TVPT
(Travelport Worldwide Limited): Travelport, a story ready for takeoff
By:
Brendan Fanning, student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
- 1Q15 results featured EPS of $0.41 beating consensus by $0.09
- However, 1Q revenue of $609M, up 6.5% year over year, missed street estimates by nearly $5M
- TVPT is showing signs of increased penetration within high value international markets
- RevPas segment growth led a strong 4Q14, beating consensus on revenue, EBITDA, and EPS
- FY 2016 guidance remains stable and management has reiterated deleveraging the business as a top priority
Travelport
Worldwide Limited: Recent News
First quarter earnings,
announced on May 5, 2015, showed more strength than weakness as adjusted EBITDA
was up 12% and adjusted income per share increased 71%. Revenue growth was led
by certain higher value International regions, including Europe (up 18%), Latin
America and Canada (up 18%) and Asia Pacific (up 9%), with International air
segment growth above International GDS air segment growth. Air revenue
benefited from a nice geographical mix as well the further adoption and
penetration of merchandising solutions – now implemented with around 160
airlines. Impressively, eNett, grew its revenue by 76% as it cleared its
backlog of customer implementations from last year and also gained more share
of business with existing clients. Additionally, MTT, TVPT’s recently acquired mobile
commerce subsidiary, announced a number of new customer wins.
In terms of margins, 1Q15
showed operating income increasing 74% primarily due to a reduction in non-core
corporate costs of $19 million mainly related to fluctuations in unrealized
gain (loss) on foreign currency derivative contracts. Additionally, a $9
million reduction in depreciation and amortization helped reduce costs as the
useful lives expired on a portion of acquired intangible assets.
4Q15 also showed signs of
improvement as TVPT beat consensus estimates for revenue, EBITDA, and EPS.
Bookings for the quarter were light of expectations, however, strong RevPas
growth made up the difference as the company focused on more profitable
segments and geographic areas.
Full year 2016 guidance
appears stable as TVPT expects 6-8% revenue and adjusted EBITDA growth and
possible 15-23% net income growth. However, the company widened free cash flow
guidance on the lower range from 15-20% to 8-23% largely due to volatile
working capital swings. Management also seems to be putting a large emphasis on
deleveraging; with a goal of a 3x EBITDA leverage target expected to be hit in
three years.
Current
Economic Environment
According US Department
of Commerce current forecasts, the United States is expected to see 0.4-4.2%
percent annual growth rates in visitor volume over the 2015-2020 timeframe. By
2020 this growth would produce 90.3 million visitors, a 20% increase, and more
than 15 million additional visitors compared to 2014. Growth is expected to be
led by travelers from Mexico, the UK, and South America, and China.
On a global scale, research
done by the Global Business Travel Association has identifies six hot spots –
India, China, Colombia, Mexico, Singapore and Australia — where increased
business travel demand is driving significant air price increases. This is
despite global air travel prices displaying signs that they will be essentially
flat in 2016.
Competitive
Environment
Travelport currently
maintains a 25% share of global GDS air-bookings in comparison with their two
largest competitors: Amadeus (40% share) and Sabre (28% share). Despite a lower
market share, TVPT’s competitive advantage lies with their technology infrastructure.
The company believes that competition lacks a scalable alternative to their
Travel Commerce Platform, which offers superior depth and breadth of travel
inventory, functionality and global reach. Specifically, Travelport boasts a significant
advantage in the B2B and Beyond Air space, with larger market shares than both
Sabre and Amadeus.
Additionally,
TVPT is increasingly targeting the indirect channel to grow their away
bookings, reach leisure travelers seeking complex itineraries booked through
travel agencies, and – most importantly – increase their access to business
travelers who use corporate booking tools accessible through GDSs. Low Cost
Carriers, which have experienced significant growth over the past three
decades, have traditionally relied on direct distribution, but are increasingly
moving towards the indirect channel to widen their reach. Unlike a traditional
GDS, TVPT provides full merchandising capabilities so that LCCs are able to
distribute their entire value proposition via the indirect channel, which is especially
valuable given the increasing importance of ancillary revenue for airline
profitability. Travelport sees the indirect channel as another opportunity to
gain ground on competitors.
What
has the stock done lately? For the 52 weeks ending 3/24/16, TVPT
was down 18.5% to $13.22. Since then, the price has increased 1.7% to $13.45
helped by an optimistic 1Q15 earnings call. In terms of valuation, TVPT is
currently trading 10.8x earnings compared to Sabre trading at 18.4x and Amadeus
at 20.7x.
My
Takeaway
As headwinds from the
loss of Delta and Orbitz business are increasingly pushed into the rearview,
investors should have a reason to be excited for the future of TVPT. A durable
and cash-rich Travel Commerce platform should allow TVPT to use cash flows from
its core business to invest in growth platforms and aggressively deleverage the
balance sheet. Specifically, investments in eNett’s emerging platform presents
some exciting growth potential. Due to the unique structure of eNett, a few
large deals could provide some significant upside and increase revenue per
booking with ancillary and advertising revenue. If TVPT continues to see
success in penetrating high growth markets and diversifying away from the US,
this stock could really take off.
