Description
Tomorrow Focus (TFA.GY) is an undervalued German technology company. The company trades at 7x 2016 EBITDA which is close to free cash flow as it is not a capital intensive business. The top line is forecast to grow at 15%+ and margins should continue to expand over the next few years.
Originally the company operated in three divisions, travel, subscription, and publishing. Travel assets included the company's flagship property, Holidaycheck.de, as well as Tjingo and Zoover, its travel sites in the Benelux region. Publishing included a number of German news and weather sites, as well as the German version of Huffington Post. The subscription business has the German dating site ElitePartner as well as jameda, a fast growing doctor rating site.
Our original thesis was that Holidaycheck was being held back by a legacy IT platform and that they had a modernization plan in place with a new IT system that had the potential to significantly enhance their conversion rate and increase revenue. The implementation of this new IT system has been underway for the past year with the company rolling it out to less important geographies first and then going after its more significant geographies. It has been rolled out in Switzerland with good results and has been rolled out to their mobile platforms as well. Before this system was in place Tomorrow Focus's mobile users had no way to book trips and had to go to the desktop version to do so. So far mobile is ramping and will be more significant in 2016. The final piece is to roll the system out to German desktop users and this will be done this summer when business seasonally slows down.
Holidaycheck is an online travel business focused on the packaged travel market. In Germany it is popular to book travel as a package, consisting of hotel and airfare together. These bookings have traditionally been done offline with travel agents such as Thomas Cook but have begun to migrate online over the past three years. The current penetration of online travel bookings in Germany is 30% and that number is steadily increasing. Holidaycheck's draw is that it has user ratings of hotels and flights on its website and once people come to look at the user reviews, they frequently book on the site as well.
The company's main comp is Tripadvisor (TRIP), a US company that books travel on its websites. Tripadvisor has much more scale than Tomorrow Focus, with $1.6b in 2015E revenue versus $105m for TFA's travel business. TRIP also sports 28% EBITDA margins versus 22% for Tomorrow Focus, so TFA has some room to expand. TRIP plays in the German market but is more focused on city-based business trips with hotel-only reservations versus the holiday focused packaged trips that TFA specializes in. We think that TFA would make a nice acquisition for Tripadvisor to deepen their penetration in the German and Benelux markets.
Since we initiated our position last year, a lot has transpired at Tomorrow Focus. The company shut down its money-losing French travel operation late last year. A few months ago, the company agreed to sell its publishing division to Burda, TFA's largest shareholder with a 58% stake. The price was 30m EUR or about 10x EBITDA for that division. The company then announced that they would be looking to partner or sell their stakes in jameda and Elitepartner. They already have multiple bidders for jameda which is growing 50% and will do 3.5m in EBITDA in 2016. They think they can get at least 12x EBITDA for that business or about 42m EUR. Finally, we estimate that they can sell Elitepartner for at least 25m. The result will be a company with 60m EUR in net cash and a 105m travel business growing 15% with 25% EBITDA margins that, as a pure play, can garner at least a 12x EBITDA multiple or roughly 50% upside from here. In a sale scenario, we think the price could be even higher.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
There are numerous catalysts for TFA. A sale of jameda and / or Elitapartner will make Tomorrow Focus a more focused travel business and will garner it a higher multiple. There is also a good probability that the entire business will be sold to either a strategic player such as TRIP or to a financial buyer like a PE firm.