AMADY - Amadeus IT Group: One Of My Most Convicted Longs

Summary

• Amadeus IT Group, S.A. is a major provider of IT services to the airline industry.
• I believe the hospitality segment is a promising area of growth and has the potential to become a major contributor to revenue growth.
• Management's focus on long-term growth and investment, including the ongoing migration to the cloud, is commendable and should enhance the business and long-term margins.

Overview

Amadeus IT Group, S.A. ( AMADF ) is a major provider of IT services to the airline industry, giving airlines access to one of the largest global distribution systems [GDS] and a variety of software solutions. Despite the GDS industry's matureness, AMADF has a lot of room to expand its airline IT division through cross-selling and new customer acquisition. Furthermore, I believe AMADF's hospitality business is still a promising one and has the potential to become a major contributor to revenue growth as the company expands its operations in the coming years.

I also think AI - also think AIR IT - will continue to grow over the coming years as more people travel and Amadeus IT Group, S.A. implements organic price increase. As the business recovery is gaining a lot of traction with a clear path to regaining pre-covid heights, I expect management to resume dividend and share repurchase programs soon. Also, I would not be surprised if management used the balance sheet 's strength (net debt/EBITDA of 1.1x today) to return capital to shareholders by increasing leverage. Overall, I think Amadeus IT Group, S.A. is a great investment and a stock one should consider buying.

Q4 2022 earnings

Q4 2022 for AMADF was in line with expectations. Putting historical results aside, I think the 1Q trend is the highlight, as it is pretty supportive of consensus estimates. Revenue and EBITDA guidance from management are also in line with consensus estimates for FY23, while free cash flow ("FCF") guidance at the midpoint is 6% below consensus.

Importantly, Amadeus IT Group, S.A. management has signaled that reinvestment in cloud technology in FY23 will push OPEX higher, with normalization beginning in FY24 and continuing through FY25/26. Based on this information, I believe that the consensus will revise their forecasts downwards, first adjusting their near-term forecasts and then upgrading their mid-term forecasts for FY25/26. Overall, I don't think investors will be too concerned about the near-term downgrades because they know there are more positive developments on the horizon (macro normalizing, reopening tailwinds, etc.). Investor optimism can also be seen in the rise in stock price following the release of quarterly results.

Bookings recovery

Extreme bears may be fixated on the fact that Amadeus IT Group, S.A. Q4 air bookings are still 28.4 percent below 2019 levels, but as a long-term investor, I'm more interested in the fact that bookings have recovered further in January and February of 2023. Most investors, I'd guess, are banking on the airline industry continuing its recovery this year, and 1Q23 trends show that there has been a sequential increase in bookings so far. To be exact, the positive trends in air IT PBs and air bookings made by Distribution after COVID have reassured my belief that the path to recovery and growth is clear.

Guidance

Amadeus IT Group, S.A. management's reiteration of optimistic forecasts for the future of air travel, which I think is supported by the data, is also promising. This is especially true when management has their finger on the travel recovery pulse. The speed of recovery is anyone's guess, but I'm confident that it will come as long as people continue to have a strong desire to see the world and as long as there are broad macro tailwinds like rising incomes, globalization (social media), more people having passports.

My prediction is fairly straight forward, with more people travelling, Amadeus IT Group, S.A. GDS will benefit from the increased international travel, especially in terms of pricing and mix - which also means higher margins. The one thing to note, as was previously discussed, is that the ongoing migration to the cloud by AMADF will increase OPEX costs. Clearly, this would put a damper on EBITDA, which has led to somewhat conservative forecasts. However, I believe this is the right move as it would enhance the AMADF business and long-term margins, so I do not believe the downgrade will derail the investment thesis. In fact, management should be commended for prioritizing long-term growth and investment over immediate profit maximization.

Conclusion

Overall, I believe Amadeus IT Group, S.A. is a promising long for those looking for exposure to the airline industry and the technology services that support it. Despite the mature nature of the global distribution systems industry, Amadeus IT Group, S.A. has room for expansion through cross-selling and new customer acquisition. In addition, its hospitality business is also a promising area of growth. While there may be some short-term headwinds due to increased OPEX costs from cloud technology investment, Amadeus IT Group, S.A. management's focus on long-term growth and investment is commendable.

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