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

Shares - - CONTENTS -

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.

EARN­INGS PRO­FILE

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.

COM­PANY STRAT­EGY

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.

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