Online Travel Agency - Investment and Financial Analysis, Competitive Positioning, and Risk Management - Example

Student Research: This report is published for educational purposes only, by students enrolled in the subject Security Valuation. 30th June 2013 Ticker: Webjet Recommendation: Hold Price: $4.45 Price Target: $5.12 EPS HY EPS FY EPS HY DPS Franking P/E Div Yield (c) (c) (c) (c) (%) (x) (%) 2009 A 5.12 10.24 5.12 6.50 100 0.13 4.92 2010 A 6.88 13.76 6.88 10.50 100 0.14 5.59 2011 E 7.17 14.33 7.17 11.00 100 0.14 5.51 2012 E 9.40 18.79 9.40 13.00 100 0.18 3.85 2013 E 4.33 8.66 4.33 13.00 100 0.51 2.92 Source 1: Company Annual Reports and Team estimates Summary of the Investment Analysis Market Growth: Following the improvement in our stock trading, we have decided to initiate a coverage based on a hold recommendation that will be targeting a stock price of $5.12. Our valuation is based on a discounting cash flow which is expected to increase the current stock price of $4.45 by 15% as from the start of the next accounting period. Webje.com is rapidly growing with absolute economic fares available to its customers and the total travel price is affordable compared to other airlines. At the same time, our customer base is growing due to the accessibility of published airfares from over 100 different airlines as well as more than 50,000 affordable hotels for our esteemed customers to make their reservations. Therefore our target market in South & North America and parts of Europe is really promising and thus expect increased revenue in the next financial year. Highlights The company, webjet.com having been founded on the basis of an existing mother companies, the company had an easy time during its entry into the market, its customer base grew so fast as a result of the affordable fares and hospitality services that were being issued. Easy accessibility of hotels and cars through webjet.com has proven to be of great importance especially to customers attending conferences or business seminars to some foreign nations. The fact that they can easily get affordable accommodation and cars to facilitate their movements through the company has increased their trust and loyalty to the company hence refereeing even their close associates to the company as well. The availability of cheaper insurance cover has been one of the greatest contributors to the rapid growth of Webjet.com; this is because customers tend to prefer organizations that put their interests fast. There is a wide range of insurance policies that customers are allowed to subscribe to. The fact that bookings can be easily done online has given it an upper edge in comparison to some of its competitors. In addition, the company has a dedicated team of employees who work tirelessly seven days a week to assist their customers. Graph 1: Net profit, Final Dividends Ordinary & Interim Dividends Ordinary Source 2: Financial Records Table 1: Market Profile Business Description Webjet.com is an online travel agency that majorly deals with international and domestic travels. It is a subsidiary company that was founded in 1st April,2010 in Florida as a subsidiary of the largest online air travel agency in Australia known as Webjet Marketing Pty Ltd. The company is one of the leading international travel agencies in the United States and its still in the verge of growth. The company offer a variety of products in addition to flight services, these include: Hotels:-Webjet.com provides easily accessibility to hotel services to its customers as well, that is, customers traveling to foreign nations can book accommodation through Webjet. Car rental services: - The Company has a fleet of cars for hire to its customers, which is one of the fundamental services that attract lot of customers. Cruises services:-The Company offers flexible and affordable cruise services to its customers. Vocational packages:-Webjet.com is in the first line in terms of providing its clients’ with special vocational packages at the best prices. Industry Overview Transportation industry tends to be wide since different modes are used to commute from one point to another. In the South America for instance, there are preference of trains and buses despite being a number of small cars. However, when it involves traveling for quite some distance, air transportation becomes the best alternative. The Australian and United states airline industry has experienced turbulent seasons for quite some time. There were times when the industry was sort of international tourists especially following the environmental threats in parts of Asia and Canada such as the outbreak of acute respiratory syndromes (SARS) among others. Despite all these, the airline industry has gone through so many changes since early nineties to date. Following the reductions of flights in the so called domestic trunk routes in the 2000, Webjet.com decided to make entry into the airline market. In recent years, the airline industry has grown and Webjet.com is having a number of competitors including Flight Centre Travel Group, Qantar Airways, Virgin Blue and Impulse Airline among others. The domestic industry in Australia on the other hand is largely liberalized while the Austrian and United States international airline industry still adversely regulated international level due to many outlined a bilateral air service agreement (ASAs) that strengthens the industry. Meanwhile, Webjet.com has grown one of the sought after airline agencies due to the customer friendly services at their disposal. The variety of products they offer has proved be in high demand thus enabling them to remain relevance in the market. Airline agencies in Australia and South America have strategies that outline a clear path based on their goals and objectives. These objectives are based on the following strategies:- Improvement in performance in the market Creation of new values in the ever charging market Capitalize on improving the safety measures for its customers and employees. Company analysis Following the entry of a number of online airline agencies in the market, webjet.com has continued to offer high quality services in regard to airline operations thus remaining competitive in the market. They have gone ahead to introduce new technologies which makes accessibility of the services quite easier Webjet.com has advanced at a great deal, for instance in 1st July 2014, webjet.com entered into an agreement to acquire SunHotels Group. SunHotels Group was established in the year 2002 and prior to its acquisition it had a turnover of close to a tune of $100m. SunHotels Group had a wide range of hotels especially in Europe. Therefore, the step towards acquisition of the Group of hotels will be a significant factor towards extending the issuance of accommodation services to its customers. This group of hotels has an notable past and has been growing steadily over the past few years, for instance they in the financial year 2013, the group made a profit of $3.75m, the subsequent year actually surpassed the $3.75m. Webjet.com has a very experienced team which is entirely committed and passionate about the opportunities that are available for advancement. According to the memorandum of understanding between webjet.com and the