The Webjet Limited (ASX:WEB) share price is pushing higher on Wednesday after being the subject of a bullish broker note this morning…
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The Webjet Limited (ASX: WEB) share price is on course to record a decent gain on Wednesday.
In morning trade, the online travel agent’s shares are up 2% to $6.32.
Why is the Webjet share price pushing higher?
The catalyst for the strong gain by the Webjet share price today appears to be a broker note out of Goldman Sachs this morning.
According to the note, the broker has initiated coverage on the company’s shares with a buy rating and $7.36 price target.
Based on the Webjet share price at yesterday’s close, this price target implies potential upside of 21% over the next 12 months.
Why is Goldman Sachs positive on Webjet?
Goldman believes that Webjet is well-placed to benefit from the travel market recovery. It explained:
“Webjet, the #2 bed bank globally and Australia’s leading domestic Online Travel Agent, looks well-placed to benefit from the travel recovery. Webjet’s OTA profitability was already one of the strongest among competitors prior to COVID-19 and we expect this to improve as activity levels return to normal. We believe bed bank players will take on increased importance as independent hotels compete amid the reduced demand.”
“We forecast Webjet to post an EBITDA CAGR of +9.5% over FY19-24E. We believe its OTA business offers a balanced exposure to the domestic-led recovery and expect it will maintain a strong balance sheet. We initiate with a Buy and a 12-month TP of A$7.36, with potential upside of 21.1%.”
The broker also suspects that Webjet could be in a position to bolster its future growth with acquisitions once trading conditions return to normal. It said:
“Webjet has said it has maintained its interest in looking for attractive acquisition opportunities that might arise, especially adjacent to the Bedbanks business. Taking the DOTW and JacTravel acquisitions as a point of reference, these businesses were priced at an average of 0.4x EV/TTV. We calculate headroom availability to the group for acquisitions as equal to the sum of cash balance and undrawn facilities, net of the minimum reserve requirement (A$125mn) — this was a total of c. A$258mn as at the end of December 2020.”
“Based on the historical acquisition multiples, we estimate the group has enough capacity to acquire a business with TTV of up to A$650mn in the pre-pandemic scenario, representing c. 30% of FY19 TTV. That said, we think valuations could be more attractive in the current environment, implying potential for a sizeable acquisition if the right opportunity was to come by.”
Goldman acknowledges that the Webjet share price looks overvalued based on its short-term earnings. However, it feels it is attractive on a normalised basis. It explained:
“The absolute enterprise valuation is up 9.1% vs pre-pandemic times (using 21 Feb 2020, the pre-pandemic peak, as the reference period). On a relative valuation basis, WEB trades at a 143% premium to industrials ex financials, vs a pre-pandemic average of a 2% discount. However on a normalized forward earnings basis (FY24), WEB currently trades at 17.6x P/E.”
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.