aapsky
Summary
Following my coverage of Amadeus IT Group (OTCPK:AMADF), for which I recommended a buy rating due to the strong growth tailwind from air travel and pricing power seen in the distribution segment (due to the product’s stickiness), this post is to provide an update on my thoughts on the business and stock. I reiterate my buy rating for AMADF. I believe the risk of direct connection disintermediating AMADF from the value chain is overestimated. My view is that AMADF will remain an important part of the value chain, and it will continue to benefit from the long-term secular tailwind of air passenger growth. While the EBITDA margin is going to flatten in FY24, it should resume expansion as the cost of migrating to the cloud tapers.
Investment thesis
AMADF reported 4Q23 revenues of EUR1.355 billion and EBITDA of EUR469 million. In Air Distribution, 4Q23 air bookings were still down 23.4% against 2019 levels, while in Air IT, passengers boarded were 0.5% above 2019 levels. However, booking performance could have been better if not for the cancellations related to the conflict in the Middle East and a specific customer situation in North America. Excluding these effects, booking growth would have been 12.7%, which would have put bookings at 19% below 2019 levels. The major debate for the AMADF equity story is that direct connect in the US is going to continue pressure volume growth. For those that are not familiar, direct connect is when travel agents, mostly OTAs (online travel agencies), access airline inventory directly and bypass the GDS (global distribution system) (AMADF in this case). And the 4Q23 performance sort of feeds into this narrative as AMADF saw volume headwind in North America. Leading to investors questioning the disintermediation risk over the long term.
My belief is that, yes, there is definitely going to be an impact on AMADF and other GDS players like Sabre. However, I don’t believe AMADF will be entirely disintermediated by all airlines. Remember that direct connections are not new and have been around for many years, but they have generally been limited in scope. There is a reason why it has not taken off in any major form so far. Firstly, think of how complex it would be for the airlines to build, maintain, and operate. If you look at how a GDS works, it basically connects tens of thousands of pieces of inventory from airlines across the globe into various distribution channels (OTAs, travel agents, corporate travel management, etc.) daily on a live basis. AMADF is a system that works and has worked very well over the decades. Reliability is important because any cancellation will just frustrate consumers, no matter the reason. You can simply look at the scandal at Qantas to see how bad the situation can get. The instances where I think it makes sense to connect directly are when it is a very concentrated airline market, where a few large airlines are connecting to a few large OTAs. This makes sense because the complexity is a lot less, and large airlines have the necessary financial and technical capacity to do so. This is not the case for a budget airline that basically competes on offering low-cost flights (likely no spare resources to build its own tech team and hire people to manage such a complex operation) and needs a lot of volume (they need to rely on all possible customer acquisition channels, so the complexity shoots through the roof). Hence, I think AMADF will still be an incredible and important part of the value chain, and the market seems to be over-discounting the stock valuation because of this.
A few days ago, it was also announced that AMADF would be acquiring Voxel, a prominent supplier of B2B payments and electronic invoice solutions to hotels, travel agents, and other travel industry participants. Incorporating Voxel into Amadeus’s current payments business, Outpayce, enhances the product suite for travel sellers and opens up new opportunities in the hospitality industry. In my opinion, this acquisition will strengthen Amadeus’s product line and pave the way for the company to provide an automated payments system that is consistent throughout the travel ecosystem. This should solidify AMADF’s position as a key player in the value chain, making disintermediation all the more difficult.
Also remember that the overall pie (air travel addressable market) is still expanding, and the growth runway is strong. Historically, air traffic volumes grew at 1.5x GDP growth, and I don’t see any reason for this to not be the case in the coming years. Based on the IATA forecast, passenger travel is expected to grow at ~2 to 4% for the coming 2 decades, implying ~4 billion incremental passengers in the next 2 decades, which represents a huge opportunity for AMADF to capture. In the near term, I expect AMADF to benefit from business travel growth as the work-from-home culture continues to die down. Given that corporate travel is still ~ 75–80% of 2019 levels, it means there is more potential for outsized growth in the near term as recovery takes place.
IATA
Valuation
Own calculation
My target price for AMADF, based on my model, is ~EUR69. My model assumptions are that growth will follow management guidance for low-teen growth in the near term (I assume 13%). That said, I am still sticking to my 10% growth expectation in FY25 as the recovery growth benefit starts to taper. I have also tapered my expectation for EBITDA margin. Management has guided to flat EBITDA margins in 2024. A major part of the lack of leverage at the EBITDA margin level this year is the continued cost of the cloud migration project. However, moving ahead, I expect AMADF to resume operating leverage as these costs taper away. A large revenue scale also provides AMADF with more fixed-cost coverage. Since June last year, the AMADF valuation has traded down from 14x forward EBITDA to 12x EBITDA. The beauty of investing at this valuation level is that we do not need multiples to go up to make an attractive return. Although I think that direct connect is not as big of an issue, I think this narrative will take hold for the near-term, pressuring valuation at this level, until AMADF shows a positive inflection in booking growth. Assuming a 12x forward EBITDA multiple, we can still see 16% upside.
Risk
If a growing number of airlines are willing to bear the pain of connecting directly, regardless of the financial cost and operational complexity, it could really become a big problem for AMADF as booking growth continues to decline, putting a lot more pressure on valuation.
Conclusion
In conclusion, my rating for AMADF is a buy rating. Although there are concerns about direct connect disintermediating AMADF, I believe it is not as bad as it seems. Furthermore, the overall air travel market is on track for significant growth, offering AMADF ample opportunity to capture new passengers. The recent acquisition of Voxel strengthens AMADF’s product portfolio and positions them to be a key player in the entire value chain. While the stock valuation has been impacted by disintermediation fears, AMADF’s current price represents an attractive entry point with decent upside.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
