Last Friday, ASW reported H1 results with muted profitability, as expected, due to P&L effective investments into R&D, setting the grounds for positive inflections in FY’25e.

Slow sales growth against a strong comparable base: Sales grew by 2% yoy to CHF 11.8m, as H1'23 saw a strong recovery post COVID (+55% yoy), serving as a tough comparable base. Nevertheless, ASW showed the ability to sustain the elevated levels. The strong demand for First Class and More (FCAM) has weakened, but has been compensated by upselling customers to travel services (e.g. hotel bookings up 34% yoy), indicating a shift within the Services segment (overall: +2% yoy; 35% of sales). Also, ASW's legacy business (Subscription segment) grew slightly by 3% yoy (65% of sales) due to unchanged demand for Prestige and Signature Memberships.

EBITDA muted due to P&L effective investments: as expected, EBITDA came in muted at CHF 0.9m (-10% yoy; 8% margin) due to the weak segment EBITDA in the Subscriptions segment of CHF 0.3m (-48% yoy). This is due to (1) increasing R&D expenses (i.e., investments) into a rebranding and the platform preparations for the free membership starting in Nov' 24e and (2) increased competition for the miles packages. On the other hand, the Service segment has improved profitability substantially by 55% yoy to CHF 0.6m segment EBITDA, which is due to the improved mix mentioned above, thus partially offsetting the decline in the Subscriptions segment.

Weak H2 ahead: Although ASW reached already 90% of its FY'24e EBITDA guidance of CHF 1.0-1.2m in H1, we do not expect H2 profitability at this runway, but an even more muted H2 EBITDA of only CHF 0.1m due to increased investments (R&D expenses), implying a FY'24e EBITDA estimate of CHF 1m (4% margin).

Light at the end of the tunnel: The strategic rationale of offering low entry barriers to the ASW ecosystems should start to bear fruit in FY'25e. By adding a free membership (start in Nov'24), more mass-affluent ASW members are prone to the higher margin Service segment which offers all kinds of luxury travel services. Moreover, upselling potential to the premium memberships (Subscription segment) also increases with a greater community. Therefore, we expect a strong EBITDA (and FCF) rebound in FY'25e due to a higher margin product mix and lower R&D expenses.  - continued -

Cash flow down only temporarily: H1's CFO of CHF -0.6m was burdened by an unfavorable timing of WC swings (CHF -1.7m), as a high build up in receivables towards end of June tied up cash. However, this should have already reverted back, supporting a positive CFO of 1.8m (eNuW) in H2 and thus CHF 1.2m for FY'24e.

Debt level substantially decreased: Following last year's debt-to-equity swap, ASW continued to decrease debt by CHF 1m to CHF 3.2m in H1. As FCF was negative in H1 (described above), the disposal of obsolete financial assets (CHF 1.2m cash inflow) has been used to repay COVID related government loans of CHF 0.8m. Consequently, net debt remained stable at CHF 1.2m per H1 vs. CHF 1.1m Y/E'23 and the equity ratio increased by 4pp to 32.6% per H1.

While we regard FY'24 as a transitional year burdened by the strategic change in business model, we expect positive inflections to stem from this as early as FY'25e. Consequently, on FY'24 financials, ASW shares do not seem to be attractive, however, on a FY'25e basis, ASW shares offer an attractive FCF yield of 13.5%.

Against this backdrop, we reiterate our BUY recommendation with unchanged PT of CHF 4.30, based on DCF.