Hostelworld - recovery potential? Gary Newman reviews...

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Although my main focus is in the oil and mining sectors, I do also follow quite a few shares which don’t fall into this category, with Hostelworld (HSW) being one of them. This Irish company has built up a business by acting as an online booking agent for hostels all over the world, and in the process has built up quite a following, with 2.6 million followers across social media, and over 77 million visits to its website and mobile app during the first half of 2019. The share price declined sharply in the latter half of last year, and although the preliminary results for 2018 seemed to be taken well by the market initially, the publication of the full annual report, including potential future risks, seemed to be taken badly and caused a steady drop from around the 250p area, with lows of close to 100p during October. The risk warnings within that report haven’t been the only factor though, as one of the major risks highlighted was actually playing out, with uncertainty over Brexit and the impact that would have on both the Pound and also the economy of the UK once we do exit the EU...

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The strength of the UK economy and our currency play a big part in the decision of people to travel abroad, even if it is just staying in hostels. In terms of currency risk, this works both ways as whilst a weaker Pound means less travellers from the UK going abroad, this business is global so it also makes it cheaper for foreign users of the website - which is available in 19 different languages - to come to the UK, although that does still only represent around 6% of total business. Overall, there is roughly a 50:50 split between bookings in Europe and the rest of the world. Looking back at the financial history of Hostelworld, it hasn’t really been growing as a business, with total bookings and revenue fluctuating up and down from period to period, and the most recent set of financials showed a reduction in both, although in terms of revenue, part of that was as a result of provisions being made for a new free cancellation policy. Revenue for H1 2019 was down by 9% to €38.8 million - but that does include a higher provision for free cancellations, at €4.4 million, and free cash flow also took a hit at €9.6 million for the period, compared to €13.6 million for H1 2018. So, on that basis alone things don’t look great, but if we go back through the accounts over a few years we can see that there have been similar dips in the past, often followed by a much better performance. So as long as what we are seeing now is just a temporary drop, rather than signs of a more prolonged trend, then I don’t see any major signs for concern at the moment. Whilst revenue has been decreasing, the company has also been making efforts to cut costs, with administrative expenses now down to just over €31 million - roughly 6% below those for the same period in 2018 - and although this may sound high, it is worth remembering that this company has over 300 employees.

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It is noticeable that pretty much all of the reduction in revenue has come from the European part of the business, whilst it is on a similar level to 2018 for North and South America, plus Asia, Africa and Oceania. So it is worth keeping an eye on factors which will further impact that area, either negatively or positively – with Brexit certainly being one of those. The last set of interims showed that it only managed to generate a small profit, but thanks to some deferred tax adjustments relating to a reorganisation of the group, it managed to show a total profit of more than €6.5 million, with EPS of €0.0682. Its balance sheet also looks healthy, with over €25 million of cash, no debt and a fairly small amount of lease liabilities – just over €1 million in current liabilities, plus a longer term liability of circa €3.8 million. It does have €17 million of trade payables, which seems high at first glance, but taking a closer look, €8.4 million of this is in the form of deferred revenue as a result of the free cancellation policy. A further €4.3 million relates to accruals and other payables, including a lease incentive. So, in actual fact, only circa €3.7 million actually relates to trade payables, and is easily covered by cash in the bank, plus the €1.2 million of trade receivables.

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Hostelworld also pays a decent dividend and despite the poorer performance in H1, it still returned €8.6 million via a €0.042 per share dividend – although that was down from €0.048 per share for the 2018 interim dividend. Based on that and what we have seen previously, I would expect a final dividend in the €0.07-0.08 per share range, giving a total for the year of somewhere around €0.12 per share. That equates to around 10p, and at the current share price gives a yield of around 7.3%, which is well worth having, especially as this is in addition to the growth potential for the share price. At its peak in early 2018, the shares traded as high as 420p - with the same number in issue as there are currently - and although it has bounced back a bit off of the recent lows, this could just be the start of the reversal of the downtrend if its next trading update, which I would expect towards the end of this month, shows any positive signs.

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Although of even more importance will be how the company performs post-Brexit, as that is one of the main risks here, along with any sort of worldwide economic downturn, and of course increased competition from other similar providers of this service. Any further significant cuts in the dividend also would not be taken well by the market. But despite the risks, I see a chance for this company to do well from the current market cap of £130 million, but we will need to see some signs of growth in revenue and profitability again, otherwise the current PE ratio of more than 23 times looks high, even allowing for the fact that it has only been listed for a few years, having raised €180 million for its IPO in 2015. There also seems to be a fair bit of movement recently in funds changing their positions here, with some reducing and others increasing – the largest holder of the shares is Miton with 12.75%, and over 63% of the shares are in the hands of various funds. So, if you’re looking for something a bit different which has the potential to see a decent share price rise, as well as providing an income via the dividend in the meantime, then this is definitely worth a look and I think it has the potential to see the share price recover back towards the recent highs. It is certainly one that I am keeping an eye on myself for a bit of diversity in my portfolio.

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Filed under: Hostelworld, Versarien, Lekoil, Bearcast, Mereo, Taylor Wimpey, PageGroup, Morrisons

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