MoneyTalks: Goldman Sachs says Webjet will fly higher as travel rebounds, Life360 ‘screens cheap’

Goldman Sachs believes Webject is better placed than its peers to take advantage of the return to long-haul travel. And it’s bullish on Life360 too.

It seems like everyone wants to travel at the moment. Picture: Getty Images

MoneyTalks is Stockhead’s regular drill down into what stocks investors are pondering right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

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Goldman Sachs believes Webjet is better placed than its peers to take advantage of the return to long-haul travel. And it’s bullish on Life360 too.

The broker has upgraded its rating on Webjet (ASX:WEB) from Neutral to BUY, and revised its 12-month target price from $7.70 to $8.30 (versus its $6.52 price on Wednesday morning).

Webjet has two main businesses: hotel bed B2B provider WebBeds (wholesaler), and its Australian online travel agent (OTA) business, with a leading domestic online market share of around 40 per cent.

GS says its Buy thesis on WEB is premised on the company demonstrating strong cash generation as the travel market recovers, while the current share price continues to be impacted by macro concerns.

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Goldman believes the resumption of international travel in the Asia Pacific region will boost demand for WEB’s services, and has identified three pockets of recovery upside that are still under-appreciated by the market.

First, although international and APAC recovery remain laggards, signs of acceleration have emerged.

“For example, China Golden Week Holidays saw international air flight capacity ramping up to 58 per cent v 2019 levels, and international flight numbers were at 56 per cent v 2019,” said Goldman’s note.

Secondly, hotel demand has remained robust, supported by international recovery.

And thirdly, there is expectation corporate travel will recover to 100 per cent pre-Covid levels by 2024.

According to Goldman, Webjet is better placed than to Flight Centre (ASX:FLT), and Corporate Travel (ASX:CTD) to benefit from the return of international long-haul travel through the WebBeds business.

“From a pricing perspective, we believe that the industry will remain largely rational as the largest industry player, HotelBeds, (high single digit market share) is highly leveraged with margins under pressure, GS said.

“Additionally, we expect WEB to achieve improved cost leverage from the consolidation of four separate operating ecosystems into one more efficient technology ecosystem.

“Therefore, we see WebBeds division as well placed to expand EBITDA/TTV margin from 4.2 per cent in FY23, to 4.3 per cent in FY25 (3.1 per cent pre-Covid).”

In the OTA segment, Goldman believes Webjet’s business is exposed to the right channels with the ongoing shift towards digital bookings likely to aid its growing market share.

However, Goldman Sachs concedes that any increase in competition by global OTAs, as well as domestic physical travel retailers, could result in WEB having to spend more on marketing, offering downside risk to profitability.

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With regards to valuation, Goldman sees the recent fall in Webjet’s share price as an attractive entry point.

“The recent pull back in Webjet’s share price has resulted in reduction in 1-year forward Price/Earnings (P/E) to 18.5x, from 24.5x in May.

“And whilst we factor in full convertible bond dilution, Webjet has around $650 million cash as of end-FY24, and is working towards various options of buying back to reduce dilution,” said GS.

Life360 ‘screens cheap compared to peers’

Goldman Sachs, meanwhile, has reiterated its Buy rating on Life360 (ASX:360), with a 12-month price target of $10.50 (versus its Wednesday morning price of $8.90, itself up by nearly 7 per cent for the day).

Life360 is a global family safety service that aims to keep families, partners, and friends connected and safe. The apps can be used to locate someone travelling, receive notifications when a loved one requires assistance, and detect car crashes on impact.

Goldman says Life360 is exposed to the $US12 billion global addressable market with a large opportunity to expand its product suite.

The company is currently raising prices for its existing iOS US subscriber base, which demonstrates its pricing power with its more than 50 million global users.

Further, Goldman says Life360’s cost base and customer acquisition economics compare favourably relative to its US peers.

While Life360 spends relatively more on sales & marketing (S&M) now, this is justified by its rapid subscription growth with its S&M spending performing well per unit of incremental annual recurring revenue (ARR), says Goldman.

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“As a result, we see scope for significant margin expansion and earnings growth as Life360’s margins increase towards scaled peers – from EBITDA $US14 million in FY23 to $US60 million in FY25,” said Goldman’s notes.

In the last quarterly update, Life360 provided guidance for positive adjusted EBITDA to increase to between $9 million and $14 million by the end of calendar 2023, from $5 million-$10 million in the pcp.

In terms of valuations, Life360’s shares “screen cheaply compared to peers when accounting for its robust growth outlook – particularly now that it is moving from the pre-profit to profitable tech basket,” says Goldman.

Goldman’s research also indicates that Life360’s subscription business trades at a discount to global subscription app peers when adjusting for its superior growth outlook.

“While execution risks remain, we see scope for re-rating as Life360 demonstrates pricing leverage, improving unit economics and operating leverage through FY23.

“With fundamental momentum, a strong balance sheet and attractive valuation, we are Buy rated on Life360,” noted Goldman.

This content first appeared on stockhead.com.au

The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article. 

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Originally published as MoneyTalks: Goldman Sachs says Webjet will fly higher as travel rebounds, Life360 ‘screens cheap’