Wotif and Webjet – clicks don’t come cheap

Financial journalist
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I well remember the heady days of the technology boom in 1999-2000, when any stock with a .com in the name scored a huge premium on listing, and went onward, ever upward, unencumbered by such old-hat concepts of profit – even of revenue, in some cases – driven by new buzzwords, such as ‘downloads,’ ‘unique visitors’ and ‘eyeball time,’ before the sharemarket gods put their foot down in April 2000.

Those were the days when a fish-farming business, which had decided it was going to sell its wares over the internet, could christen itself ‘Seafood Online.com Limited’, and float. (It sank, and barely lived out a year.) But it was the heyday of the internet stock, and we were galvanised by tales of how disruptive the internet would be to traditional business models.

Little did we know, as we picked up the pieces after the tech bust, that internet stocks would prove all of that right – just not those internet stocks and just not that time. They were 10 years ahead of their time.

I want to look at two of our top internet stocks, although to call them that today sounds so dated. Sure, they use the internet to conduct their business, but it’s what they do on it that matters these days.

Wotif.com

Listed in June 2006, Wotif.com (WTF) – valued at $1.04 billion – provides online accommodation, activity and flight booking services, in a marketplace for suppliers and customers. Wotif simply takes a commission on bookings, takes upfront payments and holds the cash for up to 88 days before payment, earning interest income on other people’s money.

In Australia, Wotif is considered to have market share of about 36% of the online accommodation market, making it the biggest player – with all of the benefits of market dominance. The company offers accommodation flights, car rental, insurance, and travel packages.

Through its brand portfolio of Wotif.com, lastminute.com.au, travel.com.au, Asia Web Direct, LateStays.com, Wotflight, Go Do and Arnold – along with more than one hundred other travel websites – Wotif represents more than 23,500 properties in more than 67 countries.

Having built a dominant position in online accommodation, Wotif started its move up the food chain in October 2007, when it moved into Webjet’s online air travel patch, taking over travel.com.au – beating the rival bidder, Webjet.

The next stage was the step out of its Australia-New Zealand home market, with the purchase of the Asia Web Direct business in February 2008, beating a list of travel heavyweights, including Expedia. Buying Asia Web Direct gave Wotif access to 5,000 hotels in Asia. At a stroke Wotif had an inventory it could sell to Australians heading to Asia, as well as an attractive intra-Asian offering – right at a time when Asians were becoming comfortable in booking travel and accommodation online.

In October 2012, Wotif announced a hike in its commission rate from 10% to 12%, a move that broker CIMB said at the time was a “game-changer,” improving the stock’s earnings certainty. CIMB said Wotif still has further room to increase the commission rate, as 12% is still much cheaper than the majority of its competitors.

Webjet

Webjet was founded in 1998 by former Jetset Travel chief executive officer David Clarke, who listed the company on the ASX in 1999, through a backdoor listing, using the already-quoted Roper River Resources NL. No capital was raised. Clarke is now chairman of Webjet, which is valued at $395 million on the stock exchange.

Starting life as simply a website that allowed customers to compare airfares from several different airlines and then book the fare they wanted, the company suffered bad early hits from drops in activity caused by the September 11 attacks and the Bali bombing in 2002. But it has transformed itself through several big recent moves.

The first was in 2011, when Webjet expanded its hotel business by launching a platform featuring more than 100,000 hotels. The online travel company formed a partnership with operators Orbitz, Expedia, GTA, Tourico and Hotelbeds. The travel company also signed a deal with Tripadvisor, allowing Tripadvisor reviews to be directly accessed from Webjet’s site.

Next, in December 2012, Webjet bought online travel agency Zuji in Hong Kong, Singapore and Australia, from Travelocity for US$25 million. This was a great deal, greatly expanding Webjet’s presence in the huge growth market of Asia. The ten-year old Zuji dominates the online air ticket sales market in both Singapore and Hong Kong, where it has market shares of 45% and 36%.

Zuji instantly delivered greater scale to Webjet. On its own, the company says Zuji is capable of lifting its total transaction value (TTV) by 30%. Webjet has also expanded aggressively in the US and South Africa – but is keeping its powder dry for Europe.

Growth comes at a price

Webjet and Wotif are certainly companies that are fulfilling the promises that the tech stocks made in 2000 – of the explosive growth opportunities and free cash flow that would come from a low fixed cost base and significant operating leverage. Along the way they have grown into solid corporate citizens, paying fully franked dividends, even qualifying – in Wotif’s case – as a dividend yield candidate for an SMSF portfolio: the stock is priced at a 5.7% dividend yield for FY 14, equivalent to 8.1% for an SMSF in pension mode. Webjet, at 3.8%, would pay 5.4% to the same fund.

But both stocks have run a long way, According to the AFR, the 12-month total shareholder return for Webjet came in at an outstanding 61.4%, with Wotif returning 36.7%.

And neither stock is exactly cheap, with Webjet trading at a FY 14 prospective price/earnings ratio of 18.3 times earnings, and Wotif on 16.0 times earnings.

Another cautionary note is that the consensus of the eight brokers that follow Wotif is neutral to negative – not one has a buy rating, and one, Citi, rates it an outright sell. For its part, Webjet has four brokers following it, three who say they are ‘neutral’, while one, UBS, rates it a ‘buy.’

Either of these stocks would make a useful addition to your SMSF portfolio – but not at these prices. Wotif and Webjet are quality stocks, but look for a significant share price downturn before you click the respective mouse of either.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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