MARKETS SPECTATOR: Wotif doubters

Wotif.com has this morning been downgraded by a couple of investment banks following yesterday first-half result. Goldman Sachs has cut the group to a sell recommendation from neutral and moved its target price slightly higher to $4.80.

The research houses downgrade was predicated on four concerns:

– The weak first-half result which has led to EPS downgrades in the vicinity of 9-10 per cent per annum, which would have been larger had there not have been a change to accounting methods.

– Increased competition, which Goldman thinks is starting to affect Wotif's market share.

– An increase in business reinvestment given the rising competition from much larger global peers.

– A full valuation given the stock is trading at a 12 per cent and 10 per cent premium to Goldman's target price and discount cash flow valuation respectively.

The signs of increased competition and the need for an increase in business reinvestment is a worrying sign to the broker. Goldman notes that despite the continuing migration to online bookings, Wotif.com's domestic room nights have reduced since the first half of fiscal 2010. It also highlights that market share loss in its international business has been heavier due to its lack of incumbency and advertising budget.

On the back of this, Goldman's sees a requirement for increased business investment which it views as necessary to protect the company's market position against large international peers. This is most likely the reason behind Wotif.com's most recent price increase. However, looking ahead the broker believes Wotif's ability for further increases will be limited by the competitiveness of the landscape.

Elsewhere, Credit Suisse also downgraded the stock to underperform from neutral, citing many of the same concerns as mentioned above.