TRAVELPORT WORLDWIDE LTD TVPT
August 29, 2016 - 10:20am EST by
ElCid
2016 2017
Price: 13.62 EPS 0 0
Shares Out. (in M): 124 P/E 0 0
Market Cap (in $M): 1,690 P/FCF 0 0
Net Debt (in $M): 2,284 EBIT 0 0
TEV ($): 3 TEV/EBIT 0 0

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Description

Business

  • Travelport (TVPT) operates an airline Global Distribution System (GDS), which connects travel agents with airlines and hotels

    • Provides travel agents with flight/hotel availability, prices, ancillary products (e.g., extra legroom options), ability to rebook because of bad weather, etc

    • Allows travel agents to book inventory directly

    • GDSs industry-wide account for ~55% of airline bookings, and this has been steady in the US/Europe over the last few years

    • Industry market share (approximate) is:

      • TVPT = 25%/Sabre (SABR) = 35%/Amadeus (AMS SM) = 40%

  • Business breakout

    • By product

      • Air = ~80%

      • Hotels/Car Rental/Cruise Lines/etc = ~20%

    • By geography

      • Europe = 30%/US = 30%/Asia = 20%/MEA & Latam = 20%

  • TVPT also acts as the SaaS business process outsourcer for travel agents

    • Integrated into travel agents’ back office for accounting, reporting, sales, etc

    • Itinerary management

    • Facilitate legal, like duty-of-care agreements

  • Additionally, TVPT owns a small payments business called eNett, which enables travel agents to pay airlines and hotels while lowering fraud and integrated directly w/ the travel agents’ accounting systems

    • eNett revs are only 5% of total revs, but growing quickly at ~50%

    • Eventually eNett can be 500 in revs at a 20% EBITDA margin, so 100 in EBITDA (vs current company total EBITDA at ~ 600)

  • Company is the result of a Blackstone roll-up of GDSs from ’06 until its IPO in ’14

    • Prior acquisitions include Galileo, Worldspan and Apollo

 

Business Model

  • Receives a GDS fee from airlines each time a “segment” (e.g., flight, hotel room, etc) is booked

    • Fee is ~ $6 per segment (or $12 per round-trip)

    • Fee is fixed and not based on ticket prices or ADR

      • However, fee typically equates to ~2% of the booking

  • Pays an incentive fee to travel agents for booking through their GDS

    • Incentive fee is ~ 50% of the GDS fee

 

Thesis

Company trades at a discount to (1) GDS peers and (2) a fair multiple for the company’s growth, b/c of historical market share losses.  However, these share losses are only temporary and are not driven by any structural competitive disadvantage

  • Valuation for TVPT is discounted vs peers and vs growth opportunity

    • EV/EBITDA (Forward): 6.6x vs peers at 7.4x+

      • Peers trade at ~9.0x to 11.5x on a consolidated basis.  However, if assume a 13x for peers’ SaaS, then implies peers value the GDS segment at 7.4x+

    • P/E (Forward): 10x vs peers at 18x to 19x

    • Long term guidance for EBITDA growth of 6% to 8%

  • TVPT’s IPO was in late ’14, and has been plagued by market share losses in specific geographies ever since.  However, these losses should be temporary.

    • Recent market share losses in specific geographies are not due to any competitive disadvantages

      • Orbitz customer loss in ‘15

        • TVPT owned Orbitz, but then sold to Expedia in late ‘15

        • As a part of that deal, Orbitz moved away from a sole-source w/ TVPT to a multi-source with multiple GDSs

        • This customer loss caused TVPT to lose share in the US

        • All existing online travel agencies (OTAs) are now multi-sourced, so a loss like Orbitz should not happen again for TVPT (i.e., there is not another “shoe to drop” for TVPT)

      • European share loss in ‘15

        • A Greek travel agent went bankrupt, and its business went to a competing travel agent

