✈ Sabre ($SABR) : Travel & Hospitality Software
A software company to profit from the tourism reopening
Company: SabreIndustry: Software (Travel & Hospitality)Foundation: 1960 (USA by American Airlines & IBM)Listing: Nasdaq (USA) since April 2014Ticker: $SABRStock price: $14.81(as of March 31, 2021)Market Cap.: $5.51bnInvestment Type: Mid Cap Growth📱 Company
Sabre Corporation (Sabre) is a global software and technology provider to the Travel and Hospitality industries. It works with airlines, hoteliers, travel agencies and other travel partners.
Products and services
✈️ Travel solutions
Sabre operates a global distribution system ("GDS"), essentially a marketplace where travel buyers (online & offline travel agencies, travel management companies and corporate travel departments) can access content (such as inventory, prices and availability) from multiple travel suppliers (airlines, hotels, car rental brands, rail carriers, cruise lines and tour operators) in real-time.
In addition, Sabre offers a broad portfolio of products and solutions, that integrate with its GDS, helping its customers to better market, sell, serve and operate. It includes, but is not limited to, reservation systems for full-cost and low-cost airline carriers, commercial and operation products (management of airline crews for instance) as well as agency and data-driven solutions.
Sabre has well-known clients such as American Airlines, Southwest, Lufthansa Group, IAG, Japan Airlines and Etihad Airways.
🏨 Hospitality solutions
Through its SynXis platform and solutions, Sabre offers hotels and hotel chains the ability to manage pricing, bookings, distribution and the day-to-day operations of their properties with a traveler centric approach.
The group serves over 42,000 properties in 180 countries, and recently signed new major clients such as Louvre Hotels Group (1,600 hotels in 62 countries) and All-Inclusive by Marriott International. It also serves clients such as Preferred Hotels & Resorts, Red Roof and Shangri-La Hotels & Resorts.
Business model
Sabre revenue sources can be split into three main categories:
Transaction fees: every time a transaction is made on Sabre's GDS, the company receives a fee from the travel suppliers making the sale.
✈Travel segment
Software related fees:
SaaS & hosted solutions: Sabre receives upfront fees as well as recurring usage-based fees for the use of the software. Contracts typically range between 3 to 10 years and include minimum annual volume requirements.
✈ Travel and 🏨 Hospitality segments
Licensing: Sabre receives fees for the installation and use of its software on premise, with a potential for additional revenue coming from the maintenance of the software.
✈ Travel segment
Other revenues:
Professional services fees: for clients using SaaS & hosted solutions, Sabre might also provide professional services, such as consulting services, to help clients achieve better utilization of and thus higher returns on their software investment.
✈ Travel and 🏨 Hospitality segments
Media revenues: Sabre is paid by Travel clients wishing to advertise their products and purchase preferred placement on its GDS, as well as by Hospitality clients advertising products on its CRS (Central Reservation System).
✈ Travel and 🏨 Hospitality segments
🎯 Market
The travel technology market was obviously significantly impacted by the Covid-19 pandemic. The overall market is expected to have declined by c. 35% in 2020, notably on the back of a dramatic decrease in international passenger traffic.
Over 2021-2027, the market is expected to recover at a healthy 6.8% CAGR to reach $13.6bn by the end of the period. Most of the recovery will likely be front-loaded as people are finally allowed to travel and take much-awaited vacations thanks to the vaccination efforts and the easing of travel restrictions.
This trends seems to be evidenced by Sabre numbers for North America, the company is seeing a correlation between bookings and transactions and the number of new Covid-Cases as evidenced by the graph below.
Source: Sabre's Q4 2020 results presentation.
The leisure travel segment is expected to recover faster than business travel and the pick-up in bookings should also happen sooner for domestic travels, within the US for instance, than for international ones.
We talked to an industry expert, who worked for a leading global hotel chain (Tech department). Here is his feedback about the hospitality segment specifically:
"Sabre is a heavyweight player in the field but it's running an old-school business model, as it's centralizing hospitality content and distributing it to a large number of professional travel buyers. With the rise of cloud-based solutions for hotels, cloud-PMS ("Property Management System") for instance, this model has been losing market shares to the likes of Booking.com and Expedia."
However, he added that:
"Hoteliers are resistant to change, and notably tech change, so Sabre is likely to retain a significant market share in the mid-term, thus benefit from the Covid-19 recovery. However, it will likely start to be in trouble in 5 to 7 years when major contracts are up for renewal if it's not able to transform itself in the meantime, either organically or through M&A (with the acquisition of smaller players like Mews or Cloudbeds for instance)."
😷 Covid-19
The pandemic had a significant impact on Sabre's business in 2020, as evidenced by a 67% decrease in revenues compared to 2019 and by the graph below:
Source: Sabre's Q4 2020 results presentation.
Sabre took a lot of initiatives to mitigate the impact of the pandemic on its business and to position itself to benefit fully and more profitably from the recovery.
Cost reduction programs
The company expects around $200m annual cost savings for 2021, a figure forecast to increase to $275m by 2024.
