e-Dreams: New Enough Information

All,

Please refer to our updated analysis of e-Dreams here.

Clearly the market has traded up significantly, and there is a good risk that buying some of the names that have recently traded up from deep distressed levels leaves us chasing the market. However, because that clever insight leaves us with an investment universe of Zero, we are trying to differentiate one level deeper:

1) Long names which have traded up, because we have new information (for instance not all business is gone)

2) Short names which have traded up, even though we have no new information (high beta names)

3) Long some of the dead names in Oil and Gas, Travel, Materials and other impaired sectors (value bottom feeding)

E-Dreams to us is a category 1 name. When we saw the name trading in the 50s a few months ago, we built a model, but did not know how summer air travel bookings were going to go. From what we knew back then there was a good chance it was going to stay near zero for most of the summer, in which case the company would have arrived in Spain and filed right then. So compared to March when bonds were in the 50s we have new information.

But it now turns out that bookings have come back to 40%. So there is no filing scenario any time soon. Most economies are coming out of lock-down - or have done so - and we are of the view that from now on the pandemic will rather be managed by multiple local shut-downs rather than nation-wide ones. As far as Europe is concerned it is also a deeply political subject as the largest annual north-south wealth transfer is either happening via the usual summer tourism, or has to be engineered in Brussels, which is already a powder keg as is. So skies will be open. And most of tourism will come back.

Leverage and Bonds:

Modelling that scenario into e-Dreams suggests strongly that the company is able to pay down its revolver by the end of the next fiscal year and has plenty of cashflow and time remaining to refinance its bonds. Those have traded up past the mid-80s. But for the margin of safety we are perceiving on this bond, that’s still reasonably good. 

Equity:

More interesting is the equity - which has not traded up. Based on pre-Corona multiples and improved liquidity / lower leverage, we see the company expanding its grip on the industry as competitors struggle. Brick&mortar travel agencies (DER) and smaller rivals are going to find life tough in a consolidating industry and the biggest and most modern will be the winners. Fact. So we are actually looking for a slight multiple expansion (of FY 2022 EBITDA vs FY2020 - think March YE) and thus a share price of E3.00 in a year’s time (fully diluted). 

So we are taking a long position in a hot market in a travel name for 2% of NAV in the bonds that have recently traded up 30 points and for 3% of NAV in the shares that haven't. 

Clearly we need to prepare more high-beta shorts, but e-Dreams is not what we’d be looking for in that category.

Wolfgang