Sabre: Significant Growth Prospects At An Attractive Valuation

Summary

• The multi-year deal with Avianca to provide GDS services is expected to drive significant growth for the company in the long term.
• Sabre faces the risk of high debt burden, but the current valuation provides the company with a favorable risk-reward profile.
• I assign a buy rating for the company after taking into consideration all these factors.

piranka

Investment Thesis

Sabre Corporation (NASDAQ:SABR) is a software and technology company that provides its services, particularly to the global travel industry. Recently, the company signed a multi-year distribution agreement with Avianca. I think this agreement and scalable capacity of the airline retailing technology could be a primary growth factor for the company. I assign a buy rating for this growth investment opportunity.

Company Overview

Sabre Holdings Corporation, a Texas-based company, offers global software and technology services for the travel industry through its subsidiary Sabre Holdings Corporation. The company provides its services through two segments: Travel Solutions and Hospitality Solutions. The company earns 91% of its revenue from Travel Solutions, and Hospitality Solution contributes 9% of the total net sales. SABR's business was severely affected by the covid-19 outbreak as all governments ceased domestic and international traveling during the pandemic to stop the spread of the virus. The reduced revenue adversely affected the company's liquidity, forcing management to suspend the dividend payment and share repurchases.

In FY2022, SABR is experiencing the highest recovery level in volume compared to the 2019 fall due to the covid-19. Hospitality solutions gross CRS transactions have surpassed 2019 and grown by 112%. IT solutions passengers have recovered 82%, and distribution gross air bookings have recovered 58%. With the accelerated recovery, I believe the company might start capital distributions to its investor soon.

Investor Presentation

The company is currently focusing on expanding its business with agreements with the airline and other traveling-related companies. It has announced a multi-year distribution agreement with Avianca, which can help it grow its agency sales.

Distribution Agreement with Avianca

Recently, Avianca has chosen Sabre's global distribution system (GDS) to distribute flights & related services. Avianca is also planning to distribute its New Distribution Capability (NDC) content from the Sabre marketplace. A business focus for Sabre is moving beyond NDC to achieve its goal of becoming the leading global travel technology platform. Today, more than 3,000 agencies use the Sabre marketplace to browse, reserve, and service NDC content. More than 25 airlines have agreements with Sabre to use its GDS to distribute their NDC content. Avianca wants to implement NDC to deliver better content and solutions to travelers, and it believes that SABR will provide robust and scalable solutions that optimize the company's global distribution strategy. I believe this multi-year deal might be a stable income source for the SABR in the coming period as it is a multi-year deal. I think airline retail technology development is scalable and could be the biggest growth factor for the company because all the airline companies might prefer SABR as its distributing partner as the company provides efficient strategies to expand the revenue and margins of the airline.

Key Risk Factor

High Debt: SABR has a huge long term debt liability that could negatively affect the company's performance in the coming years. As of March 31, 2022, the company had long term debt of $4.7 billion. High debt obligation results in increased interest payment burden. With the recent rate hikes, the interest payment burden has increased resulting in decreased profit margins. Going ahead I believe company will have to address this issue to ensure smooth functioning and increased profit margins.

Valuation

SABR has a market cap of $2 billion and is currently trading at a share price of $6.26, a YTD decline of 31%. The share price has taken into account the negative factors and I believe we can witness a significant upside from current price levels. I believe the company on track to beat the market estimates for Q2 2022. The company is trading at a price/sales ratio of 1.04x compared to the sector median of 3.06x. It also has an A- grade for price/sales ratio and the leading price/sales ratio is expected to be 0.79x. I am estimating an 85% revenue and volume recovery as compared to the FY19 revenue numbers. That's the reason I believe the company will trade at a higher price/sales multiple of 1.35x as revenue and volume have shown a remarkable recovery at the start of FY22, giving us a target price of $8.2, a 30% upside from the current price levels. The company is a good investment opportunity before the quarterly results at current price levels.

Conclusion

The multi-year deal with Avianca to provide GDS services is expected to drive significant growth for the company in the long term. The company faces the risk of high debt burden but the current valuation provides the company a favorable risk-reward profile. The share price has accounted for the negative factors and we can witness a significant upside from current price levels. The company is experiencing the highest recovery volumes since the Covid-19 pandemic. I believe the company will perform exceedingly well in the coming quarters. I assign a buy rating after taking into consideration all these factors.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[Nick Langman]

Not a well managed company, that’s being polite.

[Seeburto]

Has not aged well

[jianmin chen]

Please help. SABR debt maturity:
Sabre has no debt maturing in 2022 or 2023, though $1.2 billion and $2.0 billion are scheduled due in 2024 and 2025, respectively. We model Sabre refinancing $500 million in debt in both 2023 and 2024 at 9%-10% rates (like levels seen at the depth of the pandemic in April 2020).