During 2020, Sabre reduced its global workforce by 15%, $175m expected annual savings, as the company expects "a smaller travel marketplace for the foreseeable future". Management considers it has now right-sized its workforce to face market conditions and is expecting to benefit from operational leverage as the recovery progresses.
In addition, the company undertook to modernize its tech infrastructure by moving more than 250 application to the cloud which resulted in the elimination of more the 2,500 legacy servers. Thanks to a contract renegotiation with its provider DXC and its Google partnership, Sabre forecasts $100m annual technology cost savings by 2024, on a run-rate basis, which represents around 9% of Sabre's 2020 technology costs.
Liquidity and cash management
In 2020, Sabre aggressively managed its balance sheet to ensure strong liquidity and cash position at year-end.
You will find below a slide from the company listing all the actions done in that regard during the year:
Source: Sabre's Q4 Results Presentation
🙎♂️ Management Team
Sabre's management and board members have extensive experience in the technology and travel industries. The two key leaders are:
Sean Menke (President & CEO), he has been running the company since 2016. He was previously president of Sabre Travel Network and the former CEO of two airlines. He also served as executive vice president of resources at IHS Inc., a global information technology company.
Dave Shirk (President Travel Solutions), he joined the company in June 2017 from Kony Inc. He is a veteran of the technology sector, having also previously worked at CSC, HP, Siemens and Oracle, and is in charge of the company’s airline and agency-focused business segments.
💲 Key Financial Data
* including technology costs. ** Adjusted EBITDA as reported by the company for historical figures.
2020 was a difficult year for Sabre because of the Covid-19 pandemic, however the company managed to somewhat limit losses thanks to a high proportion of variable costs in its structure (roughly 2/3 of Sabre costs are variable or semi-variable).
Top-line recovery is expected to start strong in 2021E and continue in 2022E and 2023E as the world resumes travelling.
Positive EBITDA should be achieved by 2022E at the latest as the company will start benefiting from the cost reduction initiatives undertaken in 2020 as well as top-line recovery.
📈 Historical performance and valuation
As of March 31, 2021:
Market cap.: $5.51bn (fully diluted)
Net debt: $3.31bn
Est. EV: $8.82bn
The company actively managed its cash position in 2020 by suspending common stock dividends and share repurchases as well as refinancing its debt and raising equity capital. At the end of 2020, the company had $1.5bn of available cash and a net debt of $3.3bn.
Note: n.m. stands for "not meaningful" and relates to the fact that the values are negative. Valuation metrics based on a fully diluted number of shares.
From a valuation standpoint, Sabre definitely has some leeway compared to its pre-Covid metrics. The company is currently trading at around 2.5x its FY1 Revenues (so 2022E) whereas it used to trade at c. 4x before the Covid crisis (see chart below).
🔥 With the market recovery and Sabre's leaner cost structure, we see a potential for strong gains to materialize within the next 18 to 24 months.
📌 Summary
Key highlights
A market expected to strongly recover in the next 18 to 24 months
Sabre is well-positioned to benefit early from the recovery as a large part of its business is coming from North America and Asia-Pacific
🇺🇸 In 2019, 55% of GDS bookings and 45% of hospitality bookings were North-America based while APAC accounted for 20% of GDS bookings
A top player accelerating the digitalization of its offering
🤝 Sabre signed a 10-year partnership with Google and is looking to capitalize on the personalization trend, notably thanks to Google's AI capabilities
Large portfolio of clients and long-standing relationships leading to client stickiness and new contract wins
📃 Sabre signed 2,100 contracts in Q4 2020, including new GDS agreements with Southwest and Lufthansa Group as well as new enterprise central reservations deals with Louvre Hotel Group and All-Inclusive by Marriott International
An improved cost structure expected to deliver operational leverage
💰 $200m annual cost savings in 2021 reaching $275m by 2024, on a run-rate basis
Main risks
The recovery might take longer than expected
⚠New habits of remote work and digital meetings might reduce the size of the business travel market segment
Bankruptcies and consolidation by airlines and hotel chains may negatively impact Sabre as the company could lose clients in the process
Cloud-based solutions will likely keep Sabre's market share under strong pressure in the coming years
💥 We view Sabre as very well positioned to benefit early from the travel and hospitality recovery following the Covid-19 pandemic. We are more cautious regarding longer term prospects for the company unless it shows an ability to reinvent itself and capitalize on new trends.
We would expect Sabre's share price to go back to its pre-Covid territory ($20-$23 range) within 18 to 24 months, which would represent a 33%-53% upside potential to its current share price.
Should the cost reduction program fully materialize, the share price might even go higher. However, beyond that 2-year timeframe, the investment thesis should be reexamined.
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⚠️ Disclaimer : We are personaly long Sabre shares. This analysis analysis should not be interpreted as investment advice. Before investing in a stock, we recommend you conduct your own due diligence and you will find below some links to help you get started. Growth stocks, and especially small cap stocks, can be very volatile and risky. Everyone should invest in accordance with own risk tolerance and financial objectives.