Sabre: No Valuation Room Left For H1 2021
Summary
- Sabre has raised an additional $1.5B in capital during the pandemic, causing a significantly high leverage ratio.
- The company will experience revenue recovery benefit stemming from the vaccine distribution, but this will take 2-3 years.
- Meanwhile, the high debt level and high interest payment will pressure the operating cash flow and its equity value.
- At its current price range of $16-$17, I no longer see an upside value in Sabre stock for 2021.
Thesis
While Sabre (NASDAQ:SABR) will experience revenue recovery from the vaccine distribution, the massive amount of debt and higher interest payment will pressure down the financial value of the company. At the price range of $16-17, I believe that the recovery of 2021 to 2023 is fully priced. The stock no longer provides financial value until the revenue recovery is fully materialized and the debt is paid off.
Sabre and the legacy of the 2020 pandemic
Sabre is a global distribution systems (GDS) provider for airlines, hotel, car rental and other travel services. The GDS is an oligopoly industry, with the top three players(Amadeus (OTCPK:AMADY) and Travelport) dominating more than 90% of the market share. There is a high entry barrier to become a major player, as it is difficult for small players to obtain large scale ticket inventories from multiple airlines and to build a network with online travel agencies like Expedia (EXPE) and Booking Holdings (BKNG).
More than 90% of the company’s revenue (Travel Solution Revenue) is directly linked to the number of travel bookings. This makes the company’s business very cyclical to the travel volume and vulnerable to sudden shocks like the 2020 pandemic.
During the initial pandemic shock to the travel industry, the company’s revenue declined by -67% YoY during 2020. The company started to burn cash by recording a negative operating cash flow of -$773M during 2020.
To manage this unprecedented crisis, the company raised its capital by $1.5B. ($1.1B from loan, $375M from equity and $69M from the leaseback of their own building.) Also, the company has made its business model lean, via restructuring and reducing its global workforce by 20%. The company could increase the operating margin by migrating over from a legacy server to a cloud infrastructure. The company now expects to have $175M to $200M in annual savings from 2021 onwards, based on their last quarterly review.
Time to talk about the travel recovery speed and debt
There is no doubt that Sabre will survive the crisis as its business is essential for the online booking process, and it will have a strong business in the longer term due to the restructuring efforts. The recent stock price rally reflects this aspect.
However, we have to acknowledge that the travel industry recovery will take time. McKinsey report has forecasted that global air-travel demand will not recover until the end of 2024, which is corresponding to the IATA’s forecast. I will not go into the details of those forecasts, but it is reasonable to assume that the travel industry will recover to the 2019 level by the end of 2023 or 2024.
Over the next 2-3 years of recovery, the company will not lower its debt level significantly because it needs to keep its cash reserve until its operating cash flow recovery is strong enough. According to my forecast (see the last table at the end of the post), the company cannot generate meaningful cash flow that can pay off the debt of $500M - $600M until the year 2023. This is also evident in the company's own debt repayment schedule in the table below. According to this schedule, the major repayment will start from 2023 with $645M, followed by $1.9B in 2024.
This high debt level entails additional interest costs which ranged from $80M to $100M annually, compared to 2019. The company has paid $156M of interest payment in 2019, and this is increased to $235M during 2020.
Thus the recovery of operating cash flow will be offset by this interest payment from 2021 to 2024. Prior to the pandemic, the company generated an operating cash flow of $735M excluding the interest payments of $156M. I expect that the company will generate an operating cash flow before interest payment of $10M to $200M in 2021. This level of operating cash flow is not enough to cover annual interest costs of $230M. From 2022 to 2023, the company will begin to record the positive operating cash flow, but more than half of those values will be used for paying the interests. Of course, this means that equity investors cannot expect the dividends for at least 2-3 years.
Valuation and Conclusion
I used the DCF method to calculate the enterprise value and reflect the debt and cash balance to determine the equity value. The good news is that the company is not expected to have any further liquidity issue and additional capital raise because of its high cash balance of $1.5B.
The net equity book value may fall into negative territory for the first half of 2021. This does not mean that the stock price should be scrapped to $0, as the equity market value is the discount of future cash flow. However, the negative equity book value means that the company has a long way to fix its balance sheet and recover the financial value to equity holders.
My valuation for 2021 suggests that $16-$17 is in the expensive range with the assumption of fast travel industry recovery. So my conclusion is that the investors will have to be very patient on this stock if the expectation is for the price to recover to the pre-Covid level ($20-$22). I am no longer bullish on this stock for 2021 as the upside will meet the ceiling of the $17 range. I would come back to Sabre, once they can use strong operating cash flow to pay off the debt.
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