Description

Introduction

·        Despegar.com (DESP) is an Argentina-based online travel agency (OTA).  It is domiciled in the British Virgin Islands and trades on NASDAQ.  It has an 18 year operating history and operates in 20 countries.  It is the leading OTA in Latin America.  The company had its IPO in September 2017 at $26/share and closed trading first day at $31.78/share.

·        The company is closely held with Tiger Global owning 44%, Expedia owning 14%, and General Atlantic owning 5%.  Tiger Global sold 3.4 million shares in the IPO and still holds 33.6 million shares.  Tiger invested in 2007.  Expedia invested $270 million for their 16.4% stake in March 2015 (diluted to 14% in IPO).  That stake is now worth $211 million.

Thesis

·        The big picture thesis is simple.  OTAs are good businesses and one where scale matters.  Online travel in Latin America is underpenetrated relative to North America and Europe and is going to grow for a long time.  Latin America is a relatively fragmented market.  DESP is the leading OTA in the region, and operates in 20 markets with varying languages, customs, and currency/tax regimes..  As long as DESP maintains its relative market share and the region doesn’t implode long-term, I think an investment in DESP should do quite well.  I also think there is a decent chance that DESP is acquired by either EXPE (most logical) or one of the other big players (BKNG or CTRP).  CTRP has stated that it wants 40-50% of its revenue from international markets in next 5 years from virtually nothing today.  DESP is a very good asset and its acquisition by one of the larger players would give them a large market share lead in the region.  It is also a very manageable acquisition size for any of the big players.

·        The stock trades at $21.43/share, has $5.53/share net cash, and trades at 2.0x revenue on TTM with 17.8% Adj EBITDA margins and 12.9% EBIT margins.  In 2018 Q1, transactions grew 18%, bookings grew 21%, and revenue grew 19%.

Business Description

·        DESP launched in Argentina in 1999, in Brazil, Chile, Colombia, Mexico, and Uruguay in 2000, in further markets over the years and its 20^th market, El Salvador and Honduras in 2010.

·        LTM bookings are $4.7 billion and revenue $548 million.  Brazil is 40% of transactions and Argentina is 27% of transactions.  Air is 41% of transactions and Packages, Hotels & Other are 59% of transactions.  The mix has been moving towards packages & hotels over time.  52% of web traffic is direct and the company has over 10 million user generated reviews.

·        DESP has inventory from over 250 airlines, 300k hotels (26k directly connected), 900 car rental agencies, and 250 destination service suppliers.

·        The company has a number or tailwinds.  The company claims that the Latin American travel market will do 4% CAGR through 2021, and online travel will do 8% CAGR in that period due to shift to online.  Latin American online travel penetration is at 36%, below Asia at 40%, U.S. at 52%, and Western Europe at 54%.  Latin America is a relatively fragmented market, with top 4 airlines at 38% market share and top 10 hotel chains at 14% market share.  In addition, hotel occupancy is lower, at 55% in 016 vs. 65% in North America and 70% in Europe.

·        Installment plans – 55% of transactions in 2017 were paid by installment, using credit cards.  DESP has partnered with local banks to provide financing and receives immediate payment, with the exception of Brazil where it has some receivables, though it factors a portion of these.  This kind of financing is not uncommon in Latin America.  The company claims this gives it an edge vs. its competition and it has taken a long time to build up these capabilities.

·        Margins – long-term, Adj EBITDA margins will probably end up somewhere in the 20%+ range, and I think there is likely continued margin expansion over time as the company gains scale.

·        Management team is professional with top officers all having experience at major multinationals.  I think the company is well-run and making appropriate investments in the business, including most importantly their technology platform.  Mobile transactions are 33% of total, up 400 bps yoy, and traffic is now 2/3^rd mobile.

Other

·        DESP has a shareholder agreement with EXPE where the latter cannot go over 35% ownership through 2020 without tendering for over 75% of shares.  The two also have an agreement where EXPE is the exclusive provider provider of lodging outside of Latin America.

·        Tax rate is 34% in Brazil and 35% in Argentina.  The corporate weighted tax rate in 2017 was 33%.

·        The company has a useful investor presentation. 

Risks

·        “Brazil is the country of the future, and always will be.”  - Charles de Gaulle in 1947.  Brazil & Argentina are 67% of transactions and both countries are going through severe macroeconomic turmoil.  In 2016, transactions were down 6%, before rebounding 26% in 2017.  This has historically been and likely will remain a very volatile region and that will flow through to DESP results.  I think the company is well-positioned to weather this, but anything could happen in the short-term.

·        Possibly overearning – DESP earns relatively high margins on Air, which is unusual for an OTA.  These fees are coming down due to increased competition.  There is arguably reason for these to be high given the fragmentation and the installment payments.  Rates will likely come down over time but be offset to a degree by growth in high-margin hotels and packages.  For comparison, DESP take rate is 11.8% vs. EXPE take rate of 10.8% in their core OTA.

Catalyst

Continued growth.