By Alex Gavrish, Etalon Investment Research; author of “Story Investing”
Travelport Worldwide IPO
In my recently published book Story Investing I argue that just as in any good story or movie, there exists a structure in company’s history and development. Correct identification of this structure is what makes it possible for investors to deal with uncertainty, “imagine” the final part, and achieve great investment results. Just as in any good story there are usually three parts of complication, development, and resolution, similarly it is so in company’s or its share price story.
A major turning point is one of the ways to identify important part in company’s life and narrative. Such turning point can be a spin-off, merger, or any other significant corporate event. In case of Travelport Worldwide, it was company’s IPO in 2015 (until then it was owned by affiliated of The Blackstone Group and other investors and management). In addition, duting 2014, Travelport completed several deleveraging transactions. We think that results of these efforts are not reflected in company’s valuation and current share price.
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Travelport is a Travel Commerce Platform providing distribution, technology, payment, mobile and other solutions for the global travel and tourism industry. Company has a presence in approximately 180 countries, over 3,700 employees, and an additional 1,200 employees at IGT Solutions Private Ltd who provide it with application development services. Travelport’s 2015 net revenue was over $2.2 billion. Travelport is comprised of: a Travel Commerce Platform through which it facilitates travel commerce by connecting the world’s leading travel providers with online and offline travel buyers in a proprietary business-to-business (B2B) travel marketplace; a Technology Services through which it provides critical IT services to airlines, such as shopping, ticketing, departure control and other solutions, enabling them to focus on their core business competencies and reduce costs. Travelport is headquartered in Langley, U.K. The company is listed on the New York Stock Exchange and trades under the symbol “TVPT”.
Possibile buyout story
We think that Travelport Worldwide can be a possible acquisition target. Although it is a speculation and might not happen, one can not help but notice large discrepancy in valuation between Travelport Worldwide and Sabre Corp. Sabre Corp trades at much higher valuation multiples: P/S of x2.34 compared to Travelport Worldwide multiple of x0.79 (FY 2015 Sales); P/FCF of x29 compared to Travelport Worldwide multiple of x9 (9M 2016 annualized results); and EV/EBITDA of x10 compared to Travelport Worldwide multiple of x7.58 (9M 2016 annualized results); This gap in valuation can be explained in part by higher operating margins of Sabre Corp (15.5% versus 8.6% for Travelport, FY 2015) but is still not justified, in our view, on an absolute valuation basis.
Travelport Worldwide Ltd currently has a market cap of $1,754 million, net debt of $2,220 million, and an enterprise value of $3,974 million. For the first nine months of 2016, EBITDA was $393 million. On an annualized basis, EBITDA can be estimated to equal $524 million. This values the company at an EV/EBITDA multiple of x7.58. Free cash flow during nine months of 2016 equaled $144 million, and can be estimated to equal $192 million for the full year (on an annualized basis), which would value the company at a P/FCF multiple x9.2 or a FCF Yield of 11%.
If Travelport Worldwide Ltd will continue to generate a similar annual free cash flow over next three years, it will generate a total free cash flow of $575 million over next three years. Applying a x8 EV/EBITDA valuation multiple to company’s EBITDA and adding net debt would value company’s equity (in three years) at $2,548 million or $20.55 per share. This target price provides a potential upside of 45% from current share price.
However, in case of a buyout or merger, the possible upside is significantly higher. Assuming a cost savings/synergies of 20% of SG&A expenses, potential value to the acquirer can be estimated to be $805 million ($101 million at an x8 valuation multiple). Adding this amount to the equity value estimated above would value the company at $3,353 million or $27.03 per share. This target price provides an upside of 91% from current share price.
We believe Travelport Worldwide Ltd’s story provides an attractive investment opportunity for long-term, value-oriented investors.
By Alex Gavrish, Etalon Investment Research; author of “Story Investing“