Description

(note: figures above are in CHF as this trades in Switzerland).

Thesis summary: Lastminute.com NV (LMN), a diversified European-focused OTA, is the cheapest and perhaps best play on a belated post-COVID leisure travel normalization. Whilst US-listed names invariably trade at solid double-digit EV/EBITDA multiples and well through pre-pandemic absolute price levles, and even other European names like Edreams garner premium multiples (>30x EV/EBITDA), LMN languishes at under 5x pre-COVID EBITDA and I think just 3.5x post-pandemic normalized EBITDA. This is also a tiny fraction of the most recent comp transaction multiple occurred (etraveli, bought out by BKNG for 15-20x 2019 EV/EBITDA).

On the one hand, the discount is curious, because there is nothing wrong with the business - in fact, pre-pandemic LMN was successfully transitioning from a marginally profitable, flight-only transactional business to a fast growing, highly profitable, diversified online travel agent with highly complementary metasearch and media businesses. It ran a sales process just before COVID hit that likely would have seen the business sold >60 CHF/share. Moreover during COVID the business managed quite well, not needing any equity recapitalization (unlike some other competitors).

On the other hand, LMN is a small market-cap stock; has suffered from being a pan-European business, domiciled in the Netherlands, but listed on a minor Swiss exchange (the SIX) with limited liquidity, no analyst coverage, and a management team historically totally uninterested in IR/marketing (try finding their IR website!). This discount has persisted, frustratingly, despite an excellent 3Q report that validated the huge earnings power of the go-forward business; and despite competitor Edreams' equity rerating aggressively as investors appear willing to price in post-COVID earnings at that company that have yet to appear.

Still, at 37 and change, LMN presents two main ways to win. The stock last worked really well in 2019, when earnings aggressively expanded on the back of growing bookings, a shift to dynamic packages, and the potential strategic transaction. In 2022/23 it appears quite likely travel will normalize in Europe, and if that's the case LMN should be close enough to a 100mm EUR EBITDA business, forcing the market to put some kind of multiple on new-normal earnings on the restructured cost base. Even applying historically low multiples to this proven-out earnings power would likely double the stock - allowing nothing for multiple expansion as management begins to market the company and tell their story (something they have promised to do in 2022, for the first time). If that doesn't happen (or happens too slowly), though, the ownership group will likely do something to generate shareholder returns: one of the founders exited the business this year, bringing in PE owners to the holdco owning half of LMN (who will need an exit/value realization); they have also done large buybacks in the past.

More likely, though, is a strategic acquisition by Booking Holdings, who recently took out their flights partner etraveli at a 15-20x EV/EBITDA multiple and already white label their dynamic packaging technology from LMN. Any acquisition would be highly synergistic to BKNG, and it is hard to see LMN getting sold at less than a double-digit multiple of 2019 EV/EBITDA - meaning ~710mm EUR - in this scenario, a price that likely implies north of 70 CHF/share.

LMN trades 500k-1mm a day, so this is for smaller accounts only. Surprisingly it has never been written up before on VIC.

Business background:

Lastminute has the following business segments:

·       Online travel agency helps customers easily search for, compare, and book flights, cruises, vacation packages, accommodation, car rentals and other travel products and services.  Consumer-facing brands include lastminute.com (Europe), volagratis (Italy), rumbo (Spain and Portugal), weg.de (Germany), bravofly (France and Germany), and crocierissime.it (Italian cruises);

·       Metasearch helps travellers compare flight and hotel prices across different providers and receives a commission when directing traffic.  Brands include Jetcost (flight comparison) and Hotelscan (hotel comparison).

·       Media sells online advertising primarily on last minutes OTA and metasearch websites but also third parties websites.  Brands include Forward (overarching brand), Playbook (consulting), Travelpeople (online advertising), and Madfish (video content); and

·       other small ventures.

Lastminute’s strategy has been to diversify from flight-only to a diversified travel business. In 2011 Flights was 94% of revenue; in 2019 Flights was down to 40% of the business whilst 'Other Travel and Leisure' - essentially packages - was 41% of revenues. Post-pandemic numbers are muddied by the collapse in flights (IATA European flights still -50% vs 2019 in 3Q), but LMN has disclosed 70% of contribution profits now come from packages, and here the transition will only continue as flights become more competitive and commoditized, whilst packages presents more of a white space opportunity with the filing of Thomas Cook; the shrinking of TUI; and the failure of many mom and pop package tour operators during COVID.

