Amadeus: Eyeing A Rebound Opportunity

Summary

• Amadeus is a global market leader in high-barrier and mission-critical airline GDS and IT sectors. Most world major airlines are customers.
• It generated a €3.1 billion of revenue from its airline GDS business in 2019, having processed over 646 million of air bookings globally.
• The COVID-19 impact on the travel industry has temporarily weakened its fundamentals and shares price, which creates a good entry point.

Overview

Amadeus (OTCMKTS: AMADY) (BME: AMS) is a global leader in the travel and tourism Global Distribution System/GDS space. The GDS is a computer reservation system that sources real-time travel inventory data such as flights or room availability from travel providers (airlines, hotels, and others), which will then be consumed by the travel sellers (online/offline travel agents, metasearch, and others). The company has a strong moat and fundamentals. Almost all of the major online travel and hospitality players around the world are Amadeus' clients, and given the ~ €10 billion of TAM opportunity, the company's latest +€5.6 billion of revenue means it has secured over 50% of the market. Profitability has been strong as earnings, EPS (Earnings Per Share), and DPS (Dividend Per Share) growth have been consistent.

(Source: google)

Recently, COVID-19 has severely impacted the business. Shares price is currently down over 38% from its YTD-high of ~€78 to reflect the temporarily weakened fundamentals. Given the lack of visibility for the full year despite the attractive entry point opportunity, we will set a neutral rating for the stock in the meantime, with a strong likelihood to establish an overweight position in the second half as more travel-related businesses reopen.

Catalyst

Being founded by a group of airlines such as Air France, Lufthansa, Scandinavian Airlines, and Iberia in 1987, the company has established a very deep moat in the airline IT industry. As a market leader in the high-barrier airline GDS/Distribution business, Amadeus has a very defensible business.

(Source: company's financial 2019 IR presentation)

As of 2019, 55% of Amadeus' revenue has come from the airline GDS business. The €3.1 billion of revenue from its GDS segment last year represented a staggering 646 million of air booking volume flowing through the system globally. As of today, it has over 40% market share, meaning that almost all of the major airlines have already become its clients. British Airways, Air Canada (OTCMKTS: ACDVF), and United Airlines (NASDAQ: UAL), for instance, are some of its clients. Furthermore, its airline IT business, wherein it provides passenger service systems for low-cost and full-service airlines has already secured over 50% of the market share.

(Source: company's 2019 IR presentation)

As a +30-year-old company, Amadeus' commitment to innovation to maintain its relevance and growth is also unexpectedly strong. While the GDS business used to make up ~70% of the business ten years ago, the revenue stream today is much more diversified. The company has expanded into other new businesses, such as hospitality IT. The footprint in that business has been exceptional so far, having converted almost all major hospitality chains into customers. Consequently, while the airline IT business had played a key role in accelerating CAGR to 8.9% in the last decade, hospitality IT will be the business that accelerates growth in the next decade in our view.

Risk

Historically, the economic downturn has never been an issue for the company, considering its GDS' volume-based revenue model. With that in mind, the airlines could always reduce the price to increase the demand and eventually booking volume.

(Source: company's financial 2019 IR presentation)

The COVID-19 presents an entirely different challenge, however, given that most of the travel activities have come to a drastic halt due to a health concern, rather than an economic consideration. Booking volume has dropped by over 46% globally, weakening Amadeus' fundamentals in the process. In Q1, its revenue was down by 27% while EBITDA was down by 41% YoY. Therefore, as we have discussed, Amadeus will need to be in a cost-saving mode as it waits for a global recovery.

Valuation

With over 50% combined market share, Amadeus is still a giant in the GDS and airline IT industry, which relatively has a very high entry barrier and switching cost. Upon recovery, we believe that it is very well-positioned to maintain its long-term standing as a market leader while growing its other businesses to deliver another CAGR acceleration into the next decade. In 2019 alone, revenue growth accelerated to ~13% YoY from only 6.6% YoY in 2018. As we maintain our neutral position in the stock, it should be noted that the stock has already almost retested its 5-year-low of €34 per share in April, and since then has gained an upward momentum even post-Q1 earnings call, possibly due to the news of some countries like Japan starting to reopen. With that in mind, despite the attractive ~4x P/S and ~20.8x P/E at present, there is a potential for another pullback in Q2 upon any change of plan or slowdown in reopening.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s 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.