Sabre: Management Words, Travel Recovery Could Make Stock Spike Up

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Sabre Corp (SABR) mentioned in the last quarterly release that 2022 could be a beneficial year in terms of global travel recovery. Management also noted that in 2025, shareholders will likely benefit from a significant increase in profitability coming from technological innovations. In my view, if Sabre continues to sign agreements with agencies, and the clients keep on growing, both revenue growth and FCF will trend north. Despite the risks from new data regulations and negotiations with travel suppliers, the stock is considerably undervalued at the current market price.

Sabre Believes That 2022 Could Be A Year Of Progress, And Shareholders Could Experience Benefits From Tech Transformation In 2025

Based in Southlake, Texas, Sabre Corporation is a travel technology company claiming to be the largest global distribution systems’ seller for air bookings in North America.

Sabre Corp suffered quite a bit during the COVID-19 crisis, and it makes sense that investors are very cautious with the stock. With that, it is quite remarkable that management is making very positive statements about the future. Perhaps it is time to have a look at the expectations of management before everybody does:

Presentation

Presentation

From 2022 to 2025, Sabre Corp expects sales growth to go back as global travel recovers. Management is also promising new technological transformations that should enhance FCF generation. In my view, the most relevant words about the future expectations from the management were included in the most recent earnings call. Notice how the company expects 2022 to be a year of recovery and progress:

In 2025, we believe our full year run rate efficiencies and accrued technology benefits will drive superior financial results under multiple scenarios when compared to 2019. Source: Earnings Call

February month-to-date global GDS bookings were on pace to reach a similar level of recovery versus the same period in 2019 as November 2021, which was the best month since the onset of COVID-19. For these reasons, we believe 2022 is shaping up to be a year of recovery and progress. Source: Earnings Call

Among the positive remarks about 2025, I would mention a massive decrease in the hosting costs and a significant decrease in capital expenditures. We are talking about a reduction in capex of $150-$200 million, which will most likely enhance free cash flow generation:

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Presentation

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Free Cash Flow Is Expected To Turn Positive From 2023 As Capital Expenditures Decline

Analysts seem to be sharing the optimism about the year 2022. Estimates would include sales growth of 46% in 2022 and 30% in 2023. Finally, the FCF should be positive in 2023 with around $156 million. Let’s note that investors expect a reduction in the capital expenditures as compared to that in 2018 and 2019, which could explain the increase in FCF.

Market Estimates

Market Estimates

The expectations of the management are a bit more beneficial than market estimates. The FCF and EBITDA numbers in 2025 would increase significantly:

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Presentation

Two Case Scenarios Given By Management

In the most recent presentation given to investors, Sabre made several case scenarios with an increase in bookings of 80% and 125%. The results are quite beneficial, but the implied share price in both case scenarios is a bit different. Hence, I decided to make two DCF models:

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Presentation

Under both case scenarios, I believe that Sabre should successfully develop innovative technology products, which will likely allow personalized traveler experiences. Let’s say that the first core strategy noted by management is the development of technology, so any optimistic case scenario should include new innovative technology:

Transforming the security, stability, and health of our technology by leveraging maneuverability to enhance agility and modernize infrastructure at a global scale. Source: 10-k

I also believe that Sabre Corp will likely successfully sign new agency relationships in order to report an increase in bookings of 80% and 125%. Besides, I expect Sabre’s promotional activities to remain profitable. Also, with new customers from 2022 to 2032, I would obviously expect sales growth and FCF growth:

Pursuing new customers across all of our product offerings, including customers seeking distribution of content, new agency relationships, as well as corporations representing buyers of content. Source: 10-k

Strengthening relationships with existing customers, including promoting the adoption of our products within and across our existing customers. Source: 10-k

Under the worst case scenario given by management, 2025 EBITDA should stay close to $900 million, and 2025 FCF should equal $500 million. I executed a DCF model with these assumptions, which also included an EBIAT close to $2.5 billion in 2032 and 45% sales growth in 2023:

My Estimates

My Estimates

I also assumed D&A growing from around $150 million in 2022 to $205 million in 2032, and working capital and capex close to figures reported in the past. Under the previous assumptions, the FCF should grow from around $100 million in 2022 to $2.3 billion in 2032:

My Estimates

My Estimates

Ycharts

Ycharts

Ycharts

Ycharts

I also assumed a WACC of 9.87% with cost of equity of 15%, cost of debt of 5%, and a beta of 2.2. The result of the sum of the FCF should be equal to $5.95 billion:

