Tomorrow Focus AG - The Undervalued German TripAdvisor

Includes: TRIP
by: Cobiaman


TFA.GY trades at 1.4x sales versus 16x sales for TripAdvisor (TRIP).

Tomorrow Focus's HolidayCheck website is virtually identical to TripAdvisor.

Tomorrow Focus is making a new push to highlight HolidayCheck through new segment reporting.

Tomorrow Focus AG (TFA.GY) is a business that operates a collection of European websites ranging from travel to dating to doctor ratings. Travel makes up the largest part of its revenue at ~75% as of last quarter. It operates a few travel websites but the largest by far is HolidayCheck, a website where users can see ratings of packaged tours, hotels, cruises, airlines, submitted by other users, and then can click on a link to a travel agency to book their trip. HolidayCheck (and TFA's other travel websites) are paid by the travel agencies when users click on their links. TFA's travel segment has been growing at a 15%-20% rate, similar to the growth rate of TripAdvisor (NASDAQ:TRIP). The main driver of growth recently has been the migration of vacation bookings from offline to the web. Currently only 26% of travel bookings in Europe are done via the web, so there is a lot more room for growth from this source. TRIP currently has a higher EBITDA margin than TFA's travel segment as it has the benefits of much greater scale. TFA thinks it can get its travel EBITDA margin to 25%-30% in the near term.

There is the possibility of much faster revenue growth at Tomorrow Focus and consequent operating leverage if one of the company's initiatives pays off. Currently HolidayCheck has a 0.8% conversion rate meaning for every 1000 visitors to its site, only 8 of them click through to a travel agency partner site causing TFA to get paid. This compares to a 5% rate for and a 3% rate for Expedia. While some of this difference may be cultural, the company thinks that it can significantly increase its conversion rate through changes it is making to its web sites and underlying IT platforms. While management is prudently not forecasting how much upside there could be, they do think it could be meaningful. Incremental EBITDA margins for this additional revenue would be in the 90%+ range.

These platform changes, disposal of some non-core businesses, and the realignment of business units to more clearly highlight the value of the travel businesses have been brought about by the new CEO, Toon Bouten, who joined the company on Jan 1st, 2013. These positive changes have not yet been recognized by the stock market as the stock has been range bound between 3.50 EUR and 4.50 EUR over the past year. I think that the stock will begin to move once the company starts breaking out the travel business by itself (Q1) and when the platform changes begin to drive the P&L, which should occur towards the end of this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.