        • This travel agent market share shift led TVPT to lose share to SABR

        • SABR is gaining share, but on a small base

    • On a global basis, TVPT has not lost share

    • Outside of these recent company shifts, travel agent customer renewal rates are in the mid-to-high 90% range, and are typically on 3 year contracts

      • Barrier to entry is that it is expensive and time consuming for a travel agent to switch GDS providers, b/c the provider is built into the travel agent’s back office

    • Expert network calls have suggested no structural difference in product, or difference in pricing

 

Other reasons company trades at a discount are unjustified, including:

  • Previous debt holders’ equity ownership (representing at least 10% ownership in equity) presents technical overhang, which should be temporary

  • Domiciled in the UK, but trades on the NYSE

  • Busted IPO in ‘14

    • Missed first 2 Q’s after IPO supposedly due to bad communication with the Street

 

Receiving eNett for a discounted valuation, even in my base case price target

  • eNett deserves a higher multiple than the base GDS business, but this is not in the price target

    • If assume eNett trades at 13.0x EV/EBITDA, then instead of a 7.5x exit then get to a 7.9x exit, and implies an incremental ~ 10% IRR

  • eNett could be worth $5 to $6 per share

 

Industry changes could accelerate growth on go forwards

  • A new industry standard called New Distribution Capability (NDC) allows GDSs’ to gain access to airline ancillary products, like added legroom, lounge access, etc

    • NDC rollout begins in ‘16

    • Previously, these ancillary products were only available on airlines’ own websites

  • This industry change benefits TVPT in 2 ways:

    • TVPT receives incremental fees for selling ancillary revenue, in addition to a small premium for providing access to ancillary options

    • Being able to provide ancillary services makes the GDS more competitive vs booking direct on the airline’s website

      • The airlines gave GDSs access to these ancillary products b/c they wanted access to the GDSs/travel agents’ customer bases to increase ancillary products sold

  • Ancillary airline revenue represents ~8% of global airline revenue

  • Fee per booking only expected to grow LSD% on go forwards to make guidance, so doesn’t assume much contribution from ancillary sales

 

Price Target

  • Base PT = $23

    • Assumes 12/31/17 exit, and EV/EBITDA (Forward) at 7.5x, with debt paydown

    • Return = 68%/IRR = 47%

  • Downside PT = $10

    • Assumes exit now, and EV/EBITDA (’16) at 6.5x

      • Assumes realize that market share loss is a structural issue, and company continues at ~ flat growth seen in ’15 due to market share losses

    • Return = -17%

 

Risks

 

  • GDS disintermediation by airline websites

    • Concern is that booking through a GDS is higher cost than booking through an airline, and thus airlines will want to incentivize direct bookings

    • Mitigating factors:

      • This is a risk for all GDSs, and so can be hedged by shorting SABR or AMS SM

      • Nothing is changing

        • This has always been a risk for GDSs, and airlines have attempted to disintermediate, but direct share of bookings through airline websites has been stagnant over the last 5 years

        • There is nothing changing that would suggest this stagnant direct % of total flights should change

      • Travel agents are incentivized to use the GDS system

        • Travel agents bring in meaning ticket sales, and travel agents are incentivized to use GDSs b/c they receive an incentive fee.  

        • Airlines can’t give an incentive to travel agents to book with them directly, b/c that would be an illegal kick back

      • If airlines attempt to add a fee to GDS bookings, it could lower travel agent usage of that airline and thus lower that airline’s market share

      • Even if GDS became intermediated, and 100% of flights were booked direct, GDSs still provide value as the SaaS business process outsourcer to travel agents and thus will continue to receive payments for this service

        • TVPT receives ~$3k per month per travel agent in revenue, which isn’t that much compared to other SaaS operators

  • Air travel weakness due to terrorism

    • This is a risk that can be hedged with other travel related equities
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

  • TVPT demonstrates that geographic market share losses were temporary in future earnings
  • Exit by previous debt holders
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