Concerns about the spread of the coronavirus saw ASX travel shares drop sharply yesterday, with Flight Centre Travel Group Ltd (ASX: FLT), Corporate Travel Management Group Ltd (ASX: CTD), Qantas Airways Limited (ASX: QAN), and Webjet Limited (ASX: WEB) shares all heavily impacted.
The Webjet share price was the hardest hit, plummeting 13.86% to $12.37 at the close of trade yesterday. It has regained a bit of lost ground since then, rising by 3.96% to $12.86 at the time of writing, but this is still way below last week’s asking price.
Share markets often overreact to bad news
These types of events often lead to irrational fear in the short term, with the market overreacting to the severity of the event. Panic can often set in with a sudden overselling of shares, often without a reasonable or measured assessment of the real risks involved.
It is quite possible that if the coronavirus spreads further, it could have a significant impact on both domestic and international travel, and consequently impact on companies involved in travel bookings such as Webjet.
However, it appears that the world is still a fair way off that scenario. So far, the spread of the virus outside of China has been minimal, with China’s implementation of strict travel controls assisting in this regard. Also, there have been no confirmed cases of the virus spreading person-to-person on Australian soil, with all Australian cases having travelled from China.
Australian scientists have already managed re-create the coronavirus in a laboratory, which indicates that scientists are likely to be on the path to creating a vaccine soon.
This all suggests to me that the market has overreacted too harshly yesterday. In particular, I feel Webjet shares may have been unfairly hit.
Webjet seeks to clarify analyst report
The harsh market reaction to Webjet may also have been exacerbated by an analyst’s report published on 28 January.
In an ASX announcement Webjet released this morning, it sought clarification on what it believes to be inaccuracies in yesterday’s report. In one point, it states “[t]he data stating that 65% of Webjet Online Travel Agency (OTA) traffic comes from search engines at a low cost is incorrect and does not reflect the source channel mix or shopping intent of the OTA’s customer base.”
Webjet’s growth prospects still strong
I believe this leading online travel agent is still well positioned to grow its revenues strongly over the next few years, due to the continued transition of the travel industry to online bookings.
Webjet’s most recent financial results were very impressive. For FY19, Webjet Limited delivered a 43% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $124.6 million. Revenue grew 26% to $366.4 million and net profit after tax (NPAT) was up 46% to $81.3 million.
In particular the travel group’s WebBeds B2B business has been growing at a rapid rate and Webjet appears to be well positioned to continue to grow this business segment quickly over the next few years. Following the acquisitions of both JacTravel and Destinations of the World (DOTW), WebBeds is now its largest business segment.
As WebBeds continues to grow and gain scale, Webjet continues to see significant improvements in EBITDA margins across its business and remains on track to deliver our profitability target by FY22, which includes a 50% EBITDA margin by that time.
I believe that Webjet’s share price was hit unfairly yesterday, which means now could be a good time to take position in a company that I feel has strong growth prospects over the next few years.
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Motley Fool contributor Phil Harpur owns shares of Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.