eDreams - Worth another look
All,
Please find our updated analysis here.
Many companies are worth more today than they have been pre-pandemic. Few of them still generate negative EBITDA and even fewer are in the travel sector. Having bought the bonds and equity a year ago, we clearly sold the latter too early when it initially bounced up to E3.60.
Bookings:
- In line with what we’ve seen across the tourism sector, bookings have shot up into summer. In fact, August bookings have been some 26% above 2019 level (by number), in part because customers postponed their booking commitments until shortly before their trips, given pandemic uncertainty.
Composition of Revenues:
- As per our previous emails, a portion of the large accounts payables balance apparently represented revenue recognised in the past, but with deferred executions as trips had been canceled and postponed. Thus while Expansion revenue was up significantly in Q122, Core Customer revenue lagged far behind. We expect this also to be a feature in Q222, but perhaps a little less so and ultimately to normalise.
- Even though its revenues were materially held back by the unwind of ‘payables’, the company contends it is taking market share, which we think is likely.
Lower WC inflow:
- As a result of the unwind of the deferrals, as well as the shorter booking horizon vs historical behavior, the WC inflow was not as large as arithmetic would have suggested and confirming our model.
- Notwithstanding the point above, WC has flown back in. So to an extent, Q122 was not only proof of the anticipated outflow of WC from deferrals, but actually to a greater extent a proof of concept: of WC inflow - in line with model - despite shorter booking lead times and lower basket prices.
Last, but not least: Prime:
- Prime shot up to 1.5m members over summer and now accounts for nearly 40% of bookings. If management claims are correct, that prime business is as profitable as other business (higher premium service cost, offset by lower marketing and fraud), then equity heads will (have begun to) argue that the division alone is worth more than the EV of all of eDreams today.
Negative EBITDA and Liquidity:
- One reason the valuations referred to above are not materialising is the continued low revenue, falling margin, and consequently negative EBITDA - even though bookings returned.
- Revenue per booking has dropped materially, mostly due to the lack of Classic Customer revenue, where customers have been using last postponed bookings from last year to fly. This is a finite €50m phenomenon and will be cycled through over summer.
- Margins have been falling also because ticket prices/baskets are lower. The company expects baskets to return to pre-pandemic levels over the coming year.
- Liquidity remains strong. However, in case of a failure of re-opening, it does look finite. The company burns approx. €70m p.a. in SG&A and perhaps €90m in total. If we add a reversal of the E35m WC inflow from Q122, another year will be difficult to survive. For what it’s worth, however, there will be plenty of businesses that won’t survive that long. So aside from taking a more bullish view on re-opening, we see liquidity as sufficient.
Opinion:
- The company is behaving quite precisely per model and, with the exception of the Prime performance, the reporting contained few surprises. eDO remains a re-opening trade coupled with a view on Prime, the latter not being visible in the market yet.
- As the company cycles through its ‘deferred’ position, it will begin to post higher revenues along with higher bookings, and the WC inflow will come.
- eDO is very well positioned in a market that has seen a significant push into online. The company has invested its time during the pandemic into further developing its product and offering and the booking engine remains as valuable as ever - if not more so.
- That an investment in eDO should make a loss over the coming quarters is very difficult to see. By contrast, it is easy to see a doubling or more of the equity once the company’s revenues, EBITDA, and subsequently earnings return.
- The value clearly breaks in the equity, but by today’s standards and taking into account the development Prime has had, valuation overall remains distressed.
Positioning:
We retain a small legacy position in the bonds but are wondering whether to re-enter the equity while EBITDA and earnings remain negative. The re-emergence of revenues could multiply the share price once more.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003