On The Beach is a superb growth stock
The holiday retailer’s shares have doubled in the past two years and still have further to travel
Approximately 12m people book short-haul packages every year, a trend on which holiday seller On The
Beach (OTB) plans to capitalise by investing in technology to drive sales.
On The Beach is an online retailer of short-haul beach holidays. Its platform allows people to custom-build their own vacation by choosing their own flights, hotels and extra services.
Its shares are highly rated, yet we think that’s justified given the business is going through a period of rapid growth.
Pre-tax profit is expected to have jumped by 31% to £28m in the year to September 2017. Panmure Gordon analyst Mark Irvine-Fortescue forecasts £36.9m pre-tax profit in 2018, rising to £45.1m in 2019.
The recent performance has been boosted by the £12m acquisition of Sunshine.co.uk in May. That deal is earnings enhancing and provides access to an additional 200,000 customers, which the company believes will drive higher margins.
Based on the latest share price of 411.75p, On The Beach is trading on 18.1 times forecast earnings for 2018. Yes, that is a high rating – however you have to consider that analysts expect 29% compound annual growth
in earnings per share out to 2019. How many other highly profitable companies do you know are growing at that pace?
RECENT TRADING STRENGTH
Irvine-Fortescue says the company experienced significant growth for the majority of the key summer trading period and has strong forward momentum going into the new financial year.
On The Beach has also been gaining traction overseas with full year revenue growth of 48% in its international markets (Sweden and Norway), according to a recent trading update. That progress has given it the confidence to launch in Denmark early next year.
On The Beach has a slightly
different business model compared to many traditional travel agents. It does not own any planes or shops, resulting in lower costs and flexibility in how it pursues growth.
The company plans to make its website more personalised and provide more choices such as airports and hotels for a set price, which could improve conversion rates. Its goal is to encourage visitors to buy something when visiting its website, instead of simply browsing.
Numis analyst Richard Stuber is impressed by On The Beach’s ability to drive online traffic, citing an impressive 70m unique visitors to its website.
‘Rich content, intuitive platform design and personalisation encourages conversion; and its unique relationships with beach hotels coupled with volume, means it can secure exclusive terms to further drive margins,’ says Stuber.
Investec analyst Karl Burns agrees that focusing on innovation is the way forward, arguing that significant margin upside can be achieved from higher sales per booking via improved hotel content.
‘For a 2.7% per booking increase, we estimate that earnings before interest, tax, depreciation and amortisation (EBITDA) will increase by £2.3m,’ says Burns.
Another potential strategy for growth is entering the long-haul beach market, which management could achieve through acquisitions or organic growth.
IMPACT OF TERRORIST ATTACKS
According to On The Beach’s chief executive Simon Cooper, terrorist attacks are not deterring people from travelling abroad with demand particularly strong for destinations such as the Balearic Islands, the Algarve and Greek islands.
While he concedes the recent terrorist attack in Barcelona affected people’s willingness to travel, there was no ‘general lull’.
Cooper also believes that people are generally resilient to cutting spending on holidays thanks to On The Beach’s flexible payment model, which is helpful when inflation is on the rise.
COPING WITH AIRLINE SECTOR WOES
It has been a tough year for the airline sector, with Monarch entering into administration earlier this year and Ryanair
(RYA) cancelling thousands of flights due to pilot rostering issues.
Following Monarch’s fall, On The Beach announced a one-off exceptional cash cost to help customers organise alternative travel arrangements if they booked a flight with Monarch.
Most of the costs, estimated at £2m by Numis, will be covered by insurance and therefore is not expected to significantly impact the company’s outlook.
Investec says lost capacity from Monarch and Ryanair will be scooped up by other low-cost carriers, leaving seat pricing falling year-on-year, which will positively impact On The Beach as it makes travelling cheaper.
Numis says: Since listing in September 2015, On The Beach shares have more than doubled, materially outperforming peers such as Thomas Cook, TUI, Expedia and Priceline. On The Beach has proven the robustness of its business model over the last two years, with revenue and EBITDA growing by a compound annual growth rate of 22% and 33% respectively.