SunHotels Group, Webjet.com will have fully owned the group of hotels upon payment of the agreement acquisition fees. Therefore, Webjet.com is anticipated to be the biggest airline agent in the near future. Competitive Positioning The airline industry is prone to a number of challenges ranging from environmental factors to economic aspects. The environment being the ultimate concern of every human being on earth surface, the dangerous gases emitted by the airplanes have been to some extend posing as a threat to humanity and leading to induction of very costly and strict regulations to some airlines, in the process the airlines controlled by the powerful cartels enjoy freelance movement hence outshining the others. Therefore, Webjet.com has been trying as much as possible to adhere to the airline regulations so as to have a bargaining power in the market. Webjet.com has also been facing inadequate marketing strategies. The airline does not have sufficient mechanisms to help it market its products and services worldwide. The company has not invested enough in the sales and marketing to help it reach out to customers worldwide. Meanwhile, the Board of Directors has been positioning itself to have adequate and extensive market strategies as from the year 2016 to stir it a head of its competitors. The company is only operating in South America and Australia and parts of North America, compared to its competitors, it is yet to venture in the Asian and African continents in order to mark its worldwide presence. However, the company’s management is in the process of expanding and by the year 2030, the airline will be operating globally with turnover expected to grow steadily as well. Initially the company used to have a low clientele base, but with the launch of the special extra services such as vacation packages, car hire services, cruise services, travel tools among others, the company performance has been so impressive to an extend of deciding to engage in acquiring other organizations such as SunHotels Group. Source: Financial Records Financial Analysis Webjet.com is one of the most successful airline companies in South America and Australia due to its pleasant customer friendly services that have led to its advance growth rate. The company is still growing as well as stated by the top management during its last Annual General Meeting. Following the acquisition of SunHotels Group among others, the company turnover is anticipated to double the previous financial year. According to their reported financial statement for the year 2014, the company performed as outlined below:- Earnings Following its increased customer base and the involvement of dedicated team of staff, the company posted an increase in EBITDA by 90.6% from the year 2013 to 2014, which is $12,253,000 and $23,357,000 respectively. Cash Flow The Company experienced a general change in cash flow based on the same concept of increased customer base. The cash was being retained at their disposal at the end of the financial years kept increasing every other year, for instance from year 2009 to 2010 it increased by 81.6%, thereafter from Y10 to Y11 it rose again by 82.6, the same happening from Y11 to Y12 where it increased by 6.75% and from Y12 to Y13 by 97.9% and finally from Y13 to Y14, the cash at the end of the period reduced by 22.5% this could have been as a result of acquisition of SunHotels Groups which was paid in cash. Balance Sheet & Financing The company had the a significant growth in terms of its asset base, that is, its current asset increased by 26.3% from Y09 to Y10, there was an increase again from Y10 to Y11 by 5.12%, in the Y11 to Y12, some assets were sold off thus reducing by 9.37% while in Y12 to Y13 the current assets increased by 126.9% and finally declining from Y13 to Y14 by 12.1% Likewise, the fixed assets increased as well leading to an increase in the total assets in all the financial years except from Y12 to Y13 where total assets reduced by 149.5% and from Y13 toY14 experiencing the same decline by 3.72% The total liabilities on the other hand increased as well throughout the years except from Y13 to Y14 when the amount dropped by 18.4 % The total equity had a steady trend too, with Y13 to Y14 increasing by 14.1% Risk Management The company management should critically analyze the business environment and have appropriate strategies in place to counter the threats that may arose such as;- The airplane fuel costs that has been moving upwards for the last five years The declining global economy that may affect the international trade as a result of climatic changes and terrorists threats especially in Middle East Valuation As we had stated earlier, HOLD is the most appropriate in respect to Webjet.com traded shares based on discount cash flow valuation method. In reference to the present share price of $4.45, the anticipated share price shall be $5.12; the capital gain is expected to be 15% by next financial period. Discount valuation The discount cash flow method had implied the intrinsic value to give an estimated stock price of $4.97 by close of the business period Relative valuation We will base our valuation on the Price/Earnings ratio as follows Price/Earnings Valuation Value Present share price $4.45 Trailing P/E $0.51 Predicted P/E $0.58 Leading P/E 7.67 Scenario and Sensitivity Analysis Based on the present share price of $4.45, in respect to scenario analysis, the price depends on either increase capital gain by 43% or decline in capital gain by 12.5%, giving a best scenario of $6.36 or undesired scenario of $3.89 Value of sensitivity analysis We based our analysis of the fluctuation in expected price of shares on capital gain that may be realized in the market. Investment Risks Following the initiation of foreign selling restrictions, the acquisition of other organizations in addition to Zuji and SunHotels Group may prove cumbersome. There could be sessions where operation costs goes up while the government may not allow increments of airfares, this may affect business negatively. Unpredictable climatic changes may affect the international trade hence reducing market for the airlines. Appendix 1: Financial Statements and Ratios Income Statement Balance Sheet Cash flow statement Disclosures: Ownership and material conflicts of interest: The authors or a member of their household, of this report do not hold a financial interest in the securities of this company. The authors or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or director: The authors or a member of their household, do not serves as an officer, director or advisory board member of the subject company. Market making: The authors do no act as a market maker in the subject company’s securities. Ratings guide: Banks rate companies as either BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Investment Research Challenge and Global Investment Research Challenge Acknowledgement: La Trobe Investment Research Challenge is based on the Investment Research Challenge originally developed by the New York Society of Security Analysts. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with La Trobe University, CFA Institute or the CFA Global Investment Research Challenge with regard to this company’s stock. Read More