Equity Strategy
29 May 2024
Out of Season Reporting Recap
Select Companies Have Seen Earnings Upgrades

After a number of ‘out of season’ annual/interim results in the last month, aggregate forward earnings expectations for the ASX 300 remain largely unchanged. 

However, beneath the surface there have been several positive earnings updates at the stock specific level that have triggered meaningful earnings upgrades for select companies. 

Several companies held in the Focus Portfolio reported strong updates during the month, which have driven meaningful upward revisions to consensus earnings forecasts while reaffirming our positive investment views. Standout updates were provided by Webjet (WEB) (2% weight), Aristocrat (ALL) (3.5% weight), and Xero (XRO) (4% weight). These companies are the focus of this report. 

Figure 1: Forward earnings expectations for the ASX 300 have remained largely unchanged in May…
Figure 2: ...although there have been meaningful earnings upgrades within the Focus Portfolio

Webjet – WebBeds: Departure Scheduled

Webjet (WEB) is held in the Focus Portfolio at 2%

WEB reported FY24 full year EBITDA growth of +40% to $188m, which was towards the top-end of the company’s $180-190m guidance range and broadly in line with expectations. 

The major news however was WEB’s plans to demerge its B2B (WebBeds) and B2C segments (principally Webjet.com.au) into two separately ASX-listed companies in FY25. 

WebBeds - demerger talks are underway 

While WEB is best known for its online-travel agent (OTA) (i.e. Webjet OTA / Webjet.com.au), WebBeds is significantly more important for the group – and is central to our investment thesis. 

WebBeds accounted for ~86% of WEB’s EBITDA in FY24 (excl. corporate costs) and will contribute the vast majority of WEB's earnings growth to FY30. 

Given each segment’s differing growth profiles – and their independent tech, operations and management - the proposed demerger has merit and, if successful, will likely unlock value for WEB shareholders, in our view.

Figure 3: WebBeds is WEB’s structural growth engine

The proposed WebBeds spin-off should unlock ‘hidden value’

WEB’s current market value doesn’t appreciate the quality or growth potential of WebBeds. 

In its current structure, WEB trades on a ‘conglomerate discount’ in our view, due to the combination of two distinct and unrelated segments: Webjet OTA (lower growth, mature), and WebBeds (higher quality, structural growth). 

Therefore, the demerger of WebBeds could realise significant shareholder value if the market is better able to appropriately value WebBeds as a stand-alone business. 

What is WebBeds worth? 

As a stand-alone business, WebBeds deserves to trade on a valuation multiple that is broadly in line with other global ‘structural growth’ companies. As such, to determine appropriate comparables we have screened the ASX 300 for businesses with global operations and structural growth potential (see figure 4). 

WebBeds’ comps trade on an average FY25e EV/EBITDA multiple of ~26x with a consensus 2-year EBITDA CAGR of ~18% - which is broadly in line with WebBeds' EBITDA CAGR of ~20%. Simplistically, this implies WebBeds should trade on an EV/EBITDA multiple in the order of ~20-30x. 

WebBeds is undervalued by the market 

To estimate the current ‘implied’ market valuation of WebBeds, we have conducted a sum-of-the-parts analysis of the combined WEB group (see figure 6). 

Our analysis assumes that Webjet OTA will trade on an FY25e EV/EBITDA multiple of ~8.6x – directly in line with the global peer average. Presuming this is accurate, WEB’s headline market multiple of ~13x implies WebBeds is valued at an implied FY25 EV/EBITDA multiple of ~15x – well below the average comp multiple of ~26x. 

This suggests that WebBeds is undervalued by the market in the current group structure. As such, we are confident that the proposed demerger, if successful, is likely to drive a re-rate of WebBeds valuation multiple (and thus WEB’s sum-of-the parts multiple), unlocking ‘hidden value’ for WEB shareholders. 


Figure 4: WebBeds – comparable ASX 300 ‘global growth’ companies
Name Ticker EV/EBITDA (FY25) 2 yr EBITDA CAGR*
Lovisa LOV 13 19%
Car Group CAR 21 13%
Wisetech WTC 50 32%
Xero XRO 35 23%
REA Group REA 26 17%
Technology One TNE 23 16%
Breville BRG 15 10%
Comp average 26 18%
WebBeds ? 20%

*FY25/26 compound annual growth rate. Source: Visible Alpha Consensus, Wilsons Advisory.

Figure 5: WebBeds’ EV/EBITDA multiple should re-rate higher as a stand-alone business
Figure 6: Our sum-of-the-parts analysis implies WebBeds is undervalued by the market
WEB - FY25e consensus ($m) Assumed/implied value Assumptions
EBITDA Corporate costs Adj EBITDA EV / Adj. EBITDA multiple Enterprise Value (EV) ($m)
Webjet OTA / other 60 -9 51 8.6 444 Valuation multiple is based on the average FY25 consensus EV/EBITDA multiple of WEB OTA's global peer group*.
WebBeds 200 -23 177 14.7 2,606 Market implied EV/EBITDA multiple, which is back solved (taking the above Web OTA segment EV/EBITDA multiple as accurate) to achieve WEB's current market Enterprise Value.
WEB - combined group (current market value) 228 13.4 3,050

*Global peer group includes Flight Centre Travel, Corporate Travel Management, Expedia Group, Tripadvisor, Trip.com, Booking Holdings, and Hostelworld.
Source: Visible Alpha Consensus, Wilsons Advisory.


