Lastminute.com ($LMN.SW)
Dirt cheap travel beneficiary at ~4.5x EBITDA undergoing a strategic review
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Investment Thesis Summary
I believe that an investment in the common shares of Lastminute.com (trading on the SWX Swiss Exchange, ticker: $LMN.SW) is compelling for the following reasons:
The governance overhang has been cleared as Lastminute has settled the issue of misused COVID funds and paid back the amount to the Swiss authorities. The company now has a new CEO and a completely new Board of Directors. This makes the stock investable again for investors.
Reaching 2019 travel volumes at the current price/mix level should result in a meaningful upside to estimates.
LMN is trading at an attractive valuation relative to itself and to peers. On my 2023 and 2024 EBITDA numbers, LMN is trading at 4.2x and 3.3x. Adjusting out capitalized software, LMN is at ~4.5x 2024 EBITDA.
The company is undergoing a strategic review that could lead to a sale. I believe that the latest trading update (Q1 2023) had some signs pointing to this scenario.
All-in, I see a path for the stock to be worth at least CHF 55/share, or about 90% upside from today’s current price.
Why this might be mispriced:
Governance issues / negative headlines: the old CEO and COO were arrested in a very public probe looking into the misuse of COVID reimbursement funds. LMN itself was not charged with wrongdoing.
Small-cap and illiquid: the company’s market cap is EUR 350m, which might be too small for most funds. Liquidity is also limited, with an average daily traded volume (ADTV) of ~$400k USD per day.
Limited sell-side coverage: LMN is only covered by two analysts, one of which just recently initiated coverage. On TIKR, you can only see one analyst’s estimates and they look pretty stale.
Numerous disruptions: COVID, the war in Ukraine, and a 2022 summer with limited travel capacity put a damper on travel volumes and profitability.
Messy and confusing financials: there are numerous adjustments that have to be made to get a good picture of underlying profitability.
Capital Structure
Lastminute has a market cap of EUR ~350m and an enterprise value of EUR ~280m. I am calculating the EV proforma for the pending SECO payment of ~30m EUR. I also exclude leases from the EV calculation.
Business Background
Lastminute.com is a European-focused online travel agency (OTA) headquartered in Chiasso, Switzerland. The company operates as a holding company of different websites/banners including Lastminute.com, Bravofly, Hotelscan, Jetcost, and others. The company’s primary geographic market is the UK (24% of revenue), Germany (21%), France (17%), Italy (15%), and others. In 2022, the group expanded its offering into 7 new European markets.
The company generated EUR 3.2B of gross travel value (GTV) and EUR 305m in revenue (2022). LMN takes a commission of the value of gross travel booked, with a take-rate in the 9-10% blended range.
LMN has differentiated itself by becoming a leading provider of “dynamic” holiday packages. Dynamic packages are a real-time bundling of a flight, hotel, and other ancillary travel products (car rental, excursions, insurance). Lastminute provides its dynamic packages directly to consumers through its own OTA as well as through other OTAs as part of a white-label offering; Booking.com is a major partner. Approximately 46% of dynamic package revenue came from white-label partners.
About 40% of revenue comes from “dynamic” packages, 30% from flights, and the rest is composed of an assortment of hotels, “static” packages, cruises, and advertising/meta-search. The company has evolved from selling primarily low-margin flights in its infancy to higher-margin offerings such as packages. Notably, dynamic packages now make up ~60% of LMN’s contribution margin despite representing only ~40% of revenue.
Dynamic packages offer a compelling value proposition:
For customers – allow greater savings by bundling; allows for greater flexibility with dates, times, and choices; allows for a single point of contact for all travel services booked.
For travel partners – allows partners to manage price and yield in real-time thru an opaque channel to maintain price integrity (i.e. they don’t have to advertise that they are selling at a discount).
Thesis
LMN’s governance missteps have been fixed with the successful settlement of the SECO investigation as well as with the hiring of a new CEO and the formation of a completely new Board of Directors.
In July 2022, several Lastminute.com employees including the then-CEO, Fabio Cannavale, and the COO, were arrested by Swiss authorities in a probe into allegations that COVID-19 employee subsidies were fraudulently obtained. Lastminute itself was never accused of any wrongdoing.
After a few months of turbulence, the company hired a new permanent CEO, Luca Concone, in December 2022. Additionally, the company formed an entirely new Board, with old Board members having resigned at the Extraordinary General Meeting in December 2022.
In December 2022, LMN agreed to not appeal the final decision of the Swiss State Secretariat for Economic Affairs (SECO) and agreed to repay the benefits received by the company’s Swiss subsidiaries.