The business has also diversified geographically over time: in 2011 this was a largely Italian business (founded by Italians), with 63% of revenue coming from Italy. In 2019, the revenues were basically 15-20% from the major European countries (UK, Germany, Italy, Spain, France), partially a function of smart acquisitions in other markets beyond Italy.

Segment discussion:

Online travel agency

The OTA business comprises ‘flight’ and ‘travel and leisure’ (T&L).  The majority of T&L is dynamic packages and the re-sale of third-party tour operator packages, but also includes hotels.  Dynamic packages refer to real-time bundled offerings (e.g. flight, hotel, and car-rental packaged together in one booking).  As mentioned in the introduction, Lastminute’s strategy has been to diversify the OTA business away from flights. Dynamic packages have a higher average price and better margin than flights.  At an industry level, flights are relatively stable and margins are decreasing (flights are basically a commodity product) whereas dynamic packages are growing. - note that this was the case pre-COVID, but only likely more so as consumers opt for more structured travel options (and remembering that Thomas Cook completely exited the market just before the pandemic).  Lastminute has been investing in dynamic packaging technology for 10 years and believe they have the best technology in Europe.  Validating this is that lastminute is the “flight + hotel” partner for Booking.com (the biggest travel company in the world) in Europe. Other businesses (e.g. Kiwi.com) also white-label lastminute’s dynamic packaging product, as do a number of hotel operators on the continent.

Dynamic packages are also benefiting from a shift to online - note that this was the case pre-COVID, but only likely more so as consumers opt for more structured travel options, and have largely shifted their purchasing online. Since the majority of packages are still booked in physical retail shops (think Thomas Cook or TUI shops on European high streets, at least until Thomas Cook filed), there remains a huge opportunity for the likes of LMN to tap into a natural offline -> online shift, over time, that has only been accelerated by COVID. This is a theme that has been successively called out by management in post-pandemic earnings releases. 

Management intends to replace third-party tour operator packages with its own dynamic packages over time.  This seems likely as lastminute’s dynamic packages are more flexible than your operator packages (e.g. travellers are not limited to departing and returning on set days, typically Saturdays) and dynamic package prices are cheaper than comparable travel operator packages.

Lastminute has also introduced a more sophisticated flight pricing strategy in 2018, mostly in the metasearch channel, after investment in data science, which has made flights more competitive and helped to improve cross/up-sell to other products. Although flights are profitable, management sees flights as a customer acquisition tool to cross/up-sell other products.

Metasearch

Metasearch is highly profitable with core business EBITDA margins in the mid-20s pre-COVID; it also drives traffic to the OTA.  Management has stated that revised pricing in the metasearch channel is largely responsible for the growth in OTA flight revenues.  Management sees potential for geographic expansion and future bolt-on acquisitions in this segment.

Media

Media monetises the group’s domains and app traffic (~60m visitors per month).  Management notes that for every 100 visitors to the group’s domains and apps, only 4 make a purchase.  Lastminute uses data to determine whether a visitor is likely to make a purchase or not and, if the visitor is determined to be unlikely to make a purchase, serves them external ads (e.g. competitor ads).  In doing this, lastminute is able to monetise the 96% of visitors who do not make a purchase. The media business also provides advertising content and consulting services to tourist boards and other third parties who wish to encourage travel to Europe.  Such third parties often wish to work with lastminute to leverage its experience in the market.

Acquisitions

A quick word on acquisitions. LMN has historically been quite good at acquiring smaller/distressed businesses and building them to profitability within the LM group. For example, Weg.de was Germany’s 4th-ranked OTA and was operating at EBITDA-breakeven when it was purchased in 2017 for €12m;  in 2018, the business generated €7.6m EBITDA. Hotelscan was generating €1m in revenue when it was purchased in 2017; In 2018 and 2019, Hotelscan generated €5m and €9m of revenue respectively.

