GDS 2016 year ahead – Travelport wellplaced for a re-rating, Sabre to up returns
* Still positive on the sector
We believe the GDS sector is well-placed in 2016, supported by solid airline capacity
growth plans and progressive shareholder return policies. The Lufthansa dispute and
potential for terrorist incidents to sap travel demand are risks to watch - partly as a
result we prefer US exposure over Europe. We think Travelport could be the biggest
relative gainer, given its improving competitive position and deep sector discount. See
our Travelport initiation for details.
* Looking through the noise on share gains
Market share stats in 2015 showed Amadeus taking share and Travelport losing; but our
analysis shows a more nuanced underlying picture. Adjusting for the move of over 20m
low-margin bookings from Travelport to Amadeus (BofAML estimate) following TVPT's
divestiture of Orbitz, Amadeus’ market share has been flattish (-0.1%), Travelport was
not dissimilar (-0.3%) while Sabre has taken 40bp of share. Netting out Amadeus’
growth in Korea too following the consolidation of TOPAS, Amadeus would be growing
bookings around 1.5% YTD, Travelport 3% and Sabre 6%.
* A study in pricing – Travelport rising
Similarly to share, pricing has a number of factors which obscure underlying trends – we
control for Orbitz, Abacus, FX, upsell (like TVPT’s payments biz), and regional mix. On
this basis, we estimate Sabre’s pricing is down 1.1% - consistent with it being a share
gainer, and that it has less to lose from being aggressive in high-priced EMEA. In
contrast, Travelport is showing the most positive trends at +1.5%. This lends credence
to management’s view that 1) it is being price disciplined, 2) rich content and branding
is beginning to have a meaningful impact on its pricing.
* Capital allocation story – Sabre set to be most proactive
A key attraction of investing in the GDS sector is the combination of strong cash
generation and shareholder friendly boards. We think Sabre is likely to be most proactive
in 2016-17 and should continue to buy back shares - we now model SABR to buy back
c.30% of outstanding shares in the next 5 years. At 4x EBITDA (2015E) Travelport
should continue to de-lever and lower interest cost (plus pay its 2% dividend). Amadeus
in theory has the biggest opportunity as it has the lowest leverage (1.6x trailing EBITDA,
pro forma for the Navitaire acquisition), but it seems more focused on M&A right now
as a way to bolster R&D for the push into hotels and airport IT. Nonetheless, we assume
all three will ultimately re-lever in the long term to 3x EBITDA (via buy-backs), meaning
EPS CAGR’s through 2020 of 25%, 22%, and 19% respectively for Sabre, Travelport and
Amadeus. Without buybacks, this would fall to 15%, 11% and 8% respectively.
* Buy Travelport, Sabre - 54% and 18% upside respectively
Travelport has historically been a laggard in market share and innovation, but we see
signs that both are changing - and at 12x FCF ('16), investors are amply compensated by
the valuation. It is now our top pick in the sector. We continue to like the Sabre as it
shifts to capital returns focus ($35 PO). We stay Neutral on Amadeus, as a combination
of slowish GDS growth and a valuation premium could keep the shares range-bound.