Sabre: Investors Continue To Experience Liquidity and Economic Turbulence; Shares Cheap

Narrow-moat Sabre’s SABR shares trade at a 70% discount to our $10.50 per share fair value estimate, which we believe is primarily due to liquidity and near-term economic growth concerns (our 2023-25 sales and EBITDA projections are near FactSet consensus). Our base case remains that Sabre will be able to service and refinance its debt obligations, barring a severe and prolonged recession or tightening in credit markets. But we aren’t blind to the fact that the current environment is ominous, as reflected by our Very High Morningstar Uncertainty Rating.

Sabre ended March with $838 million in cash, and we project positive free cash flow in 2023 (ex. restructuring costs). We estimate Sabre’s EBIT interest coverage ratio to be near zero for the year. We then expect its coverage ratio to improve toward 1 and near 2 times in 2024 and 2025, respectively, driven by gradual recovery in air booking volumes to 71% and 80% of 2019′s level in 2024 and 2025, respectively, from 64% in 2023. If, instead, a severe recession causes Sabre’s overall travel volume to sink 20% in 2024, its coverage ratio in 2024 would turn slightly negative in our model, although the company’s cash position should be able to handle the shortfall. In short, we see Sabre as able to service its debt obligations even in a more challenging 2024 demand landscape, which we do not see as likely. We think Sabre will be able to refinance its $2 billion in debt scheduled to mature in 2025, but if forced to raise $2 billion in equity at $3 per share sometime in 2024, it would reduce our $10.50 per share valuation around $5 per share, all else equal. That said, we take solace that Sabre was able to refinance $1.3 billion in debt during 2022 at rates between SOFR +4%-5%. Sabre also accessed $555 million in new debt at a rate of 11.25% last December. If Sabre refinances all its maturing 2025 debt at a 12% rate, it will lift its total interest rate to 10% from 8.5%, still leaving a coverage ratio near 2 times in that year.