The advent of COVID; restructuring the business; and recent earnings power

A key portion of understanding why the business is cheap is understanding where it was in its journey towards profitability. 2019 - reported basically when the pandemic had already caught hold - was the first year where LMN really demonstrated strong operating leverage; a big shift towards dynamic packages (bringing higher incremental margins); and of course were involved in strategic discussions regarding selling the business. All that good news was basically obliterated when COVID hit and the business was forced to fight for its survival - like every other travel business - which it managed quite well in the end. OTAs run with negative working capital, a function of the business model whereby customer cash is received well in advance of the actual travel (and payment to suppliers). Of course during a pandemic when revenues dropped 80% overnight, this creates huge cashflow issues - which in LMN's case were resolved through the issuance of >120mm in travel vouchers, in lieu of actual cash refunds. This ameliorated the immediate cash calls on the business (though did cause some negative customer response), allowing the business to stabilize. Today, only a small balance of vouchers remains (20-30mm is my estimate), and the company has disclosed that the average customer books 1.5x more than the value of their voucher (meaning voucher bookings are actually an incremental cash inflow on average).

COVID obviously saw bookings collapse and Europe is still far, far below baseline 2019 levels (IATA flights in Europe in 3Q were still -50% vs 2019 levels, far lower than TSA stats for the US). This can be explained by the patchwork of different rule and regulations for intra-Europe travel since the pandemic; varying, and on average much slower, vaccine rollouts, than the US; and in general more conservative politicians regarding re-opening/travel. Nevertheless, COVID was a huge opportunity for LMN in that it allowed them to rationalize the cost-base in a way that would not have been possible without the pandemic.

Early in 2021, LMN disclosed a vigorous cost-cutting plan that would take 20% out of pre-pandemic fixed costs (overheads, IT, and HR), resulting in a 71mm fixed cost bill vs 87mm in 2019 (variable costs are being cut too but to keep the math simple we'll focus simply on fixed costs). At the same time they disclosed that early 2020 performance (meaning Jan and Feb of 2020) was trending solidly ahead of 2019 on revenues and EBITDA, with the plan on 2020 guidance being at the time to guide 360-400mm in revenues and 80mm in EBITDA. In other words before the incremental ~17mm of costs permanently taken out of the business, LMN thought they were going to do ~21% EBITDA margins (80mm EBITDA vs 380mm revenues, at mid), versus ~65mm EBITDA in 2019 on 350mm in revenues (18% margins). It stands to reason that if business gets back to early 2020 levels in terms of bookings, run-rate earnings power should be much closer, or more, than 100mm in EBITDA (80mm pre-COVID run-rate + cost cuts) - ie, around 25.5% margins.

Looking at the just-reported 3Q numbers , it appears the business is well on the way there, despite the lack of recovery in underlying bookings so far. LMN put up 13mm EUR of EBITDA on 55mm EUR of revenues – so 23% EBITDA margins – in a quarter where GTV (a proxy for bookings) at 455mm EUR was still -45% versus the pre-COVID numbers. In other words, LMN is already earning similar margin levels today, on basically half the gross bookings, as they did pre-COVID. Given the ongoing transition to higher-margin products in packages, it seems quite likely that as or when GTV recovers fully, the margin potential of the business will be at least mid-20s, if not higher (even I think 3Q earnings power was 'too high' as marketing expenses were pared back in the weak environment, and will have to come back partially). Whilst of course Omicron will hurt 4Q (and probably 1Q) numbers, for those who can look out beyond the noise, this business seems primed to post new peak earnings power, in both absolute and margin terms, as soon as the environment normalizes, as it probably does during mid-2022 (if my view on Omicron is correct). At that point the shares would be on something like 3.5x run-rate EV/EBITDA...

The key risks: decline in bookings, competition versus Edreams, structural change in the market?

Whilst lack of awareness/coverage and illiquidity are certainly key contributors to the ongoing cheapness in the shares, another key cause of the discount is, I believe, the market worrying that Edreams is simply gaining huge share through their subscription offering ('Prime'), at the expense of LMN and other European OTAs. To be fair, EDR has certainly grown bookings impressively in recent quarters, and is already printing bookings levels ahead of 2019; given that EDR is still primarily a flights-focused business, and with flights still -50% YoY in 3Q, this suggests strong share gain from the EDR platform at the expense of other players. However, I believe the market is looking at current bookings development in the wrong way. EDR is growing bookings growth but showing a huge decline in profitability: they don't make it easy to parse out, using a variety of non standard terms to obfuscate the true numbers (for example, their definition of 'cash EBITDA' excludes a number of costs used to generate that EBITDA, in my view), but it appears despite bookings running 22% ahead of 2019 levels in the just-reported 3Q, EDR is printing just 3% EBITDA margins and negative EBIT. In 2019 with much lower bookings they generated 40% higher revenues and 20%+ EBITDA margins. No doubt shorter stage lengths are partially to blame, but speaking with industry executives, no one is spending large $$ on marketing at the moment meaning the cost of customer acquisition should be lower than normal now (indeed this was one contributor to the excellent LMN results in 3Q). Despite this, EDR's profitability appears to be going backwards, and I can only surmise this is because they are generating a ton of 'empty calorie' bookings at low/below marginal cost through the Prime platform (the unit economics of which don't appear to make sense, at least not to me). Moreover their aspirational mid-term margin targets are already lower than LMN is printing today (https://twitter.com/TheRealDavey2/status/1461573867453829122). 