Fed interest rate keeps change:
Sept 21, 2022 +75 3.00% to 3.25%

Debt-to-equity ratio:
Sabre Debt to Equity Ratio:
-7.700 for June 30, 2022

ycharts.com/...

Total Assets (Quarterly) 5.177B
Total Liabilities (Quarterly) 5.783B
Shareholders Equity (Quarterly) -616.77M
Current Ratio 2.128
Net Debt Paydown Yield -0.09%

Please estimate how low SABR stock price will go this down cycle. What is your advice?
SABR $5.06/ share close price - Sept. 26, 2022

Share your few thoughts to be a smart investor, and keep learning, how to set stop loss from SABR from $7.6 to $5.0 in less than one month?

[Mmartin fly]

@jianmin chen you worry about the wrong stuff..most important is the normalization of revenue..distressed company was due to covid...if business is doing ok, and operating numbers are ok, revenue normalization is the key, and it is happening big time+enormous cost saving on cloud

[Biological]

@jianmin chen If you look at recent SEC filings, SABRE has been successfully refinancing their debts. It also has about $1 billion in cash; yes, one billion. Cheers!

[jianmin chen]

@Mmartin fly

Based on my review of SABR articles on seeking Alpha, before 2019, 1 billion dollars incentive during three years, buyback over 10-million-dollar shares, and put 3 billion debts in balance sheet.

Zombie company is the company could not make profit, with huge debt. I am working on studying SABR debt and making comparison to RIG 7-billion-dollar debt.

Share your thoughts on SABR debt and comparison to RIG. RIG has 1 billion due in 2024 and 2 billion due 2025. Still RIG and SABR could not make a profit.

[GuyRien1]

@Mayank N. Sharma @r Negoro

Like you I bought at under $5 back in 2020 but it looks like it's going back there. Thoughts on what's holding back the stock price? It would seem that airlines are thriving so why wouldn't SABR?

[TheBot]

@GuyRien1 SABR is a "show-me" stock because it's a sort of unusual and quite small company in a sector few understand.

As it is currently slightly below/ nearly at cash flow breakeven, it's not really making it onto people's radars. I think once FCF and net income turn positive, the stock will start showing up on screens as cheap, and attract some capital this way.

I also think many investors see a recession coming and wonder (but don't actually look into) how that affects the recovery prospects.

For many it seems counterintuitive/ a difficult leap of faith to imagine a continued bookings recovery in a recessionary environment. However, looking at the past, recessions actually have very little impact on passenger numbers - and by and large lead to pauses in growth rather than to declines in these numbers.

In fact, the final piece of the recovery puzzle is not economic growth, but rather the lifting of ongoing APAC travel restrictions. Once these go, the bookings recovery will continue its march back up to levels quite close to 2019.

The other point that people miss is that SABR's long-term margins have improved thanks to COVID, as lower volumes have meant that they could accelerate their transition from old and expensive mainframe servers to Google Cloud. So in fact, SABR now does not need traffic to go back to 100% of 2019 levels in order to get back to 100% of 2019 EBITDA levels, it needs something closer to 80-90% of 2019 traffic all else equal. A welcome buffer there in case the top line underperforms the base case.

The final worry is of course debt, however this is a secondary concern in my view. Firstly, because continued high inflation would help lower net debt to EBITDA. Secondly, because banks have so far, in this challenging period for air travel, repeatedly worked with SABR to refinance the debt, so a payment default looks highly unlikely. Thirdly, because as the cost of debt increases with rates, it will start making sense to use FCF to repay it. And if FCF eventually goes back to say €500m per year, SABR will be able to make good dents in the outstanding debt at potentially attractive rates of return. The other point (more a question) is how long do interest rates actually stay this high? In a recession that leads to CB dovishness, they might well come down a bit and so reduce the pressure on net margins.

[Biological]

@TheBot Well spoken, APAC is lagging but fast improving so that will give us some good news in the next couple of quarters. Anecdotally, SQ will lower prices in the new year as competition is adding capacity. I know that lower fares, more travel options and more capacity, will lead to higher travel volumes.

As you say, the debt is there and has to be handled. Nevertheless, particularly this last quarter, they have moved quite a few maturities forward. Presentation has a nice slide on this achievement. I am encouraged by this as HY debt market is not completely open and is facing some jitters. Cash is still huge, but less than US$1 billion (a drop since last quarter), and FCF is increasing. That should set the stage for refinancings, extensions, etc. So long as they can refi, there is no need to repay. It will, however, cost a bit more.

