Description

Sabre Corporation (SABR)

Long SABR

(Please see Disclaimer below)

Pitch:

·         Stable growth business in the midst of a technology-led operational turnaround that will expand margins and make them more competitive.

·         Accounting changes mask underlying profitability and cash flows.  Street mis-modeling EPS considerably the next two years.  On my numbers the stock is very inexpensive. 

·         Capital Deployment will be unleashed next year as the tech transition ends, the TRA is completed and management can finally focus on shareholder returns.

·         Upside is +30% ($30.00).

Variant View:

·         Good, Sticky Business with Modest Growth: This is a 5% topline grower with sticky contracts and a diversified customer base.  The GDS market grows at a rate slightly less than total passengers flown: 4% vs. 5% annually.  SABR's GDS market share has been stable for over 3 years.  Airline Solutions should grow at a slightly higher rate as it is based on Passengers Boarded combined with increasing wallet share at the airlines as they offer more functionality.  Hospitality Solutions should grow high single digits as they sign up new mid-market hotel customers. 

·         Technology Transition: After SABR had several outages and lost a big contract with Southwest the Board fired the old CEO and installed the current one.  The company realized they had to overhaul their entire technology stack which was built on IBM mainframes and move it into the Cloud (AWS and Azure).  This required significant opex and capex and required the company to pull previously announced FCF guidance.  This transition will be fully completed this year (80% of compute already moved) and the benefits will become apparent over the next 2.5 years as Technology Spend as a % of Revenues declines by 200 bps.

o   DXC Contract: SABR has an uneconomic contract with DXC that costs the company $144m in 2019 (and will decline every year through 2023, buttressing margins).  This contract is for DXC to manage the company's legacy mainframes.  SABR will end this contract at the beginning of 2024. 

·         Accounting Changes Mask True Margins and Profitability: SABR is taking a double whammy in 2019 because they are converting capex into opex this year related to technology spend.  Thus, their P&L is being hit by this year's opex (which was last year's capex) as well as D&A from previous years' capitalization.  This reverses beginning in 2020; the company will 'generate' $0.12 of incremental EPS in 2020 and another $0.24 in 2021.  This is important because the Street only has EPS growing $0.25 in 2020 and $0.36 in 2021.  In other words, 50% and 66% of 2019 and 2020 EPS growth is already in the bag.  The Street is mis-modeling D&A expense pretty noticeably. 

o   SABR Screens Poorly: Especially on 2019 numbers.  A casual observer would look at 2019 and pass: EBIT margins declining nearly 600 bps, EPS declining 35%.  It looks terrible.  The stock also looks expensive on $1.00 of 2019 EPS (20x). 

·         Incentives Moderating: SABR 'bought' some TMC business in Europe last year in order to gain share by offering new clients higher incentive fees to use their GDS.  Travel Network margins declined 300 bps in FY18.  This spend growth moderates into the low single digits beginning in Q2; the company should be able to leverage incentive costs with growth over the next few years (typical contracts are 2-3 years in length).  

·         Guidance Reduced Due to Transitory Issues: SABR took down full year 2019 guidance on their Q119 call by $40m in revenue and $30m in EBITDA due to the grounding of the 737 MAX (transitory – should be flying again this summer) as well as the bankruptcy of SabreSonic customer Jet Airways (Indian).

·         Capital Deployment: Street estimates do not assume any capital deployment which is silly for a company that will generate $900m of FCF over the next two years.  My model assumes the company uses 80% of FCF to buyback stock at increasing prices – I have shares outstanding declining by 5% the next two years. 

·         Tax Receivable Agreement (TRA) is ending.  From 2017 through January 2020 SABR will make $335m in tax sharing payments to its private equity sponsors.  The last payment will be done in January 2020.  These payments have hamstrung the company's capital allocation priorities the last few years but will be done soon.  Note that $335m is 26% of FCF generated 2017-2019. 

·         Farelogix: SABR announced this acquisition late last year; it will close in Q319 for $360m; they paid 9x sales.  Farelogix is a tech provider for airlines, offering NDC capabilities which enable airlines to offer ancillary products to customers through the GDS as well as directly on their websites.  This will boost reported growth and give SABR a scaled NDC product to cross sell to its airline customers. 

Financials and Valuation and Target Price:

·         2019 Guidance: SABR looks expensive on guided 2019 EPS of $1.00: 23x.  But as described above this is artificially depressed due to an accounting change.  FCF per share this year should be $1.70.  EPS will converge to FCF/share by 2021 as margins expand, which should help to re-rate the equity.  Similarly, on FY19 guided EBITDA SABR is trading 9.8x, on the high end of its trading range the last few years. 

·         2021 Estimates: The stock looks cheap two years out.  I have EPS and FCFe at $2.00 (11.5x) and EBITDA at $1.15B (8.2x).  Growth is driven by the topline, margin expansion due to tech savings and D&A roll off coupled with capital deployment. 

·         Dividend: 2.4% annual yield.  Has been $0.14 quarterly for the past 2.5 years. 

·         Target Price: I think 15x 2021 EPS/FCFe of $2.00 is reasonable (would be 9.3x EBITDA).  That would be $30.00 (+30%). 

Risks:

·         Leverage: SABR is 2.7x levered on TTM EBITDA.  That is going to go up to 3.0x this year because EBITDA is going to decline (due to the accounting machinations described above).  Leverage is ACTUALLY going to go up to 3.4x by year end because they are buying Farelogix for $360m in Q319.  Leverage will naturally fall to 3.0x by YE20 and 2.7x by YE21 due to EBITDA growth…it can go 0.3x lower each year if they use cash flow to pay down debt.   

·         Macro: Revenue growth is largely predicated on passenger miles flown globally (which is growing ~5%). 

·         Customer losses in Airline Solutions (i.e. Southwest in mid-2017).  Similarly, customer bankruptcies (i.e. Air Berlin, Jet Airways). 

DISCLAIMER: The author is long SABR.  This is not a recommendation to buy or sell any investment.  Additionally, this document should not be relied upon to make an investment decision as the numbers and figures presented are solely the author’s estimates.  Investors should contact the company directly and read SABR public filings to form their own opinions and make their own investment decisions.  The author may transact in the securities of SABR without notice.  

Catalyst

- FY20 Guidance will demonstrate earnings leverage from technology transition

- FY19 Revenue growth should accelerate as TMC deals recently 'won' begin to bear fruit.

- Enhanced capital return after TRA is complete January 2020