Webjet Limited (ASX: WEB) shares are out of form on Thursday.
In early afternoon trade, the online travel agent's shares are down almost 2% to $5.57.
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Where next for the Webjet share price?
While Webjet's half year results fell a little short of the market's expectations, one leading broker saw enough in them to upgrade its shares this morning.
According to a note out of Morgans, its analysts have upgraded Webjet's shares to an add rating with an improved price target of $6.60.
Based on the current Webjet share price, this implies potential upside of 18.5% for its shares over the next 12 months.
What did Morgans say?
Morgans notes that COVID-19 continues to weigh heavily on the company's performance. However, it was pleased to see improving trends in the third quarter and positive operating cashflow.
The broker commented: "WEB's 1H22 result continued to be severely impacted by COVID. Importantly, it is now generating positive operating cashflow and it has plenty of liquidity. The 3Q22 is tracking ahead of the 2Q22 despite it being a seasonally slower period. Two of its three businesses are now profitable."
Its analysts also highlighted that Webjet has the potential to be a substantially more profitable business in a post-COVID world.
Morgans said: "WEB is targeting to return to pre-COVID booking levels in the 2H23. Management continues to maintain its aspirational market share targets and wants to reduce the company's cost base by 20% when it returns to scale. This means that WEB should be materially more profitable post COVID."
Why buy now?
The broker notes that the Webjet share price has been weak this month and appears to see it as a buying opportunity for investors.
It said: "WEB's share price has been weak this month as concerns around rising COVID cases and lockdowns in Europe have weighed on the sector. Following forecast changes, our blended valuation has risen to $16.60. With 16.4% upside to our new price target, we move to an Add rating."
"Based on our forecasts, WEB is trading on an FY24 recovery year PE of 17.9x which is at a discount to its five-year average PE (pre-COVID) of 20.6x. The main near-term risk to our view is if more countries in Europe go into lockdown, given this will slow down travel demand," the broker concludes.