In May 2023, the benefits received by the Swiss subsidiaries were repaid (EUR ~30m) and the matter with SECO is now considered fully closed.
Another positive step that was made was to cancel and reverse a share buyback transaction in Freesailors (an investment vehicle holding LMN shares and controlled by the ex. CEO, Fabio Cannavale) that had been planned prior to the investigations into COVID-19 funds.
With a new CEO and a new Board, the company has wiped the slate clean. I believe that investors who had prior governance concerns can now take a serious look as LMN’s governance continues to improve.
Reaching 2019 travel volumes at the current price/mix level should result in a meaningful upside to estimates. I model 2023 and 2024 adjusted EBITDA of EUR 68m and EUR 87m, respectively, vs. consensus at EUR 42m and EUR 52m.
Despite 3+ years since the outbreak of COVID, travel patterns in Europe have yet to normalize. In 2022 Europe suffered through the unexpected breakout of the Russia/Ukraine war, capacity challenges, and a significant cost of living squeeze that put a damper on a lot of summer plans. However, 2023 is likely to be a lot better, as:
European passenger volumes are set to finally normalize in 2023. The International Air Transport Association (IATA) expects the summer travel season to be a record. As per data shared for April 2023, IATA noted that European bookings were already tracking ~40% above 2022.
Read-through from travel partners points to strong results over the next few months as well. During the latest earnings call in late May, Ryanair’s CEO had this to say about summer travel demand:
“And so we're looking out into this summer with, as we said, advance bookings stronger than they were pre-COVID. And forward airfares, slightly higher than they were pre last year…. Prices are rising. Demand is strong. Europe is being welcomely -- will be invaded by American visitors, is somewhat because the strength of the dollar, and we're also seeing Asian traffic recover.”
I think bookings this year should at least match 2019 levels. The company is also running at a much larger average booking given the higher mix of travel packages as well as inflation. Putting it all together, I estimate that LMN should be generating a higher level of adjusted EBITDA than in 2019 when it generated EUR 58m (17% margin). (Please see the model for full estimates.)
Importantly, cash flow generation will also improve in 2023 and 2024 as the company cycles through a series of non-recurring expenses such as the cost of the SECO reimbursement/investigation (EUR >30m hit to earnings) and heightened travel disruptions (cancellations, etc).
LMN should have higher normalized margins as it continues to grow its dynamic package offering. I estimate a 2-3% uplift to margins for every 10pts of incremental share from dynamic packages.
I will caveat this analysis by saying that it is an illustrative exercise given that there are many assumptions involved. The objective is to get a more general sense of the company’s potential rather than a precise figure.
That said, you can back into the average contribution profit per category by making a few assumptions for take-rates (blended is in the ~9% range, so you assume packages are higher and flights are lower) and for the average booking value (I assume packages are closer to ~1,000 EUR and flights are in the ~300 EUR range). Assuming that these numbers are near the ballpark, this would suggest that the average contribution for a package is EUR ~100 vs flights at EUR ~10. This means that dynamic packages are roughly an order of magnitude more profitable, a very large delta.
So what does this mean? As dynamic packages keep growing as a percent of the total, the company’s margins will improve significantly. Currently, dynamic packages represent ~17% of the total number of bookings by my estimate. For every additional 10% of bookings that dynamic packages take, gross margins and consequently, EBITDA margins, could increase by about 2% to 3%.
Given the strong value proposition that LMN offers in packages, as well as the multiple tailwinds for the product (transition to online, etc.), I think it is fair to assume that the normalized adjusted EBITDA margin for the company will be much higher over time relative to a current mid-teens rate, perhaps as high as in the mid-20s.
LMN is a more defensible business than the market is giving it credit for.
While LMN is considered somewhat of a junky European OTA, I believe that the company is much better than is widely perceived given the following:
Attractive market: European travel is structurally more attractive than the US and other markets given its fragmented nature. There are fewer large hotel chains and airlines that can threaten to move off-platform to book through their own website.
Anti-trust favoring OTAs: the threat of hotels/airlines forcing consumers to book directly has likely diminished. In April 2023, Lastminute won a fifteen-year legal battle against Ryanair which gives the company the right to sell Ryanair’s flights on its website.
LMN is increasingly seen as a partner and not a competitor: A focus on dynamic packages makes the relationship win/win. LMN is seen as a channel that allows travel partners to manage yields in a non-transparent manner, as they can discount inventory without having to publicize lower prices everywhere.
