Opinion By Martin Kelly

WILL the Webjet share price finally take off after a couple of years in limbo? That’s the question shareholders are asking after a couple of brokers put a ‘buy’ recommendation on the stock, which has been static for the past couple of years while the likes of Wotif have gone through the roof.

The recommendations come on the back of Webjet’s recent profit announcement and forecasts, which include a steadily rising dividend stream. It’s a welcome boost for a company which has failed to deliver on its early promise to investors despite dominating Australia’s online retail sector, in terms of both visitor numbers and profits.

The reality is, after an initial surge through to mid-2005, investors have never warmed to the Webjet story as told by Managing DIrector David Clarke in the same way they have taken to other internet stocks such as Wotif, Seek and Realestate.com, which are trading on aggressive Price to Earnings multiples of around 44, indicating strong optimism about future prospects and market position.

Webjet by contrast is now trading at a PE of just 28 – pedestrian for a profitable Internet company. 

Its share performance over the past two years has also been vastly inferior to the ‘old-school’ travel companies such as Jetset, Flight Centre and MFS, all of which have been very strong.

Even the share price of online retail rival Travel.com.au has done better in recent times, although this company is still trading at a fraction of its listing price and has yet to make a profit (but the signs are it will go into the black for the first time in 2006/07).

The obvious question is why have investors avoided Webjet?

Well, there’s no easy answer. Broker Ord Minnett commented that Webjet has a history of mismanaging expectations, something it has recently sought to correct, while the online retail environment is much more volatile than hotels, on which signficant commissions can still be earned.

In fact, if you look at the recent Expedia results in the US, all its growth is coming from the sale of accommodation rather than airfares, which is Webjet’s main business.  

Anyway, to the latest result. Webjet has been trumpeting big increases in turnover and net profit, which clocked in at A$4m up from A$2.4m.

But I think it’s also worth looking at earnings before interest, tax, depreciation and amortisation. They were up just 9% year on year – from A$3.4m to A$3.7m  – thanks to largely to a big increase in marketing costs (from A$2.7m to $4.9m).

Consequently the net result was inflated by the additon of A$1.6m in interest income.

Clarke says this was all planned, the strategy being to increase turnover, up 45% to $250m, through aggressive marketing to provide a significant platform for longer-term growth.

In terms of Webjet’s revenue, it appears to be primarily service fees on commission-free domestic airfares, although the proportion of international business has increased to 30% of total turnover.

It’s new "Experience The Wonder" campaign is designed to boost that further.

As for the A$1.6m interest, Webjet earned that on its significant cash reserve, which has been well above A$25m at times and is now around A$20m following an A$8.4m share buyback.

What’s Webjet going to do with the A$20m?

Clarke, whose income increased 20% from A$370,000 to A$450,000 over the past year, said “strategic acquisitions appropriate to the business model remain under intensive investigation”.

That’s a line the company has been using for more than a year, so don’t hold your breath.

Webjet clearly has a particular set of criteria that few other online companies meet.

So the chances of it buying and running a separate brand in a more lucrative market niche appear slim, while there don’t seem to be many retail or wholesale companies out there that could easily be absorbed into the Webjet culture, though you never know.

Therefore it’s likely Webjet will still have plenty in the bank this time next year, although the company has promised to start returning more cash to share holders – 60% to 70% of after-tax profit, starting with a 2c dividend this year, and may buy back up to 5% of capital.

Looking ahead, Webjet is forecasting an increased net profit for 07/08 of A$5.2m, up from A$4m, but there are challenges.

On the plus side management has demonstrated a capacity to grow turnover and make money from the Webjet brand, though its fee-based income structure makes the company somewhat vulnerable until it can develop greater diversification. Webjet will counter that its new PLANITONEARTH customer trip management technology will induce customer loyalty.

The real test will be for a rigidly conservative board and management to finally show an ability to develop new income streams, outside of service fees, or invest in complimentary travel businesses. It’s somewhat strange that a small company such as Webjet seems to be less agile than an industry giant like Qantas, which is continually able to react to market forces and reinvent itself.

That said, Webjet is profitable, its forecasts optimistic and investors may be starting to buy the vision.

Travel Trends: August 8, 2007

*Disclosure – The author owns Webjet shares

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