Fitch Ratings has revised the Outlook on
The Positive Outlook reflects eDreams' deleveraging and strong operating performance, confirming the company is on track to deliver on its targets for the fiscal year ending
The 'B' rating continues to reflect eDreams' good brand recognition in
Key Rating Drivers
Software Development Costs Expensed: We believe that eDreams' credit profile needs to be assessed considering an EBITDA adjustment for capex, which is related to capitalisation of internally-developed software and mostly consists of personnel costs. These expenses are aimed at improving eDreams' online platform to further drive business growth. We adjusted EBITDA by treating 80% of capex as operating expenses.
Strong Performance: eDreams outperformed our rating case in FY23, with Fitch-adjusted EBITDA reaching
Sector Recovery Continues: eDreams' performance benefited from the change in the business model and the post-pandemic recovery in travel and we believe that sector fundamentals remain supportive for the business in 2024. Fitch expects EMEA air travel volumes to increase by around 9% in 2024, fully recovering to 2019 levels, and then grow at 3%-5% per year. eDreams' business is not prone to inflationary pressures, with personnel costs the only cost item that is subject to inflation.
Execution Risks from Transitioning Strategy: eDreams has made significant progress in its business model transition into the first subscription model for the travel industry, with 5.1 million prime members as of end-2QFY24. However, the company's product offer and travellers' response to this proposition are still evolving and we see execution risks in its strategy to increase market penetration and maintain the pace of net new subscriber additions as churn rates are high.
'B' Category Business Profile: We view eDreams' business profile as in line with the 'B' category. This considers its relatively small business scale (measured by EBITDA) and concentration on flight ticket sales, balanced by its brand recognition in
Fast Deleveraging: We expect eDreams' EBITDA leverage to fell to 4.9x in FY24 (FY23: 7.1x), before dropping below 4x in FY25, well below our positive rating sensitivity for an upgrade to 'B+'. We believe the company may continue deleveraging in FY26-FY27, if it manages to maintain its new subscriber additions at a similar pace and does not materially allocate its capital to shareholder remuneration or bolt-on M&A. Clarity of the company's targets beyond FY25 will be important to determine the leverage profile in FY26-FY27.
Cash-Generative Business Model: eDreams operates an asset-light business model with a majority of its costs being variable and mostly consisting of customer acquisition, merchant, IT and call centre costs. The business also has limited capex requirements, resulting in positive FCF generation, which favourably differentiates eDreams from other 'B'-rated peers. We project eDreams will sustain positive FCF over the medium term, assuming a continued growth in the prime business and neutral changes in working capital (after adjusting for deferred prime revenue).
Strong Positioning in Competitive Market: The global online travel agent market is characterised by low switching costs and intense competition from bigger and more diversified operators, metasearch sites and the direct channels of airlines and hotels, making industry players more vulnerable to higher customer acquisition costs and rates of churn.
However, the highly fragmented travel industry in
Derivation Summary
eDreams lags global online travel agents
Compared with other-subscription-based businesses, such as gym operators, eDreams bears higher business risk in view of its less sticky customer based and more discretionary product. Fitch rates eDreams at the same level as
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue from non-prime business reducing to around 20% of total revenue by FY27
Addition of 1.4 million new prime subscribers in FY24
No deterioration in churn rates and increasing share of subscribers that stay with the company for two and more years
Stable working capital (after adjusting for changes in deferred prime revenue)
Fixed costs at
Capex of around
No bolt-on M&A
No dividend distributions
Recovery Analysis
KEY RECOVERY RATING ASSUMPTIONS
eDreams would be considered a going concern in bankruptcy and would be reorganised rather than liquidated; we have assumed a 10% administrative claim in the recovery analysis.
Fitch assumes a going concern EBITDA of
We assume a 5.0x distressed enterprise value-to-EBITDA. The distressed multiple reflects a weaker competitive position than global leaders and represents around 50% discount to the current trading multiple.
These assumptions result in a distressed enterprise value of about
Based on the payment waterfall, we have assumed the group's
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Successful transition to a subscription model, reflected in stable or decreasing churn rates of prime members and sustained profitability improvements
EBITDA leverage below 4.5x on a sustained basis, supported by a consistent financial policy
FCF margin in the mid- to high- single digits
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Increasing churn rates or diminishing share of prime subscribers that have been with the company for two and more years
EBITDA leverage above 6x on a sustained basis
Increased volatility in profitability
Liquidity deterioration, leading to cash drawings under the RCF
Liquidity and Debt Structure
Satisfactory Liquidity: As of
Issuer Profile
eDreams is the world's leading travel subscription platform and one of the largest e-commerce businesses in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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