The ASX 200 (INDEXASX: XJO) has jumped up 1.7% today at the time of writing as investors hope that central banks around the world will step in and save markets such as the ASX.
However, the share price of travel business Webjet Limited (ASX: WEB) is down another 0.8%. It’s obvious that the coronavirus could cause more countries to shut down travel with specific affected countries.
It’s true that the Webjet share price should be lower because of the lockdown concerns. The company itself has said its earnings will be lower than what it would have been without the coronavirus.
But a company shouldn’t be valued on just on one year of affected earnings. That’s why share prices are so volatile, investors are too focused on the short-term. Webjet has a very promising future, particularly WebBeds.
In the FY20 half-year result the B2B WebBeds business reported an 81% increase of earnings before interest, tax, depreciation and amortisation (EBITDA) to $57.3 million. That division also saw an earnings before interest, tax, depreciation and amortisation (EBITDA) margin improvement of 775 basis points (7.75%) to 45%. Management thinks that the WebBeds EBITDA margin can reach 50% in FY21. It already accounts for 60% of total EBITDA.
It’s likely that the second half of FY20 will be disrupted, but despite external challenges of the coronavirus, Webjet is still forecasting underlying EBITDA of $147 million to $165 million, which would be an increase of 14% to 28%.
Assuming everything is back to normal before the start of FY22, it’s trading at around 11x FY22’s estimated earnings. There may be some more weakness in the weeks or months ahead, but over two years – which isn’t long in the investment world – I think Webjet will produce a solid return, there’s a good chance it may be taken over in that time.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.
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