This is not really meant to be a ladder attack on EDR, per se, but it appears quite clearly that whilst LMN is doing more with less, EDR is doing a whole lot of less with more. Despite this, the market appears convinced - for now - that EDR is 'winning' and so has accorded it the lofty multiple of ~33x EV/EBITDA. EDR also has 500mm of net debt (whilst LMN is net cash). On the other hand, LMN is willing to cede some share in low-margin flights (though keep in mind bookings in 3Q slightly outperformed the broader market so I don't think they are a huge share donor) whilst instead focusing much more on becoming an actual earnings machine, through focusing on the higher-margin, less-competitive packages business. In any case the valuation disparity is beyond crazy, to me, and will correct over time as 1) the overall market rebounds and sustainable profits at LMN win out; or 2) LMN is acquired at multiples of its current price.

Furthmore, the market is missing that LMN and EDR are basically operating in two different sub segments for most of their businesses, and the competitive landscape difference in these two segments could not be more stark. A key thesis of the EDR bull case is that eventually a larger (probably North American) OTA like BKNG or Expedia will pony up and buy them given the increasing 'success' of Prime and the large market share in flights. But Booking just purchased eTraveli for the princely sum of 1.63bn EUR. This is an interesting transaction for the European travel space in many respects: Etraveli is a pure flights business, and already was an existing partner of BKNG – suggesting a strong move by BKNG specificially into the European flights business - and thus probably a detriment to the 'need' to purchase Edreams (also basically a flights business) as well as the competitive environment within flights going forward. Whilst Etraveli was private and thus we don’t have all the financial information, speaking with LMN, it seems in 2019 Etraveli did ~450-500mm in revenues off of ~3bn EUR in GTV. We do not know discrete profitability, LMN thinks the business did 70-80mm in EBITDA (largely metasearch so structurally less profitable), meaning BKNG was still willing to pay ~20x pre-synergy EV/EBITDA (on 2019 numbers no less), and say 0.5-0.6x EV/GTV. 

While of course this reflects well on most all the European travel names trading at much lower valuations, I believe it has particular relevance for LMN's future. BKNG has tipped their hand: they are willing to pay up to get scale and access in Europe for key market leaders. They have already signalled their intentions in the flights segment, buying up one of their suppliers; why wouldn't they look to consolidate LMN as well - already their white-label technology provider for dynamic packages - if they decide to bulk up in packages as well? The financial logic of such a move - even at levels 2-3x higher than current - is easily supportable, such that speaking with LMN management they will basically tell you they are open to a discussion with BKNG, as long as the price is right and when the remaining founder running the company (Fabio Cannevale) is happy to sell. Obviously that is not going to happen anywhere near the current price. On the other hand, why would BKNG step up to buy EDR now after buying a key competitor and completing their in-Europe technology offering with this deal?

Ownership and incentives

One of the founders, Marco Corradino, left during the back-end of COVID and sold down his stake (equating to 12.3% in LMN) to a new buyer (at an undisclosed price) that came into the ownership group (Freesailors Cooperatif) in concert with the existing founders and management still in Freesailors. This group owns 44.6% of LMN and has de facto (and board) control). Note that the management incentive comp plan is basically 2/3 based on getting the stock above 60 CHF/share (1/3 based on stock above 45 CHF/share), so with shares at 37 and change no one is getting paid unless something transformative happens. 

Catalyst

people start traveling for leisure again in Europe post Omicron and quarterly bookings recover

new-found profitability shines through the PnL

business is sold to BKNG at a huge premium