Global Blue Q1: Strong FCF Generation Prepares to Accelerate Deleveraging (NYSE:GB)

investment thesis

In my previous article covering Global Blue (NYSE: GB), I assigned a Buy rating to the stock as I found its valuation to be very attractive given the company’s dominant market position. as solid growth outlook and room for improvement. Its latest earnings results prove that my original thesis remains on track as the business begins to demonstrate strong operating leverage, leading to substantial growth in its FCF, which in turn accelerates reducing the company’s leverage. Although I was initially skeptical about the acquisitions made by management to expand the product suite, they have now started to have a positive impact on the company’s bottom line. The valuation remains modest at an adjusted EV/EBITDA multiple of 8.4, and I’ve outlined why I believe there is further upside to the current share price. Accordingly, I maintain my Buy rating on GB stock.

Key takeaways from Q1 earnings 25

Global Blue reported a 25% year-over-year increase in revenue for the first quarter ended June 30, 2024. This strong growth was primarily attributed to the APAC region, where revenue grew 109% year-over-year, Japan contributing 67% of revenues. from the region, up 172%. A key factor driving this growth was the weakening of the Japanese yen against currencies such as the Chinese yuan, making it a more attractive travel destination. Meanwhile, growth in Europe was up a steady 19% year-on-year, with notable weakness in France due to the Olympics. Commenting on this, the company’s CEO stated:

And you can see that the main element in Europe in July versus Q1 was France’s weak performance at minus 2% versus 10% growth in Q1, which is really explained by the negative pre-Olympic impact from Paris basically for almost 10 days Paris. it was completely empty before the Olympics. Clearly, the Olympics were positive, but we will see that impact in August.

In Q2, I expect growth in Japan to moderate given the recent strengthening of the yen. However, growth in France should pick up from August, which should help support global growth.

As shown in the image above, Adjusted EBITDA increased to €43m at a margin of 36.5% as the business shows strong operational leverage with 65% of incremental revenue reaching the bottom line . In particular, the company’s new post-purchase solutions (PPS) contributed positively to adjusted EBITDA. Despite posting strong Adjusted EBITDA, FCF this quarter was negatively impacted by higher interest expense as a result of the company’s debt revaluation late last year. As shown in the image below, interest rates on the Revolving Credit and Senior Debt Facility (RCF) are now considerably higher than last year. However, annual interest expense is expected to be €45 million compared to €50 million last year, as interest costs should gradually decline in the coming quarters as management allocates FCF generated by company to reduce leverage.

Thoughts on Evaluation

Management’s guidance for FY25 calls for adjusted EBITDA to exceed €200m as shown above. With the company’s TTM Adjusted EBITDA already at €205m, I expect FY25 Adjusted EBITDA to be closer to €210m. This translates to approximately $231 million, assuming an exchange rate of 1 euro = 1.1 dollars. With interest expense and capex expected to total around €90 million (or $99 million), FCF is likely to be around $132 million.

At the current share price of $5.6, the company has a market capitalization of $1.4 billion. Considering its net debt position of $550 million, its enterprise value is $1.95 billion. Therefore, the stock currently trades at adjusted EV/EBITDA and EV/FCF multiples of 8.4 and 14.7, respectively. I think the valuation looks optically more expensive due to the company’s high debt and associated interest costs. As the company continues to deleverage through FCF generation, I expect its valuation multiples to narrow sharply. For example, when removing cash interest payments, FCF will be closer to $181 million, which translates to a Price/FCF multiple of just 7.7.

As a payment processing company, Global Blue has incremental margins of nearly 50%, meaning FCF growth should be significantly higher than revenue growth. Peers such as Edenred ( OTC:EDNMF ) and WEX ( WEX ) typically trade at high double-digit FCF multiples despite slower growth than Global Blue.

Why I remain bullish on GB shares

As I described previously, I continue to see room for further growth through significant FCF growth as well as multiple expansion. Besides the valuation, there are other reasons I’m bullish. Management continues to prioritize debt repayment using FCF generated from the business. This will gradually reduce the company’s interest costs and improve the overall financial strength of the company. More importantly, this means that management is unlikely to use cash for acquisitions, which I highlighted as a potential risk in my previous article. In addition, management has now approved a $10 million share repurchase program, which I consider a prudent move given the circumstances in which the stock is traded.

The company’s monthly tax-free shopping for July and August continued to show strong in-store sales growth, particularly in Asia. Therefore, the company’s earnings in Q2 are likely to continue the momentum from Q1, giving me confidence that full-year earnings will comfortably meet my expectations. However, given the macroeconomic backdrop where luxury brands such as LVMH ( OTCPK:LVMHF ) are reporting declining year-over-year sales, they maintain a degree of caution.

Risks to consider

The company is sensitive to global travel demand and luxury shopping spending. A deterioration in the macroeconomic environment could impact growth and profitability prospects, while also influencing the deleveraging timeline. Given that its debt doesn’t mature until 2030, I don’t see this as a significant risk to the company’s financial health.

While not a risk to the business, the low liquidity of its stock is something investors should be aware of. As shown above, the public float represents only about 12% of its outstanding shares, which has led to low trading volumes and high volatility in its share price. The company’s buyback program should provide more stability and support on the downside, especially given the company’s latest announcement of a potential sale of shares from private shareholders.

Conclusion

I remain confident that my initial thesis on this investment is playing out well, as the company is demonstrating solid growth while generating strong FCF, which is vital to continuing to reduce its debt levels. Despite the recent rally in the share price, I still see upside as the business enjoys strong operating leverage, which should drive investor returns through higher earnings as well as margin expansion. Therefore, I maintain the Buy rating.