My Estimates

My Estimates

Under this case scenario, I used an exit multiple of 6.55x, which is quite conservative. Take into account that according to Seeking Alpha, the sector median stands at 13x. With this figure, the terminal value discounted with a WACC of 9.87% should be equal to close to $2.95 billion. Now, if we subtract the net debt, the implied equity valuation should be $1.5 billion, and the fair price should stay at $5:

My Estimates

My Estimates

Management also noted that under a scenario with 120% booking recovery, 2025 EBITDA will likely stay close to $1.2 billion, and FCF should be $900 million. In the figures shown below, I included 2025 EBITDA of $1.281 billion and 2032 EBITDa of $3.4 billion. FCF should also grow from $891 million in 2025 to $2.452 billion in 2032:

My Estimates

My Estimates

Under this scenario, I also used a WACC of 9.87%, which implied a discounted sum of FCF close to $7.354 billion. If we also include an exit multiple of 11x 2032 EBITDA, the terminal value discounted should be $14 billion, and the implied share price should stay closer to $57:

My Estimates

My Estimates

My Estimates

My Estimates

Risk Factors: Negotiations With Travel Suppliers And Data Regulations

In my view, Sabre Corp could suffer significant pressure on its FCF margins if management cannot find sufficient qualified personnel. Under the current environment, it is likely that software engineers and other developers might require more salaries, or they might decide to work for other organizations. If the company can’t find sufficient personnel, sales growth could also diminish. The company disclosed this risk in the most recent annual report:

There is high demand and competition for well-qualified employees on a global basis, such as software engineers, developers and other technology professionals with specialized knowledge in software development, especially expertise in certain programming languages. Source: 10-k

Sabre Corp may also suffer significantly from a wave of consolidation in the travel industry. If travel suppliers become larger organizations, they may obtain larger bargaining power. They may be able to negotiate prices with Sabre Corp. As a result, shareholders could suffer a significant decline in the FCF margins, and the implied fair valuation will likely diminish:

For example, consolidation in the airline industry, the growth of LCC/hybrids and macroeconomic factors, among other things, have driven some airlines to negotiate for lower fees during contract renegotiations, thereby exerting increased pricing pressure on our Travel Solutions business, which, in turn, negatively affects our revenues and margins. In addition, travel suppliers’ use of multiple distribution channels may also adversely affect our contract renegotiations with these suppliers and negatively impact our revenue. Source: 10-k

Sabre Corp collects a significant amount of information from customers. In the future, governments may increase the level of regulation and data protection policy, which may be very detrimental for Sabre. If Sabre Corp has to hire more personnel, or it has to make new investments to respect future data protection laws, the company’s FCF should decline:

Personal data is increasingly subject to legal and regulatory protections around the world, which vary widely in approach and which possibly conflict with one another. In recent years, for example, U.S. legislators and regulatory agencies, such as the Federal Trade Commission, as well as U.S. states, have increased their focus on protecting personal data by law and regulation, and have increased enforcement actions for violations of privacy and data protection requirements. Source: 10-k

While management gave its own forecasts, I tried to complete the DCF model with a detrimental case scenario. Under this specific model, net sales should include growth of close to 15%-5% from 2024 to 2032, and the EBITDA margin should stand at 12.5%-15.5% from 2023 to 2032.

With changes in working capital/sales of 1% from 2024 to 2032 and capex/sales of 3%, the FCF margin should stay close to 10%. Finally, 2032 FCF should be close to $815 million:

My Estimates

My Estimates

If we also use a WACC of 10%, the NPV of the future FCF from 2022 to 2032 should be close to $2.3 billion. Finally, if we assume an exit multiple of 6.55x, the sum of the terminal value and future FCF should be 1.5 billion, and the implied stock price will likely be $5:

My Estimates

My Estimates

My Estimates

My Estimates

Balance Sheet

As of December 31, 2021, Sabre Corp reported $978 million in cash and goodwill worth $2.4 billion. More than 40% of the total amount of assets is represented by goodwill, which means that Sabre expects a significant amount of synergies from previous acquisitions. In my view, it is likely that synergies lead to FCF generation in the future:

10-k

10-k

Even with long-term debt worth $4.7 billion, I would not be worried about the company’s future financial obligations. Take into account that Sabre expects to report an EBITDA of $1.2 billion in 2025. In my view, considering the future profitability of Sabre Corp, the total amount of leverage appears under control:

10-k

10-k

Conclusion

With Sabre noting that 2022 could be a year of transformation and significant profitability expected for 2025, Sabre’s financial profile looks interesting. In my view, if the expectations given by management are correct, the current valuation does not represent the future free cash flow. In my opinion, new agreements with external agencies and the development of new innovative technology products will likely bring larger FCF margins in the coming years. I obviously see some risks from new data privacy regulations and negotiations with travel suppliers. With that, the Sabre looks like a buy at the current market price.

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