what cost base is required to support the business long-term.
The company did not disclose the cost base associated with Thomas Cook, deeming it commercially sensitive, but in the broker’s opinion this is critical to determining whether B2B is hitting targets at a time when the company is putting significant incremental capital to work in this space via the JacTravel acquisition.
There are three Buy ratings, one Hold (UBS) and one Sell (Morgan Stanley) on FNArena’s database. The consensus target is $13.08, suggesting 11.5% upside to the last share price. Targets range from $11.35 (Morgan Stanley) to $15.00 (Ord Minnett).