This weekend, we take a look at eDreams Odigeo SA (BME: EDR) results for the first quarter of 2022 and discuss recent selling pressure from Ammo Inc (NASDAQ: POWW).
Letters, conferences and more on hedge funds in the second quarter of 2021
Cornwall Capital: The Big Cock Patient Approach
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Before we dive in, here’s a look at the moves we made in the portfolio last week:
- NTDOY and HCITY cut to free up money to buy a starter position in Wheels Up (UP). You can read our most recent thoughts on UP here.
- Increased our exposure to uranium by adding to Centrus Energy (LEU) and buying a new position in Paladin Energy (PDN.ASX). Those who wish to read Alex’s thesis on the bull Uranium can find out more here.
Well, the housework is done. Let’s dig.
EDR is a lean and resilient online travel agency (OTA) rapidly growing its high margin membership subscription business while connecting the highly fragmented European air travel industry. The company currently has a 37% market share in Europe, 2.3 times more than its closest competitor. It is also the second OTA in the world in terms of flight revenue, just behind Trip.com.
You can read our original EDR article here.
The bull thesis revolves around two key questions:
- Will the industry (OTA) get bigger or smaller after COVID 19?
- Will eDreams (EDR) become a more or less important player in the sector?
With COVID-19 lockdowns mostly behind us and world travel starting to pick up, the response to both is a resounding response Yes.
Here is the most impressive part of EDR’s first quarter earnings. Not only did the company beat the year-over-year numbers. They even beat pre-COVID demand metrics. Let’s review the numbers.
Growth in bookings exceeds pre-COVID 2019 levels
The relatively strong growth in EDR bookings can be explained by three reasons:
- A stronger desire of consumers to travel
- Denied demand for COVID travel restrictions
- Strong execution in EDR’s mobile app
Were barely starting to see the benefits of this increased travel demand. For example, June marked the first month that demand for 2021 exceeded 2019 levels by 2%. July was even more robust, with demand exceeding the 2019 figures by 6%. And in August, the most important demand increased, exceeding the 2019 figures by 27%.
The company has outperformed its industry in terms of bookings growth in each of the past five quarters. Check out the delta below (emphasis added):
- 1Q 2021: + 9%
- 2Q 2021: + 15%
- 3Q 2021: + 14%
- 4Q 2021: + 11%
- 1Q 2022: + 52%
The advantage of the growth in EDR reservations is that it takes place against a background of relatively high sector restrictions. Last week, the EU introduced new travel restrictions and recommended suspending “non-essential” travel. The EDR is most affected by these restrictions, as it is primarily aimed at leisure travelers.
These restrictions translate into lower average revenue per booking (EDR calls it Average Order Basket), with AOBs 39% lower than in 2019.
Growth in the number of Prime members continues at a steady pace
One of the reasons we love (and invest in) EDR was its Costco-like subscription model, Prime. For ~ 60 EUR / year, members have access to discounts on 100% of EDR flights, up to 50% off accommodation (hotels, etc.), an exclusive 24-hour customer service hotline and 7 days a week, and the possibility of reserving a whole family / group for the discount rate specific to the member.
EDR is the only OTA to offer a subscription type product like this.
The company has reached a milestone this quarter because it surpassed 1.5 million Prime members. It’s an incredible feat, so let’s put it in perspective. EDR has added 500,000 new Prime members in the past three months. To compare, it took EDR 13 months to reach its previous growth mark of 500,000 members.
Over the past twelve months (June 2021), EDR has increased its number of Prime members by 116%.
Today, Prime members are responsible for 39% of all flight bookings. This is more than double the share of flight bookings compared to Q1 2021 (18%).
Here are CEO Dana Dunne’s thoughts on Prime membership growth (emphasis mine):
“And we plan to hit our goal of 2 million Prime members more than a year ahead of schedule. The already revised target was newly set before the end of summer 2022. But most likely, We will once again advance this self-imposed goal that we set for ourselves last May by an additional 3 to 6 months.“
The beauty of Prime membership is that it allows EDR to benefit from the shared economies of scale. Here’s how…
More members equals 100% higher margin income. The company can then use this additional revenue to charge lower prices for its flights, as it will make up for this lost margin in its subscription business.
Cheaper flights entice more customers to join EDR Prime Membership. It is a powerful flywheel.
Finally, the acquisition costs are significantly lower for Prime members than for non-Prime members, which makes sense. If you are a core member, you will likely research EDR before looking elsewhere.
Therefore the bigger the percentage of core members, the less the money that EDR has to spend to generate that income. In turn, EDR should know massive operating leverage as the company lowers the CAC on a larger portion of its client base.
We also see evidence of EDR’s economies of scale shared in its acquisition data. In 2015, EDR’s acquisition cost index per reservation was 100. Today, it is 70, which represents a 30% decrease in acquisition costs thanks to the increase in its base. of Prime members.
Future prospects: what will the company look like in five years?
Investing in EDR is betting that the company will ultimately revert to standardized pre-COVID metrics, but with a larger percentage of higher margin Prime subscription revenue.
EDR will capture the lion’s share of revenue and profits as travel restrictions are relaxed across Europe. Currently, the company estimates around € 445 million in revenue by 2023 and around € 73 million in EBITDA (16% margin).
Suppose the company grows revenue at a CAGR of around 15% after 2023. This will bring us $ 708 million in revenue by 2026, which is almost all of the company’s market capitalization today. ‘hui.
Now, let’s also assume that the EDR improves EBITDA margins to pre-COVID levels by 2025 and maintains them for the duration of our five-year scenario. This brings us ~ 163 million euros in 2026 EBITDA or ~ 8x current EV.
How reasonable are these assumptions? The former EDR Marketing Director phoned Tegus in May 2021. Here’s how he sees the next few years:
Our estimates correspond to his reflections as we model an EBITDA of more than 135 million euros in 2025.
Now, what would a reasonable buyer pay for EDR’s business if it reached over 160 million euros by 2026? The currently integrated multiple of ~ 8x is far too cheap. The median EV / EBITDA for related companies (like Expedia and Trip.com) is 18x.
Applying a multiple of 18x to our 2026E EBITDA, we get almost € 3 billion in enterprise value. Subtract $ 500 million net debt and you get roughly $ 2.5 billion in shareholder value or $ 21 / share. This is an implied increase of 224%.
The stock is stuck in a side range. We will add technical entry points.
POWW sales pressure: GunBroker founder cashes in
I wanted to jot down some quick thoughts on the recent POWW selling “pressure”. The company is arguably the US-based ammunition maker best positioned to benefit from Russia’s ammunition ban. So why has the stock barely moved, and when it does, is it going down?
The answer lies in Steve Urvan’s insider sales.
POWW bought GunBroker with a mix of cash and shares, making Urvan the largest shareholder in the company after the acquisition. Since then, Urvan has regularly sold blocks of its shares on the open market in a series of S-3 public deposits.
Some might ask, “Why is he selling if the business is so undervalued?” My answer is: “I don’t know”. Urvan has spent over two decades building the world’s largest online gun marketplace, and now he probably wants to cash in. I don’t blame him.
POWW’s long-term thesis remains more optimistic than ever, and we can’t wait for the September 7 ammunition ban to go into effect.
Other news and notes
We recently added Tegus to our internal MO research toolkit, and I’m like a kid on Christmas morning. There are dozens of expert calls to every company in the portfolio that consumes most of my waking hours.
I look forward to sharing my thoughts and findings from these calls over the next few weeks.
Article by Brandon Beylo, Macro Ops