The Webjet Limited (ASX: WEB) share price will face the spotlight this week as the ASX travel share reports its FY23 result.
Webjet has two main parts to its business – an online travel agency (OTA) in Australia and a global business-to-business (B2B) segment called WebBeds which "digitally provides hotel rooms to global partners".
I think there are two main areas that investors should focus on to decide whether the business is a buy right now. They are how much profit it can make and whether the outlook is strong.
Image source: Getty Images
Is profitability improving?
As an online-only business, Webjet's operating model can come with noticeable benefits compared to a 'bricks and mortar' travel agent.
In the company's FY23 half-year result, its OTA segment achieved an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 41.3%. Webjet said it expects the future EBITDA margin to be more than 40% despite inflationary wage pressures.
Webjet also said that its total transaction value (TTV) to revenue margin is expected to improve from 8.4% to between 9% to 10% once international capacity returns to 2019 levels.
Qantas Airways Limited (ASX: QAN) announced just last week it is boosting its international network with extra flights, more aircraft, and new routes. This will see its international capacity double compared to pre-COVID levels. Perhaps this could be the margin booster that Webjet was referring to.
WebBeds reported an excellent EBITDA margin of 55.7% in HY23. It's targeting an EBITDA margin of 62.5% so there's room for further improvement.
It seems there's scope for Webjet's margins to improve for both of its main businesses, which I think is very promising for the Webjet share price.
The company is expected to generate growing profit over FY23, FY24, and FY25. The estimates on Commsec suggest it could make 15.1 cents of earnings per share (EPS) in FY23 and 26 cents of EPS in FY24. This would put the Webjet share price at 49 times FY23's estimated earnings and 29 times FY24's estimated earnings.
Outlook potential
When we look at two of Webjet's ASX travel share peers, both talked about strong travel demand which also bodes well for Webjet.
In a recent trading update for Flight Centre Travel Group Ltd (ASX: FLT), it said travel demand was "holding up strongly". It achieved a "post-COVID record TTV in March 2023 – 6% above March 2019".
Corporate Travel Management Ltd (ASX: CTD) also said in its trading update with its FY23 half-year result that "travel demand remains strong with no signs of macroeconomic factors impacting the recovery".
With travel demand looking good, that seems like a good tailwind for the Webjet share price going forwards.
The digital business model means its profit could be very scalable as it processes more travellers. The same digital infrastructure has already been built and can handle large volumes of customers.
Is the Webjet share price a buy?
As we can see on the graph above, the Webjet share price has climbed 20% since the start of the year. The market seems to have largely priced in the recovery of travel demand.
I'm not expecting the Webjet share price to rise another 20% over the rest of the year. But I think the underlying travel demand and rising profit margins can help the business continue to outperform the market over 2023 and beyond.
On top of that, the business could start paying dividends again in FY24 (according to Commsec projections), which can boost shareholder returns.
I'd be happy to buy Webjet shares on a three-year or five-year investment horizon.
