Webjet (WEB) is in the final stages of demerging its well-known Webjet B2C business (principally the Webjet online travel agent), from its lesser-known - but much larger - B2B business, WebBeds. 

With the demerger now formally approved by shareholders, Webjet B2C (Webjet Group) will commence trading as a separately listed entity next Monday (23/9/2024) on a deferred settlement basis. The B2B business (WEB Travel Group) will retain the existing WEB listing.

Demergers on the ASX have historically created value for shareholders, with both the parent and the spin-off outperforming the ASX 300 on average in the 12 months and 24 months post demerger. 

There is strong rationale for WEB’s looming demerger, which we expect to unlock hidden value for existing WEB shareholders. This is the focus of this report. 

WEB is currently held in the Focus Portfolio at a 3% weight. 

Based on our analysis of major demergers over the last 15 years, on average both the parent entity and the spin-off have outperformed the market in the 12 months and 24 months post demerger. 

Typically, the spin-off has outperformed the parent entity by around 2x (excluding notable outliers) over these time frames. 

This naturally supports a positive view of WEB in the lead up to its scheduled demerger. 

However, as every business and demerger is inherently unique, it is important to review the investment rationale of each entity on a case-by-case basis. This is the approach we have taken towards the WEB demerger (detailed below). 

1. WebBeds’ value is underappreciated in WEB’s current market valuation 

Demergers can create shareholder value when individual segments are undervalued by the market due to the presence of a ‘conglomerate discount'. Spin-offs allow investors to more appropriately ascribe value to each segment independently. 

In its current structure, we believe WEB trades on a ‘conglomerate discount’ due to the combination of two distinct segments with different long-term growth profiles: Webjet B2C (more mature, modest growth), and WebBeds (less mature, strong structural growth).

As such, we expect the demerger to drive a re-rate of WEB’s combined (sum-of-the-parts) valuation.

2. Lack of operational synergies or strategic alignment between B2C and B2B segments

In situations where there is a clear lack of interdependency or strategic alignment between the different segments of a business, demergers allow both the parent and the spin-off to focus on pursuing their individual growth strategies, while adopting tailored capital structures that are most appropriate to their unique characteristics. 

In the case of WEB, given its B2B and B2C segments have different growth profiles, independent operations with limited interdependency, and separate management teams, the demerger should be relatively frictionless. 

Under the structure of the WEB demerger, the B2B business - WebBeds, will trade under the existing listed entity (under the WEB ticker, albeit renamed to WEB Travel Group), while the B2C business - now named Webjet Group, will trade as a newly listed entity. 

WEB shareholders will retain their existing shareholding in Webjet (albeit renamed to WEB Travel Group), and eligible shareholders will receive one Webjet Group (B2C) share for every WEB share they hold on the Record Date (24/09/2024).

With respect to the Focus Portfolio’s existing 3% position in WEB, at this stage our bias is to hold only WEB Travel Group (B2B) and to remove Webjet Group (B2C) once it is spun-out, given:

1. WEB Travel Group (B2B) has a much stronger earnings growth outlook over the near and long-term than Webjet Group (B2C) (consensus EBITDA CAGR to FY30 of 14% vs 5%)
2. Webjet Group (B2C) has a greater degree of sensitivity to consumer weakness and the risk of a prolonged slowdown in domestic travel spend than WEB Travel Group (B2B).
3. Webjet Group (B2C) will be below our preferred size/liquidity thresholds for Focus Portfolio holdings, and is at risk of being removed from the ASX 300 index (our research team’s indicative equity value range is ~$270-370m). 

WEB Travel Group (B2B) will include the WebBeds business, which is a leading online travel intermediary. The WebBeds Global Marketplace connects hotels (‘travel sellers’) that are looking to fill rooms with ‘travel buyers’ (e.g. OTAs, retail travel agents, tour operators, airlines etc.) that are trying to book rooms for travellers. 

Since WEB was introduced to the Focus Portfolio in April 2024, WebBeds has been central to our investment thesis as the structural growth engine of the combined group. 

Importantly, WebBeds remains on track to achieve its TTV target of A$10bn in FY30, which underpins consensus expectations of highly attractive ('mid-teens') earnings growth over the next decade. 

While WebBeds is not immune to the risk of a potential travel slowdown, its structural growth traits (i.e. its ability to grow ‘above system’) will provide a degree of insulation against the cycle. 

The three key pillars of WebBeds’ growth will be: 

1. Growth in existing portfolio (system growth)

The global hotel wholesale market is forecast to grow at a CAGR of ~8% over the next three years, which will be supported by the structural shift towards distribution consolidation as well as general travel market expansion. WebBeds is confident it can grow its TTV from its existing portfolio of travel buyers and hotel partners at least in line with ‘system growth.’

2. New customers, supply, and markets (market share gains)

WebBeds plans to grow its market share by adding new hotels and travel buyers to its marketplace, and by growing its presence in less penetrated markets (with North America expected to be a core growth driver). 

There is a large opportunity with independent hotels, given the fragmented nature of the hotel market. 

Through its partnership model, WebBeds offers significant value to independent hotels to help them compete with the big chains. It acts as their sales, marketing and distribution partner, which lowers their guest acquisition costs. 

WebBeds is also focused on expanding its retail travel agent channel presence, by upgrading its trade booking website with better features.

3. Improved conversion 

WebBeds is focused on improving its conversion rate, to drive a higher number of bookings from online searches. Key drivers of this will include:

1. AI: efficiency improvements driven by AI adoption.
2. Pricing: competitive pricing vs the market.
3. Technology: improving response time and look-to-book ratios.
4. Mapping: enhancing the quality and relevance of content. 
5. Rate plans: more choices to cater for preferences and budgets e.g. early bird discounts and non-refundable rates.
6. Accuracy: minimising technical errors.

The WEB demerger is likely to be value accretive for shareholders in our view. 

Based on relevant comps, we expect Webjet Group (B2C) to trade on an EV/EBITDA multiple of 5-7.5x, and WEB Travel Group (B2B) to trade on an EV/EBITDA multiple of 15-20x (albeit there is upside potential to this range given WebBeds’ pure-play focus, high growth rates and attractive margins). 

Under these assumptions, risks are skewed to the upside for WEB’s combined sum-of-the-parts valuation. We note that the high-end of our research team’s indicative valuation range presents 29% upside to WEB’s current share price, while the low-end estimate suggests just -1% downside. 

Given the key swing factor in our sum-of-the-parts valuation of the combined group will be the multiple that the market ascribes to WEB Travel Group (B2B), we see little merit in holding Webjet Group (B2C) for an extended period of once it is spun-out.

We note that using the low-end valuation multiple, rather than the high-end multiple, for the B2C segment results in only a ~3% decrease in the group’s combined valuation.