We present our note on Amadeus IT Group (OTCPK:Amadi), a Spanish IT provider to the global travel and tourism industry, with a Buy rating. We are impressed by the structural outlook of the industry, quality of Air IT business, cash-generating The nature and relative forecast of the business, as well as the better competitive position of the company. We believe there is more upside left in the stock. We will provide a brief overview of the business and analyze the key drivers of our thesis as well as potential risks.
Introduction to Amadeus IT
amadeus Leading global travel technology company. It provides services and solutions to travel providers and travel agencies. Amadeus was founded in 1987 to support airline distribution by four major European airlines and has since expanded to serve customers across the travel industry.
The main business lines of the company are Air IT Solutions, air distributionAnd hospitality and other solutions. Air IT provides business technology solutions that facilitate business processes including reservations, ticketing, inventory management and departure management. It provides integrated passenger service systems, standalone software, as well as analytics and consulting services that help airlines operate efficiently and increase profitability by reaching more customers, optimizing costs, and increasing customer loyalty. In addition, Amadeus provides airport solutions for passenger services and operations management. The air distribution business connects travel providers including airlines, car rentals, hospitality providers, cruises, railways, etc. on the one hand, and retail and corporate travel sellers, online travel companies and other buyers on the other, which offers significant economies of scale. Provides and capacity. The company’s scope has broadened, and through acquisitions new market in 2014 and travelclick In 2018, Amadeus expanded into Hotel IT, offering a variety of solutions to hospitality providers. Divisions are highly synergistic.
Amadeus is headquartered in Madrid and is present in more than 190 markets. The company is listed on the Madrid Stock Exchange and has a market capitalization of ca. €28 billion.
A high quality business model
Air IT, currently the company’s most important value creation driver, is a high quality business with a significant growth trajectory and key competitive advantage. Along with CA, it has a dominant position in the East-China market. PSS has 50%+ market share while approximately 65% of the global market uses at least one type of Amadeus Airline IT product. Market share continues to expand and has a market leading customer retention rate. Customers include over 180 airlines with a pre-Covid passenger count of around 3.5 billion. PSS contracts are for long term i.e. more than 10 years and there is opportunity for upselling. PSS revenue grows through natural passenger growth, price increases, as well as new customer wins. There are economies of scale as there is little incremental cost to serve additional customers. Many customers are on board, including United, Delta and Iberia. Amadeus wins virtually all the competitive tenders which are awarded fairly on the basis of quality. Additional growth comes from upselling existing customers. Most of the customers are eligible for upselling. We believe upselling and new customer acquisition will drive EBIT growth for the group in the mid-teens.
Air Distribution – Stable and Profitable
The air distribution business is expected to experience growth in average volume as more travelers turn to direct bookings, also a result of declining business travel, and low-cost airlines preferring direct bookings. However, we expect market share to remain satisfactory as Amadeus invests in new technologies. new delivery capacity (NDC) is improving its product offering. We expect Air Distribution to drive lower growth but remain a highly cash-generating, financing investment in high-growth areas. In addition, hospitality remains a key growth area, which could offset slower growth in distribution, with the platform already being adopted by IHG Hotels & Resorts and Marriott.
Investment case and valuation
We believe that at current valuations, Amadeus offers attractive embedded returns. We forecast sales of €6.2 billion and Group EBITDA of €2.4 billion in FY2024e. Our figures are in line with sell-side analysts’ consensus, and we believe there may be some modest upside to these forecasts. However we remain conservative.
Going forward, over the medium term we expect Air Distribution divisional EBITDA to grow very modestly, remaining in the low single digits or 1% in the €1.4-5 billion range. On the other hand, we expect Air IT to grow significantly in the low teens and then low double-digit % CAGR, which is expected to reach EBITDA of €2.4 billion by fiscal 2028. We expect a similar growth path in the hospitality sector, but we have less visibility and hence are less sure about it. As operating leverage comes into play, we expect significant margin improvement and Group EBITDA of approximately €3.5 billion by 2028, almost doubling in half a decade.
For the purposes of this valuation exercise, we use less long-term forecasts, and we apply a forward PE multiple. We estimate EPS for FY2024e to be €3.1. The current share price implies a forward PE multiple of 20x. Given the excellent upcoming EPS growth and earnings quality, we believe the group should trade at high multiples in line with the historical range, having been above 25x EPS for the last 5 years. We believe a 20% premium is required to the current multiple, which would lead to an implied 20% upside, and a share price of €74 or $80 per share. Since EPS growth has finally been achieved and Amadeus’ earnings prints come out every quarter, the stock should be trading higher. Meanwhile, the group also trades at around 12x EBITDA which looks cheap to us considering the EBITDA growth. On our medium term assumptions on EBITDA growth, capital distribution etc., the group would be trading at approximately 6x EBITDA 27e, which we find a cheap valuation. In addition, the company is returning 50% of last year’s net income as dividend as well as buyback with scope for more.
Downside risks include worsening macroeconomic conditions, major events affecting air traffic, further decline in business travel, decline in travel and tourism related to environmental concerns, higher competition in distribution and air IT, lower than expected sales in air IT are but not limited to these. , more direct booking, technology risk, operational risk, etc.
Given the attractive fundamentals and valuations, we recommend long positions in Amadeus IT. The equity story lacks any major short-term catalyst and is a long-term quality compounder at a good price.
Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these shares.