MoneyTalks: Webjet to fly higher as travel rebounds, Life360 ‘screens cheap’
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Goldman Sachs has upgraded its rating on Webjet (ASX:WEB) from Neutral to BUY, and revised its 12-month target price from $7.70 to $8.30 (versus current price of $6.33).
Webjet has two main businesses: hotel bed B2B provider WebBeds (wholesaler), and Australian online travel agent (OTA) business with leading domestic online market share of ~40%.
Goldman says its Buy thesis on WEB is premised on the company demonstrating strong cash generation as the travel market recovers, while the current share price continues to be impacted by macro concerns.
Goldman believes the resumption of international travel in the Asia Pacific region will boost demand for WEB’s services, and has identified three pockets of recovery upside that are still under-appreciated by the market.
First, although international and APAC recovery remain laggards, signs of acceleration have emerged.
“For example, China Golden Week Holidays saw international air flight capacity ramping up to 58% vs 2019 levels, and international flight numbers were at 56% vs 2019,” said Goldman’s note.
Secondly, hotel demand has remained robust, supported by international recovery.
And thirdly, there is expectation for corporate travel to recover to 100% pre-COVID by 2024.
According to Goldman, Webjet is better placed compared to Flight Centre (ASX:FLT), and Corporate Travel (ASX:CTD) to benefit from the return of international long-haul travel through the WebBeds business.
“From a pricing perspective, we believe that the industry will remain largely rational as the largest industry player, HotelBeds, (high single digit market share) is highly leveraged with margins under pressure.
“Additionally, we expect WEB to achieve improved cost leverage from the consolidation of four separate operating ecosystems into one more efficient technology ecosystem.
“Therefore, we see WebBeds division as well placed to expand EBITDA/TTV margin from 4.2% in FY23, to 4.3% in FY25 (3.1% pre-Covid),” said Goldman.
In the OTA segment, Goldman believes Webjet’s business is exposed to the right channels with the ongoing shift towards digital bookings likely to aid its growing market share.
However, Goldman concedes that any increase in competition by global OTAs as well as domestic physical travel retailers could result in WEB having to spend higher on marketing, offering downside risk to profitability.
With regards to valuation, Goldman sees the recent fall in Webjet’s share price as an attractive entry point.
“The recent pull back in Webjet’s share price has resulted in reduction in 1-year forward Price/Earnings (P/E) to 18.5x, from 24.5x in May.
“And whilst we factor in full convertible bond dilution, Webjet has around $650 million cash as of end-FY24, and is working towards various options of buying back to reduce dilution,” said Goldman.
Goldman meanwhile has re-iterated its BUY rating on Life360 (ASX:360), with a 12-month price target of $10.50 (versus current price of $7.96).
Life360 is a global family safety service that aims to keep families, partners, and friends connected and safe. The apps can be used to locate someone traveling, receive notifications when a loved one requires your assistance, and detect car crashes on impact.
Goldman says Life360 is exposed to the US$12bn global addressable market with a large opportunity to expand its product suite.
The company is currently raising prices for its existing iOS US subscriber base, which demonstrates its pricing power with its more than 50 million global users.
Further, Goldman says Life360’s cost base and customer acquisition economics compare favourably relative to its US peers.
While Life360 spends relatively more on sales & markerting (S&M) now, this is justified by its rapid subscription growth with its S&M spending performing well per unit of incremental annual recurring revenue (ARR), says Goldman.
“As a result, we see scope for significant margin expansion and earnings growth as Life360’s margins increase towards scaled peers – from EBITDA US$14m in FY23 to US$60mn in FY25,” said Goldman’s notes.
In the last quarterly update, Life360 provided guidance for positive Adjusted EBITDA to increase to $9 million-$14 million by end of calendar 2023, from $5 million-$10 million in the pcp.
In terms of valuations, Life360’s shares “screen cheaply compared to peers when accounting for its robust growth outlook – particularly now that it is moving from the pre-profit to profitable tech basket”, says Goldman.
Goldman’s research also indicates that Life360’s subscription business currently trades at a discount to global subscription app peers when adjusting for its superior growth outlook.
“While execution risks remain, we see scope for re-rating as Life360 demonstrates pricing leverage, improving unit economics and operating leverage through FY23.
“With fundamental momentum, a strong balance sheet and attractive valuation, we are Buy rated on Life360,” noted Goldman.
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead.
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