Amadeus IT Group: Expensive But Likely Worth The Price

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About: Amadeus IT Group, S.A. (AMADF), AMADY, Includes: EWP
by: The Investment Doctor
Summary

Amadeus IT is converting a large part of its revenue in EBITDA and free cash flow.

This allows it to pursue large acquisitions like the $1.5B purchase of Travelclick last year.

The company is expensive, but quality has its price. There's no rush to initiate a position at the current levels, but keep an eye out during possible pullbacks.

Introduction

It’s always interesting to have a look at companies almost everyone uses in their lives without realizing they do. One of those companies is Amadeus IT Group (OTCPK:AMADF) (OTCPK:AMADY), a Spanish company providing the backbone of for instance online reservation systems for flights, serving over 163 million passengers (for a 44% share in the air transportation segment) in the first quarter of the year. Considering the air bookings represent approximately 90% of all bookings through Amadeus’ systems, it’s only fair to consider Amadeus to be a proxy for the demand for air travel.

Source: Yahoo Finance

Amadeus IT is a Spanish company and its main listing on the Bolsa de Madrid exchange (where it’s part of the IBEX 35 index) is by far the most liquid listing as the average daily volume approaches 1.5M shares, for an euro volume of in excess of 100M EUR per day. The ticker symbol in Madrid is AMC.

Amadeus is also part of the iShares MSCI Spain ETF (EWP) with a 4.61% weight, making it a top-10 position.

An exceptionally high revenue-to-free cash flow conversion

2018 was once again a year of strong growth for Amadeus IT as its revenue increased by just over 6% to 4.94B EUR. Unfortunately the company had to deal with accelerating COGS and staff costs, while the depreciation charges increased by 15% as well. These three elements were the main reason why the operating income increased by just 6% as well (and this was mainly thanks to a decrease of the ‘other operating expenses’. So there is some margin pressure, but I also would expect some of the 2018 expenses to be non-recurring as there most certainly will have been some legal fees and banking/advisory fees due over a large acquisition which required Amadeus to fork over in excess of a billion euros in cash. So if we would be able to isolate the non-recurring elements (estimated at 24M EUR in the footnotes of the annual report 2018) from the operating income, we would probably have seen an operating income that grew at a faster pace than the top line, and that’s something most equity investors enjoy seeing.

Source: annual report 2018

Thanks to a slightly lower financial expense, the pre-tax income increased by 6% as well while the net income remained almost unchanged at 1B EUR due to a higher average tax rate. The net income per share was a solid 2.33 EUR, which means Amadeus is currently trading at just over 30 times its earnings.

And while that’s expensive, it would still be a reasonable valuation for a fast growing and capex-light company. Although it’s perhaps a bit questionable to call a 6% revenue growth ‘fast growing’, Amadeus IT Group has been very successful in converting a large part of its revenue into free cash flow thanks to the low overhead expenses of the company.

That’s clearly visible in Amadeus’ cash flow statements. The company reported an operating cash flow of 1.73B EUR, but this includes a 1M change in the company’s working capital position but also includes a 50M EUR discrepancy between taxes owed and taxes paid. On an adjusted basis, Amadeus generated an operating cash flow of 1.68B EUR. Not too shabby on a revenue of less than 4B EUR.

The capex mainly consists of investments in intangible assets that have been capitalized, and after deducting the entire 720M EUR capex from the adjusted operating cash flow, Amadeus IT Group generated approximately 960M EUR in free cash flow in 2018. This amount was almost completely spent on the dividend (494M EUR) and buying back its own stock (509M), and the company borrowed money to complete its 1.3B acquisition.

The growth rate is accelerating after the recent acquisition

Indeed, in 2018, Amadeus IT Group wrote a 1.3B EUR cheque to acquire TravelClick, which increases Amadeus’ presence in the hospitality sector which actually is a logical next growth step for the company which had been predominantly focusing on air travel. The Travelclick acquisition was an expensive one as the company paid over 4 times revenue and almost 18 times EBITDA for Travelclick.

Source: Amadeus-Travelclick presentation

This acquisition (which was only completed during the fourth quarter of 2018) had an immediate positive impact on the financial results in the first quarter of the year as Amadeus’ total revenue increased by almost 15% to 1.41B EUR on the back of a substantial 31% increase in the IT solutions division, which is the division where the TravelClick acquisition was integrated in.

The operating income in Q1 increased by 7.1% to 427M EUR while the net income increased by 4% to 298M EUR or 0.69 EUR per share. The relatively low increase in the operating income and net income is predominantly due to the higher interest expenses (the TravelClick acquisition was 100% debt-funded) and higher depreciation charges. The EBITDA margin decreased just slightly to 42.5%, reaching 599.8M EUR in absolute euro-terms.

Amadeus also provided a shortened cash flow overview of the first quarter of the year, and while I realize this is just a brief overview, it hurts my eyes to see‘capex’ is included in the operating cash flow, while taxes and interest expenses are excluded:

Source: Amadeus Q1 report

That being said, Amadeus’ free cash flow result excluding the changes in the working capital position and taking the real taxes and financial expenses into account (respectively 112M EUR and 20M EUR), the adjusted free cash flow result was approximately 264M EUR, in line with the expectations for Amadeus to generate well in excess of 1B EUR in free cash flow this year. And as there are no large acquisitions in the works, Amadeus will very likely hike its dividend again while buying back some more stock to further boost the per-share results further down the road.

Keep in mind the free cash flow result includes signing bonuses (capitalized as capital expenditures) as well as spending north of 220M EUR on R&D (almost 16% of the revenue) in the first quarter of this year.

Investment thesis

Amadeus’ current market capitalization of around 31B EUR indicates the company isn’t cheap considering it’s currently trading at a free cash flow yield of approximately 3.5%. Fortunately the net debt position remains under control with a total net debt of just over 3B EUR and a debt ratio of just over 1.4. Amadeus IT is currently trading at an anticipated EV/EBITDA ratio of 15, but the incorporation of TravelClick into Amadeus’ corporate structure should provide a healthy boost to the consolidated EBITDA over the next few years.

Amadeus IT is a well-managed company with a robust balance sheet and strong moat, but it could make sense to wait for a small correction on the financial markets. During the December 2018 correction, Amadeus’ share price dipped below the 60 EUR level which made it a more attractive investment opportunity. I’m not sure we will see those levels again, but perhaps writing an out of the money put option could be a valid strategy. A P60 expiring in December, for instance, has an premium of around 1.15 EUR and could be an interesting option (pun intended).

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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