Airline Solutions:
Part of our Short-to-Long thesis rests on a positive inflection in the downtrodden Airline Solutions business. Sabre's Analyst Day, which took place yesterday, helped to flesh out the potential for the AS business above and beyond what we had expected. The company showcased a range of product and business model improvements in the AS business including:
- a streamlined and modernized product
- greater R&D efficiency
- faster time to market for new features
- greater monetization of systems for airline customers
- improved competitive positioning based on newly created software for Sabre unique products
- beginnings of a platform that customers can use to implement data driven automation where relevant
- open API so customers can mold data analytics to their specific needs
- improved business model for the related professional services business
- and the potential for automating parts of the professional services implementation process
Over a three year period of time, we see this translating to improving margins, higher revenue, potential share gains, and the development of more software-like business model elements (margins, OCF) which can help underpin gradual estimate and multiple improvement. A good system with the right architecture can also stimulate a long-awaited migration period of airline systems from internal to merchant. A modern software product growing inside a legacy IT provider will have positive implications for the stock.
NDC & TN GM%:
Sabre also still has work to do. It is clear to Sabre that the NDC will be overly burdensome for the airlines to manage by themselves. Now Sabre must convince the airlines of similar logic, and hope the airlines will agree to let Sabre manage new NDC borne complexity. Sabre also needs further effort on TN gross margins; a 50% improvement in cost per booking was not enough to offset a 70% increase in look to book ratio. We think help is on the way, as Sabre's new systems offer a 50-90% improvement (our research) but accounted for a still small portion of overall capacity in 2017. Sabre was not prepared to give guidance for improving TN gross margins in 2019, which is our view.
final thoughts & VALUATION:
The company is guiding for a 10% FCF CAGR starting from 2018 levels (guidance $390m, our estimate $405-$410m). Sabre is wisely keeping the dividend flat, re-designating the buyback for dilution offsets or extremely rainy days, which means starting in 2018 the company will have $200m-250m+ per year of incremental cash that can be used either for debt reduction (~$151m Pro Forma annual interest expense), or appropriate tuck-in acquisitions. Isn't it great to have cash options to help accelerate the business or pay down debt to eliminate onerous interest expense?
At ~17x EV/FCF today, we don't think this stock is priced for continuous improvement. We see upside to the mid-$30's on an ~18 month horizon based on ~20x F20 FCF. With a $6b cap, plenty of liquidity, and potential for a value-to-growth type inflection, we continue to see Sabre as a Best Idea Long.
