After an amazing rally over the last two days, Webjet is currently trading at $4.50 as I type this. While at first glance this is still over 50% below where the stock traded pre-Covid 19 it doesn’t account for the significant dilution forced upon shareholders at $1.70 as the business required an immediate cash injection to cover its operating costs.

So what is priced in to a $4.50 share price? Let’s run the maths.

Pre-Covid 19 Webjet had roughly 136m shares on issue. At a share price around $10 in January and February this equalled a market capitalisation of $1.36bn.

Looking at consensus earnings estimates, across 7 brokers the average expected operating profit for FY20 was 102m (adjusting for some changes to accounting). Dividing the $1.36bn market capitalisation by the $102m earnings estimate means the market was pricing Webjet on about 13x forward operating earnings.

To stay afloat as domestic and international travel fell dramatically, Webjet issued 203m shares to raise cash. With 339m shares on issue, at the current $4.50 share price this equals a market capitalisation of $1.53bn.

Assuming a full earnings recovery to $102m, this means the market is pricing Webjet on 15x pre-Covid 19 earnings, a higher multiple than it was trading on previously!

Importantly, it must be noted that Webjet’s raise was purely for working capital. The additional cash is not being used for acquisitions or investment that will result in higher normalised short term earnings than the $102m pre-Covid 19.

That means the key assumption in this whole calculation is actually if/when earnings normalise. Covid-19 has caused immense disruption to the travel sector, meaning we may see vastly different business models emerge out of the crisis both positively and negatively. The devil’s advocate to buying Webjet today may argue that with a pure online offering Webjet is well-positioned to take market share from the physical competitors such as Flight Centre and Helloworld, similar to the trends we are seeing in retail.

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