Operational complexity/regulation provides somewhat of a moat: providing and servicing dynamic holiday packages requires companies to have licenses/insurance as tour operators in each market in which they are selling packages. Additionally, you need the technology and relationships with travel partners that allow you to generate dynamic offerings in real-time.
LMN is trading at an attractive valuation. On my 2023 and 2024 EBITDA numbers, LMN is trading at 4.2x and 3.3x. Adjusting out capitalized software and the net effect of cancellations, LMN is trading at ~4.5x 2024 EBITDA.
Relative to itself:
Just prior to COVID, LMN was trading roughly at 8-9x adj. EBITDA. But that number did not exclude capitalized software.
Relative to competitors:
European peer: eDreams trades at 13-14x NTM EBITDA. It’s a different business model, to be fair, so we should take this with a grain of salt.
Global peer Expedia has traded in the 9-13x EBITDA range (on adjusted numbers, which do not subtract out capitalized software and stock-based comp.) To be fair, it currently trades at a much lower multiple of 8x NTM, but, you can argue that EXPE is also very cheap right now.
On a free cash flow basis, I estimate that LMN will generate EUR ~43m in 2024, which puts the company at a ~15% free cash flow yield.
Given the low implied multiple of 4.5x and a solid balance sheet with ~65m EUR in net cash, I believe the risk/reward is quite compelling.
The company is undergoing a strategic review that could lead to a sale. I believe that the latest trading update (Q1 2023) had some signs pointing to this scenario.
Following the formation of the new Board in late 2022, the company began a strategic review process in December, specifically mentioning that “all options are on the table” (Q4 call in April 2023).
Incentives: Former CEO and founder, Fabio Cannavale, still owns a good chunk of the company through his stake in the investment vehicle, Freesailors. On a pass-through basis, Fabio owns 3.7m shares (Fabio owns 72% of Freesailors, which owns 44.6% of Lastminute) or roughly a third of the company. I think it’s also important to note that Lastminute is Fabio’s baby and the only way he can close the LMN chapter of his life is through a clean exit, which means a sale of the company.
Luca Concone’s (current CEO) background suggests that he was brought in to be an interim caretaker CEO. His experience is in financials, having worked as the Chairman of an investment group specializing in renewable energy and as the CFO of the city of Milan. For the CEO of an OTA, I would think some experience in travel or internet/digital advertising would be a must. One thing that stands out is that he worked at AT Kearney and McKinsey at the exact same time as the old CEO, Fabio Cannavale, was there. Given the possible history between them, this suggests that Luca was put forth as a candidate with Fabio’s blessing, and not as a CEO that would try to shift the organization in an entirely new direction. If Fabio’s ultimate goal is to put up the business for sale, which I think might be the case, bringing in an old friend you’ve worked with in the past seems like a great way to accomplish that goal.
Latest signs: there were a few key things that caught my eye in the latest trading update (as seen below).
The addition of a new board member, Marco Forasassi, with “investment banking” experience. Obviously having a board member with investment banking experience is valuable if you’re putting up the company for sale.
Changing the company’s stock option plans (SAR 1 & SAR 2) “accelerated vesting” requirements. Previously, stock option plans had a price level vesting requirement, with some vesting at 40 CHF/share, and others at 60 CHF/share, even in a change of control. Now, those gates have been removed, and a change of control results in an immediate vesting of all stock options.
While there is no guarantee that the company will be sold, I do believe that a lot of signs point to the company being shopped, at the very least. A travel competitor like BKNG would make a lot of sense as an acquirer given that they are already an important white-label partner.
Valuation and Model
A few important notes on valuation:
I am making a few adjustments to management’s reported adjusted EBITDA numbers, including subtracting capitalized software development costs and the net effect of cancellations / voucher misredemptions. I believe that this better approximates the free cash flow generation of the business.
I value the business using a 9.0x EBITDA multiple, which is at the bottom end of the range where peers like Edreams and Expedia trade / have traded. It’s also at roughly the same level where LMN traded before COVID.
At 9.0x EBITDA, my price target is CHF 55/share, or about 90% upside.
9.0x EBITDA imputes a ~8% free cash flow yield and 15x earnings, which strikes me as a reasonable valuation - not overly aggressive.
Here is a copy of my earnings model:
I am also attaching my model in case it’s helpful.
As always, if you have feedback or suggestions on what I should look into, send me a note to info@clarksquarecapital.com or @clarksquarecap on Twitter.
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Thank you for the nice work. One issue with LMN is that the net cash exists mostly because of advance payments. Look at the balance sheet. How do you deal with this?
Great write up!
How did you estimate the dynamic packages %?