Aristocrat – Jackpot Result

Aristocrat (ALL) is held in the Focus Portfolio at 3.5%

Aristocrat’s (ALL) 1H24 result was an impressive, double-digit beat to consensus earnings expectations, which demonstrated the quality of the business underpinned by its ability to consistently gain market share. 

Given ALL’s strong balance sheet (1H24 net cash of $366m), the business increased its on-market buyback by $350m, bringing the total buyback outstanding to $500m, which will be earnings per share (EPS) accretive over the next 12 months. 

Figure 7: Aristocrat’s first half result was well ahead of consensus expectations…
Figure 8: ...driving significant EPS upgrades

Market share gains underpin Aristocrat’s resilience 

The key driver of ALL’s impressive 1H24 earnings growth was the company’s continued market share gains, which has more than offset softer US slot machine demand this year, in line with our expectations. 

In the key North American Gaming Operations segment, ALL grew its installed base comfortably ‘above system’ at +10% in 1H24, while maintaining market leading pricing with a fee per day of US$55.50. Together, these factors saw ALL’s market share increase to an all-time high of ‘over 40%’ in the US gaming operations market. 

Management guided towards continued market share/profit growth in land-based gaming over FY24, which will be supported by the superior depth and strength of ALL’s portfolio driven by its unparalleled development and design spend. 

Figure 9: Aristocrat comfortably outgrew its competitors in 1H24

Aristocrat remains cheap for a high quality global leader

ALL is still ‘cheap’ despite its recent rally with the company trading on a forward PE of ~18x. This multiple is attractive given ALL’s competitive strengths and the long runway for double-digit EPS growth, underpinned by continued share gains in land-based gaming and the accelerating performance of Aristocrat Interactive within the fast-growing real money gaming industry. 


Xero – Cost Control and Pricing Drives Earnings Upgrades

Xero (XRO) is held in the Focus Portfolio at 4%

Xero’s (XRO) FY24 result was an impressive beat to consensus expectations, which has strengthened our conviction in our investment thesis. In the result, XRO showcased its ability to balance top line growth with profitability following recent cost outs. Notably, the company achieved its ‘rule of 40’ target several years earlier than expected by the street, with revenue growth of +22% and a free cash flow margin of 20%. 

Figure 10: Xero’s full year result showed inflecting profitability…
Figure 11: …driven in part by strong cost control

Pricing power on full display

As we flagged earlier this month, pricing is a key lever available to XRO to further ‘monetise’ its large subscriber base and drive significant revenue/earnings growth over the balance of this decade. 

Pleasingly, in its FY24 result XRO showcased its ability to raise subscription prices - driving average revenue per user (ARPU) growth of +14% - while still maintaining double digit subscriber growth (+11%) and keeping monthly churn below pre-pandemic levels (0.99%). This highlights the ‘stickiness’ of XRO’s customer base reflective of the high switching costs associated with its ‘mission-critical’ software suite. 

With more price increases slated for July 2024, pricing will remain a key driver of XRO’s earnings growth in FY25 and over the long-term. Forward consensus estimates still underappreciate XRO's ARPU upside potential in our view when considering the much higher ARPU achieved by XRO’s larger, more mature competitor, Intuit (see figure 13).

Figure 12: Xero lifted prices strongly in FY24 while maintaining double digit subscriber growth
Figure 13: Xero’s long-term ARPU potential remains underappreciated by the street

Keeping a long-term view - Xero still presents good value

In summary, we expect continued double-digit subscriber growth, combined with price increases and a leaner cost base, to underpin significant long-term earnings growth that is not fully appreciated by the market in our view. Therefore, despite XRO's high forward PE multiple of ~78x, the company still offers attractive value at current levels considering consensus EPS growth of ~34% p.a. (CAGR) to FY30 with potential for upgrades on top of this.


Positive Updates Build Conviction in our Positioning

In summary, pleasingly despite the subdued market earnings backdrop, this ‘out of season’ reporting period has been overwhelmingly positive for the Focus Portfolio. 

Every industrials company (excluding financials/resources) in the portfolio that released a financial update over the last month has received forward consensus earnings upgrades and is expected to deliver above market EPS growth in FY25. 

Most importantly, the updates released during the month have strengthened or reaffirmed our positive investment views across some of our key portfolio positions including (but not limited to) those detailed in this report. On this basis, we remain broadly comfortable with how the Focus Portfolio is positioned. 

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Written by

Greg Burke, Analyst

Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.

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