eDreams - Should've, would've, could've
All,
Please refer to our unchanged analysis here.
eDO was great for us last year, but this year? What do you learn if you were right about a name, said you’d do it, and didn’t? In September we were shouting we’d buy the stock again anywhere with a 5-handle. The opportunity came one week later, but was short lived. Then it never came back.
Unless European lockdowns make a more substantial comeback than is currently our anticipation (note that the virus is out of control and the first countries have re-introduced measures to contain it) we may therefore have to shelve this name soon. The bonds are far too tight for us now and we are not pretending to run an equity fund. That said, we think there is yet more juice in that share price.
Bookings:
- Bookings are pulling ahead of 2019. It is anyone’s guess what part of it is pent-up demand vs. actual growth, but three should be some guidelines. It’s crude, but if we take Ryanair as a proxy for tourism volume at large, we find them still trailing their 2019 performance (passengers) by some 15%. By contrast, eDO’s bookings are up 20% for the same period. Clearly bookings and passengers are not the same thing, and while ticket prices have been rising, eDO’s basket has been falling, but as far as volume growth in each company’s key metric is concerned, pent-up demand should show up in both. So did eDO just grab 10% market share? By this crude comparison it would appear so and the trend towards online booking would support at least a large part of that.
- The current profile of bookings is not classically seasonal, but bookings are not pulled forward. Instead bookings tend to be for weekends in the next 2,3,4 weeks. So far customers are not booking for Christmas any more than usual, which again would support the thesis that eDO are “booking” actual growth. Management would not be drawn to making that statement however. It would probably be hard to reverse and if there is any powder in this keg, it’s probably wise to keep it dry.
- eDreams calculate 37% Market Share in Europe as more than half of their bookings now come from mobile phones.
Investment in margin:
- As per above, the company is clearly hunting market share - and rightly so. It’s basket size is down as it is shifting its revenue margin from Classic Customer to Diversification. We have been writing about this before. The classic business model of charging the customer a commission on the flight itself has become vulnerable in a transparent market and is effectively dead. So eDO and competitors try to avoid those visible charges and instead live largely of the ancillary products and services they sell alongside those flights, such as hotels and rental cars. That is a step-down in margin, which management did their best to camouflage in nefarious references to basket mix several times yesterday.
- However, the drop in basket size is not entirely due to this shift. The company and market now faces a higher weighting of low-cost carriers, fewer customers per booking, shorter distances, bookings closer to departure date etc. Those factors should reverse, still supporting the re-opening trade.
- EBITDA has turned positive, just.
Prime:
- The subscription business almost has 2m members by now - up 160% LTM and responsible for 40% of bookings. The program sounds very successful, not only in take-up rate, but also in margin and repeat business. Naturally the take-up has to slow down at some point, but it should consolidate as by far the largest of its kind in this flight centric market.
- The program was discussed at length in the Cap Markets presentation yesterday, but the short of it is that management did a good job dispelling any fears that it may harbour any differences from the current business that would limit its growth or profitability in the future. All things considered, it is fair to look at it as a frequent flyer program in the tourism space and possibly better executed than the ubiquitous miles-based scam that leaves the customer uncertain about the currency those miles really represent.
- We remain very positive on this program. It’s pricing seems in line with some similar products and even if that needs to be adjusted or turns out to be mildly negative (investment in margin) the increase in volume and customer loyalty should more than make up for the difference.
Financing:
- On 29th of October the group paid down 10m of RCF.
Positioning:
- We have retained a small legacy position in the bonds, which we will be exiting.
Unless you would like us to continue coverage - please get in touch, we are shelving this name.
Wolfgang
T: +44 203 744 7003