Webjet: Downside of Postpandemic Recovery

Shares in Webjet WEB have fallen 9% since providing a trading update at the annual general meeting on Aug. 31, 2023, and are now trading in line with our unchanged AUD 6.80 per share fair value estimate. The underperformance, relative to the 1% decline in the S&P/ASX 200 over the same period, is not due to any alarming deterioration in trading conditions. Indeed, we have nudged up our fiscal 2024-26 EBITDA forecasts by around 4%, reflecting better-than-expected continuing momentum for WebBeds.

Granted, WebBeds’ total transaction value growth has eased to 30%-plus in the first five months of fiscal 2024 to the end of August 2023, down from 40%-plus in the first seven weeks. Similarly, over the same period, the online travel agent, or OTA, unit’s TTV growth has eased to 20%-plus, from 30%. However, prior-year comparisons were always destined to be tougher, as the group moves through fiscal 2024. This is especially for WebBeds where TTV cracked through prepandemic levels from the July-to-September quarter of fiscal 2023.

Critically, we prefer to focus on Webjet’s longer-term maintainable earnings, rather than obsess over near-term fluctuations in earnings-growth rates. To that end, the group is on track to deliver on our three-year EBITDA CAGR projection of 22%, reaching AUD 231 million in fiscal 2026, from AUD 127 million in fiscal 2023.

Such a stellar trajectory is the very reason Webjet now has a dilemma with its AUD 250 million of convertible notes. These were issued in 2021 to cut debt and shore up the balance sheet, at a time when post-COVID-19 recovery was in its infancy and uncertainties were aplenty. Fast forward two and a half years of earnings snap-back, the 0.75% per year cost of these notes could suddenly turn into an issue of 39 million new Webjet shares, if noteholders elect to convert at the conversion price of AUD 6.35 per share, 6% below the current stock price and 7% below our fair value estimate.