Sandstone Insights: Webjet demerger, analysts see over 30% upside

ASX code: WEB

Suggestion: Buy

Need to know

• Webjet demerger could unlock significant value for WebBeds
• A bull case scenario could unlock more than ~30% value for shareholders
• We retain our Buy for Webjet given continued strong growth opportunity, regardless of upside valuation on a demerged entity.

Who gets the Ferrari in the breakup?

With Webjet Ltd (ASX: WEB) considering a business split between B2B (WebBeds) and B2C (Webjet OTA and GoSee), analysts examine potential scenarios and the associated upside. The WebBeds segment is clearly the superior one, exhibiting mid-teens revenue and earnings growth and substantial market opportunities. In contrast, the B2C segment, while growing in market share, exhibits higher cyclicality and will likely trade at a lower multiple than WebBeds.

What multiple could WebBeds trade at?

As a B2B software company with transaction-based revenues and EBITDA margins around 50%, comparable companies are limited. Carsales (ASX: CAR), given its ASX listing, similar product category, growth rate, and margin profile, serves as a relevant benchmark. Carsales currently trades at an EV/EBITDA multiple of approximately 22x, whereas Webjet trades at around 13x, indicating significant potential upside for a demerged WebBeds entity.

Have other recent ASX demergers worked?

Recent demergers from companies like Woolworths (ASX: WOW) and Endeavour (ASX: EDV), The Lottery Corp (ASX: TLC) and Tabcorp (ASX: TAH), and Iluka (ASX: ILU) and Deterra (ASX: DRR) provide a framework for potential upside. Initial demergers often provided shareholder value as investors prefer pure-play exposures over potential conglomerate discounts. Efficient capital structures and targeted investments could further unlock value for standalone entities.

Investment view

Webjet continues to perform driven by significant market growth and opportunities for the WebBeds business, as Webjet OTA and GoSee recover from the pandemic impact. The 2030 TTV target for WebBeds of $10 billion appears increasingly achievable, with FY24 results showing meaningful upgrades to consensus expectations, bringing the market closer to this target.

A demerger could unlock significant value for Webjet as WebBeds should trade at a significantly higher multiple than current market pricing implies. Additionally, there is potential upside in a more capital-efficient B2C business that can better target investment. Analysts await further details on a demerged entity, including any potential sale or merger of the lower quality B2C business, which looms as a key catalyst through FY25. A Buy rating on Webjet is maintained.

Valuation scenarios for Webjet's demerger

We evaluate several demerger scenarios to estimate potential valuations. In our bull case, we consider Carsales (ASX:CAR) as an appropriate comparison for WebBeds, which is trading at approximately 22x EV/EBITDA—significantly higher than Webjet's current implied multiple of around 14x. While this valuation upside is possible, it is unlikely WebBeds will achieve this in the short term due to its significant exposure to a consumer-sensitive sector. Our base case uplift centers around a new demerged group valuation of just under $4 billion market cap, or approximately $9.70 on a fully diluted basis, accounting for any equity conversion of the convertible bond.

WebBeds' largest competitor, Hotelbeds, is currently privately owned, though rumours suggest an IPO in Spain later in 2024 or early 2025. Any further news on this IPO would directly influence WebBeds' valuation, which we are closely monitoring.

Assessing the B2C business value

The more significant question is what value the market will ascribe to the remaining B2C business, which is inherently lower quality. There are few pure-play listed online travel agents, making relative valuation challenging. However, looking at travel sector comparisons, Flight Centre (ASX:FLT) and Corporate Travel Management (ASX:CTD) currently trade on EV/EBITDA ratios of around 8.6x, which we use as our base valuation for the B2C business.

Given that a standalone B2C business would be much smaller (<$500 million), it will likely attract a small discount due to lower liquidity. We therefore assume in our analysis that the broken-up business would trade at a discount to FLT/CTD multiples and closer to small-cap listed peer Helloworld Travel (ASX:HLO - not covered). Given the small size of the new segment, it is highly likely that Webjet would seek to either merge or sell the business to give it instant scale. We believe that Webjet could attract an M&A premium, and a merge with Helloworld Travel or another opportunity could make sense and deliver additional upside.

Capital allocation and cost considerations

In our scenarios, we outline the WebBeds B2B business taking approximately 80% of the capital allocation, with the OTA/GoSee business receiving a 20% allocation. We also assume an uplift in total corporate costs to account for dis-synergies from additional overheads as standalone entities. As a conservative estimate, we also deduct around $40 million from the valuation to account for transaction costs and restructuring payments. We believe this is a conservative and sufficient estimate.

Figure 1: Current share price of ~$8.63 implies a ~14.3x EBITDA multiple being applied to the WebBeds business (where FLT and CTD average is 8.6x).

Figure 2: ASX100 names with similar forecast EBITDA growth rates (13-16%pa) give an average EV/EBITDA of ~17.2x.

Figure 3: Assuming a new averge WebBeds multiple and taking 80% of costs, there is a potential ~12.0% valuation uplift.

Figure 4: Our bull case sees a CAR like multiple of 22x for WebBeds, driving ~30.6% upside.

Figure 5: In a worse case scenario where there is no valuation uplift, extra costs see a ~11.4% valuation reduction.

Risk to investment

Webjet is highly leveraged to consumer travel demand. Any significant deterioration in overall macroeconomic conditions would impact the business. Potential for future global border closures, either from health or political standpoints. Contract wins/losses for key supplier and distribution channels. Potential threat of increased competition, particularly with AI related travel bookings and other technological advances.

• ^{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}