2023-05-30 05:33:30 ET
Summary
- Despite weak performance and missed guidance, Sabre shows signs of improvement with increased revenue and higher-than-expected EBITDA margins, supported by strong travel demand and growth in bookings.
- Management's reorganization plans aim to generate cost savings, while technological initiatives and operational enhancements contribute to the company's long-term prospects.
- The undemanding valuation presents an attractive investment opportunity, but it is crucial for SABR to generate positive sentiment and exceed guidance to break the negative cycle and unlock significant upside potential.
Thesis update
It has been a really tough ride with Sabre Corporation ( SABR ). At first, the bull case seems to been moving in the right direction after I wrote about it in September last year. Then comes the weak 4Q22 results and that missed guidance sent the stock nose diving from $8 to the current levels of $3.2. I think the bull case for SABR assumes that the company will soon generate revenues comparable to those seen before the company's covid era, with margins that are significantly higher as a result of efficiencies and technological transformation and subsequently stronger EBITDA and free cash flow. The upside potential remains very attractive even if we assume EBITDA to reach back 80% of 2019 levels at $900 million by FY25. However, the caveat remains that investors must look beyond the temporary weakness caused by negative sentiments, a lack of transparency, high interest rates, etc. In fact, if we look at the 1Q23 results, things are actually showing signs of improvement. The company's revenue increased by 27% to $743 million, and its EBITDA margins were higher than expected. Importantly, management outlined a reorganization that would save $100 million in the 2H23 and an additional $200 million a year by 2024. That said, I think this is also a reason why the share price fell further as management reiterated FY23 guidance in spite of these savings, implying an increase in cost somewhere or top-line to perform weaker than expected. On the flipside, this can also be seen as a conservative approach so that SABR can perform the “beat and raise” playbook over the next few quarters. However, I would feel better if management increased guidance to stimulate a more bullish mood for the share price. At the current stage, it will continuously be trapped in a vicious cycle of negative sentiment until the next results. All in all, my recommendation remains the same – to continue going long on SABR stock. The valuation is undemanding today as market is not pricing SABR to hit FY25 guidance. If it does, the upside is significant.
Travel update
The primary driver for SABR to return back to 2019 EBITDA levels is the demand for travel, and 1Q23 showed that demand for travel is strong and healthy. In 1Q23, total distribution bookings increased by 49%, with air bookings increasing by 47%. This fact alone is highly indicative of brisk demand and the imminent revival of SABR. When compared to 4Q22, 1Q23 saw an increase in air bookings as a proportion of 2019 from 58% to 61%. Importantly, management's comments add credence to the company's potential to meet its FY25 goals. The company has been able to capture larger booking volumes from both existing customers and new wins, according to the management.
Business transformation
SABR's case rests not just on the uptick in travel demand, but also on the company's own efforts to restructure and improve its operations. Plans for further staff reductions were announced in 1Q23 by management, with the goal of saving an additional $100 million in 2H23 and $200 million annually by 2024. I would approach this new cost cut from two approach to tamper expectations. On the positive side, the cost cut is as credible as it gets given that management has full control over how much headcount to cut, as such the $100 million savings is probably in the bag already. On the negative side, I worry if management is cutting unnecessary cost in the cost structure (especially labour), which might impact its ability to operate at the optimal level (i.e., more workload on each employee, thereby reducing operating efficiencies). I would be paying more attention to another comments about operation efficiency, hopefully SABR could leverage the use of AI to offset this. If not, at face value, I think this cost savings is a positive for sure. SABR is also making great strides with technological initiatives that, in my opinion, will result in product/operational enhancements and substantial savings. To reiterate SABR targets, management targets to move 90% of their compute to the cloud, closing down their Tulsa midrange data center, and offloading 85% of their mainframe's GDS functionality. In 1Q23, the business has already managed to migrate 69% of total compute capacity, which is an increase of 500bps from 4Q22, and has already decommissioned >400 Tulsa servers. Combining these developments, I would say that management is doing a fairly good job in achieving its internal targets. I believe SABR is more well-positioned today than the past.
Conclusion
Despite the challenges faced by SABR, there are positive indications that support the long-term bullish case for the company. The recent weak performance and missed guidance caused a significant decline in the stock price, but signs of improvement are emerging. The 1Q results showed increased revenue and higher-than-expected EBITDA margins. Additionally, management's reorganization plans aim to generate substantial cost savings, which could contribute to future profitability. Importantly, the demand for travel is strong, as evidenced by the growth in total distribution and air bookings, positioning SABR for potential revival. The company's efforts in business transformation, including technological initiatives and operational enhancements, further support its long-term prospects. Although there are concerns about management's conservative approach and potential impact on operating efficiencies due to cost cuts, the undemanding valuation presents an attractive investment opportunity. That said, I believe it will be important for SABR to generate positive sentiment and exceed guidance in order to break the negative cycle and unlock significant upside potential. Overall, I recommend maintaining a long position on SABR, considering its potential to achieve its goals and improve its market position.
For further details see:
Sabre: Underlying Fundamentals Are Improving