Sunday, May 15, 2016

68th AIM Student Equity Update by Brendan Fanning. Travelport Worldwide Limited (TVPT) "Ready for Takeoff?"

TVPT (Travelport Worldwide Limited): Travelport, a story ready for takeoff

By: Brendan Fanning, student at Marquette University

 Image result for Travelport Worldwide Limited
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.


  • 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.  

Source: FactSet

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.