Description

Business

• Travelport (TVPT) operates an airline Global Distribution System (GDS), which connects travel agents with airlines and hotels

• Provides travel agents with flight/hotel availability, prices, ancillary products (e.g., extra legroom options), ability to rebook because of bad weather, etc

• Allows travel agents to book inventory directly

• GDSs industry-wide account for ~55% of airline bookings, and this has been steady in the US/Europe over the last few years

• Industry market share (approximate) is:

• TVPT = 25%/Sabre (SABR) = 35%/Amadeus (AMS SM) = 40%

• Business breakout

• By product

• Air = ~80%

• Hotels/Car Rental/Cruise Lines/etc = ~20%

• By geography

• Europe = 30%/US = 30%/Asia = 20%/MEA & Latam = 20%

• TVPT also acts as the SaaS business process outsourcer for travel agents

• Integrated into travel agents’ back office for accounting, reporting, sales, etc

• Itinerary management

• Facilitate legal, like duty-of-care agreements

• Additionally, TVPT owns a small payments business called eNett, which enables travel agents to pay airlines and hotels while lowering fraud and integrated directly w/ the travel agents’ accounting systems

• eNett revs are only 5% of total revs, but growing quickly at ~50%

• Eventually eNett can be 500 in revs at a 20% EBITDA margin, so 100 in EBITDA (vs current company total EBITDA at ~ 600)

• Company is the result of a Blackstone roll-up of GDSs from ’06 until its IPO in ’14

• Prior acquisitions include Galileo, Worldspan and Apollo

Business Model

• Receives a GDS fee from airlines each time a “segment” (e.g., flight, hotel room, etc) is booked

• Fee is ~ $6 per segment (or $12 per round-trip)

• Fee is fixed and not based on ticket prices or ADR

• However, fee typically equates to ~2% of the booking

• Pays an incentive fee to travel agents for booking through their GDS

• Incentive fee is ~ 50% of the GDS fee

Thesis

Company trades at a discount to (1) GDS peers and (2) a fair multiple for the company’s growth, b/c of historical market share losses.  However, these share losses are only temporary and are not driven by any structural competitive disadvantage

• Valuation for TVPT is discounted vs peers and vs growth opportunity

• EV/EBITDA (Forward): 6.6x vs peers at 7.4x+

• Peers trade at ~9.0x to 11.5x on a consolidated basis.  However, if assume a 13x for peers’ SaaS, then implies peers value the GDS segment at 7.4x+

• P/E (Forward): 10x vs peers at 18x to 19x

• Long term guidance for EBITDA growth of 6% to 8%

• TVPT’s IPO was in late ’14, and has been plagued by market share losses in specific geographies ever since.  However, these losses should be temporary.

• Recent market share losses in specific geographies are not due to any competitive disadvantages

• Orbitz customer loss in ‘15

• TVPT owned Orbitz, but then sold to Expedia in late ‘15

• As a part of that deal, Orbitz moved away from a sole-source w/ TVPT to a multi-source with multiple GDSs

• This customer loss caused TVPT to lose share in the US

• All existing online travel agencies (OTAs) are now multi-sourced, so a loss like Orbitz should not happen again for TVPT (i.e., there is not another “shoe to drop” for TVPT)

• European share loss in ‘15

• A Greek travel agent went bankrupt, and its business went to a competing travel agent

• This travel agent market share shift led TVPT to lose share to SABR

• SABR is gaining share, but on a small base

• On a global basis, TVPT has not lost share

• Outside of these recent company shifts, travel agent customer renewal rates are in the mid-to-high 90% range, and are typically on 3 year contracts

• Barrier to entry is that it is expensive and time consuming for a travel agent to switch GDS providers, b/c the provider is built into the travel agent’s back office

• Expert network calls have suggested no structural difference in product, or difference in pricing

Other reasons company trades at a discount are unjustified, including:

• Previous debt holders’ equity ownership (representing at least 10% ownership in equity) presents technical overhang, which should be temporary

• Domiciled in the UK, but trades on the NYSE

• Busted IPO in ‘14

• Missed first 2 Q’s after IPO supposedly due to bad communication with the Street

Receiving eNett for a discounted valuation, even in my base case price target

• eNett deserves a higher multiple than the base GDS business, but this is not in the price target

• If assume eNett trades at 13.0x EV/EBITDA, then instead of a 7.5x exit then get to a 7.9x exit, and implies an incremental ~ 10% IRR

• eNett could be worth $5 to $6 per share

Industry changes could accelerate growth on go forwards

• A new industry standard called New Distribution Capability (NDC) allows GDSs’ to gain access to airline ancillary products, like added legroom, lounge access, etc

• NDC rollout begins in ‘16

• Previously, these ancillary products were only available on airlines’ own websites

• This industry change benefits TVPT in 2 ways:

• TVPT receives incremental fees for selling ancillary revenue, in addition to a small premium for providing access to ancillary options

• Being able to provide ancillary services makes the GDS more competitive vs booking direct on the airline’s website

• The airlines gave GDSs access to these ancillary products b/c they wanted access to the GDSs/travel agents’ customer bases to increase ancillary products sold

• Ancillary airline revenue represents ~8% of global airline revenue

• Fee per booking only expected to grow LSD% on go forwards to make guidance, so doesn’t assume much contribution from ancillary sales

Price Target

• Base PT = $23

• Assumes 12/31/17 exit, and EV/EBITDA (Forward) at 7.5x, with debt paydown

• Return = 68%/IRR = 47%

• Downside PT = $10

• Assumes exit now, and EV/EBITDA (’16) at 6.5x

• Assumes realize that market share loss is a structural issue, and company continues at ~ flat growth seen in ’15 due to market share losses

• Return = -17%

Risks

• GDS disintermediation by airline websites

• Concern is that booking through a GDS is higher cost than booking through an airline, and thus airlines will want to incentivize direct bookings

• Mitigating factors:

• This is a risk for all GDSs, and so can be hedged by shorting SABR or AMS SM

• Nothing is changing

• This has always been a risk for GDSs, and airlines have attempted to disintermediate, but direct share of bookings through airline websites has been stagnant over the last 5 years

• There is nothing changing that would suggest this stagnant direct % of total flights should change

• Travel agents are incentivized to use the GDS system

• Travel agents bring in meaning ticket sales, and travel agents are incentivized to use GDSs b/c they receive an incentive fee.  

• Airlines can’t give an incentive to travel agents to book with them directly, b/c that would be an illegal kick back

• If airlines attempt to add a fee to GDS bookings, it could lower travel agent usage of that airline and thus lower that airline’s market share

• Even if GDS became intermediated, and 100% of flights were booked direct, GDSs still provide value as the SaaS business process outsourcer to travel agents and thus will continue to receive payments for this service

• TVPT receives ~$3k per month per travel agent in revenue, which isn’t that much compared to other SaaS operators

• Air travel weakness due to terrorism

• This is a risk that can be hedged with other travel related equities

Catalyst

• TVPT demonstrates that geographic market share losses were temporary in future earnings
• Exit by previous debt holders