The Webjet Limited (ASX: WEB) share price is an attractively undervalued ASX share according to one leading broker.
For readers that don't know exactly what Webjet does, there are three divisions to this business.
The first is the Webjet online travel agency (OTA) business which most of the public would know the ASX share for. Next, is the segment that services business travellers called WebBeds. Finally, there is a car and campervan hire business called Go-See.
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Why is the Webjet share price undervalued?
The broker Ord Minnett believes that the Webjet share price has a 20% upside this year with a price target of $7.31.
Ord Minnett thinks that Webjet will do well, or is doing well, when it comes to the rebound of travel after all of the COVID impacts.
One of the key elements that the broker likes about Webjet's potential when it comes to WebBeds is the idea of being more profitable at scale.
When the ASX travel share released its FY22 half-year result, it said that WebBeds has an increased market opportunity due to an expansion with the business-to-customer (B2C) channel. WebBeds is also targeting previously untapped domestic markets and increasing the North American market penetration.
WebBeds is targeting a greater share of a larger market opportunity, with the business-to-business (B2B) total transaction value (TTV) now being worth more than A$70 billion. Webjet is targeting a 14% share of this.
Webjet has streamlined its technology, enhanced Rezchain (blockchain) efficiencies, it's leveraging data analytics and it is simplifying processes across the business.
WebBeds is on track to be 20% more cost efficient when at scale. This is one of the main reasons that Ord Minnett likes the current Webjet share price. Before COVID-19, WebBeds had a target of '8/4/4'. This meant that revenue would be 8% of TTV, costs would be 4% of TTV and earnings before interest, tax, depreciation and amortisation (EBITDA) would be 4% of TTV. That translated to the EBITDA margin target being 50%.
But now, WebBeds is targeting '8/3/5'. That means that the EBITDA margin is 5% of TTV, but it would be an EBITDA margin of 62.5% when compared to revenue.
WebBeds has been profitable since July thanks to domestic sales in North America and Europe. November 2021 TTV was tracking at 63% of pre-COVID, with bookings tracking at 69%. Many larger markets were yet to open.
The Webjet OTA returned to a positive EBITDA thanks to domestic border openings and a highly scalable cost base. It can scale key costs in line with demand.
Valuation
Ord Minnett is expecting the business to return to profitability in FY23. Based on the projected numbers, the Webjet share price is valued at 26x FY23's estimated earnings.
UBS, which also rates Webjet as a buy, is even more optimistic about the profit potential. This broker puts the Webhet share price at 20x FY23's estimated earnings.