Market was pretty disappointed and, I think, SABR suffers from being lumped as it is in tech/software ETFs. SABR will require patience; and some assurance that issuance of shares is not being contemplated at this point as it is not needed. CFO should be more definitive on this issue. Once that dilution cloud dissipates, SABR will go to higher single or even double digits where it was in recent quarters when the numbers, and recovery, were decidedly worse and uncertain. We are not higher due, in large part, to the recent "tech melt."

[GuyRien1]

@TheBot Would you liken SABR to a mid-stream oil company in that no matter what the cost to produce/fly the oil/plane, their fee is a constant based just on quantity not the price?

[r Negoro]

I see $20 if it recovers back to its old revenue. Once all these covid stuff blows over it will re rate to a PS of 3. This is one of those stocks , where you wait 3-5 years and it triples or quad.

[HoodWinkCapital]

@r Negoro It's not a COVID issue right now. For the most part their major markets have recovered from COVID.

It's the idea of a hard landing recession when businesses cut back on traveling, consumers cut back on vacations, and the fact this company isn't profitable any more that's holding it back.

Dead money until the Fed eases again.

[GuyRien1]

@HoodWinkCapital Spot on. So what criteria has the Fed said they will use to determine easing? Inflation? Jobs? Something else?

[HoodWinkCapital]

@GuyRien1

Inflation. That's it.

[r Negoro]

I remembered buying this at $4 .30 then i sold at $5-7 because pandemic hasnt recovered yet. Cant believe it's still $7.

[HoodWinkCapital]

@r Negoro

Here we are 8-months later and it's under $4.

[Seeburto]

Airlines are being ovetwhelmed by travel volunes and COVID fears are waning. This will offset the recession effects, which are probably already largely priced in.
I am a buyer here.

[Biological]

investors.sabre.com/...

This refinancing, a second this year, is de-risking SABR very significantly. Note they are not repaying debt, only moving maturities to 2028, well beyond the horizon. Inability to do so was my biggest concern. No cash was used. Beautiful.

[Mmartin fly]

@Biological yep, they are playing in 100% safe..

[HoodWinkCapital]

Will struggle to get above $10/share this year. There is only one more quarter to report and it's not likely 3Q will be blow out numbers so there isn't a big catalyst to move the stock up.

In 2023 it might have a chance to head back to $12-$15 but we're headed into a recession where corporates cut back on travel and consumer travel is dented by inflation.

If you're looking for a return to pre-pandemic levels of $20/share, you probably need to wait until 2024.

But risk adjusted, it's probably worth a punt at around $6 to $7/share.

[Rain23]

If you take Sabre current Net debt and subtract cash on hand, you will notice that Sabre has close to the same debt level as pre-covid. Now add to that the improved margins, covid cost cut and future cloud savings and Sabre will easily be at $20 by 2025.

[Mmartin fly]

@Rain23 Very nice, and in my opinion 2030 this is much more from 20$..

[HoodWinkCapital]

@Mmartin fly

This is not the big data AI company that you are claiming it to be. It's a software business that offers a reservation system to airlines. That's it. It not sexy tech that's going to change the world.

[Mmartin fly]

@HoodWinkCapital Again..this is in some instance even better from sexy tech...sticky, monopoly, high margin business with opportunities for expanding business in years to come..

[Seeburto]

Glad to hear your positive take. Have been bottom feeding so now am basically waiting for the current miserable conditions to recede or at least people travel in spite of it all!

[Mayank N. Sharma]

@Seeburto Thank you for your feedback

[Mmartin fly]

8$ valuation, very poor..will be 20$ in few years..debt maturity is postponed..deal was done in the heat of pandemic to secure liquidity..now they have 1 billion$ sitting on account..my point is that company does not have any debt issues, especially considering that revenue is coming back much faster than feared bcs covid is now flu..with 3,5 Billion of revenue 2025 and positive FCF in 4Q 2022 this is stock that haves 200% upside minimum..

[Mayank N. Sharma]

@Mmartin fly Thank you for your feedback. The valuation was done after taking into consideration the recession in mind. Surely the stock price can see an even higher price levels.

[vireoman]

@Mmartin fly I agree with you as to the upside. Their debt doesn't mature until 2024. I re-entered the stock last week for my third ride during the pandemic. As long as the market continues to drastically undervalue SABR, I'm more than happy to step back in.

[jianmin chen]

Share a few videos to learn how SABRE works, for example: GDS, and airline industry toughness.

1. www.youtube.com/...

2. www.youtube.com/...

[Mmartin fly]

@jianmin chen Sabre is such a great business..there is no way around it..cost and problems to change provider and platform is extreme..moat is amazing..roic is amazing...recession proofed...only thing that was able to seriously affect its business was some pandemic and now there is none..while earnings in recession may go down to various ompanies, sabre earnings will get better and better each Q..