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We believe the market is starting to regain confidence in the stock following earlier trading blips
Online beach holidays retailer On The Beach
(OTB) is looking more attractively priced with its shares currently trading 22% below their one-year high of 650p.
The shares were hit earlier this year as the market correctly predicted that trading would be hit by the hot summer weather making people less interested in booking an overseas holiday.
Half year results in May also disappointed the market with earnings hit by the collapse of Monarch airlines which impacted seat capacity.
We only see these issues as a temporary blip and would urge investors to look at the company’s longer term track record of generating value. It has grown consistently ahead of the market, increasing its share from 9% to c22% of the beach holiday sector since 2011.
On The Beach allows customers to package their own holiday by picking their own flights, hotels and transfers via its online platform. Every year, over 1.5m customers use the company to plan their beach holiday.
One of its advantages over rivals is a lack of inventory risk as the company never speculatively pre-buys hotel beds or flight seats.
In May, Numis analyst Richard Stuber said On The Beach’s business model benefits from structural growth in dynamic, short-haul package holidays, its lean cost base and its market-leading, personalised product. ‘Earnings levers include greater directly-contracted beds (up to 68%), and strengthening airline distribution agreements,’ he added.
Berenberg analyst Owen Shirley argues investors are giving ‘virtually zero value’ for the international rollout in Sweden, Denmark and Norway with positive news involving these geographies potentially acting as a share price catalyst.
He likes the recent acquisition of Classic Collection, a business-to-business distribution network which sells premium holidays for an average £1,750 per person. Most of the holidays are sold through third party independent travel agents.
Across the industry, over 5m holidays are sold offline with 3m of these sold by independent agents, offering a new growth opportunity for On The Beach.
Classic Collection is expected to be loss-making near-term due to launch costs of putting the proposition on the acquirer’s technology platform but is forecast to reach £2.5m to £3m in earnings before interest, tax, depreciation and amortisation by 2021 according to Numis.
Berenberg’s Shirley believes Classic Collection has the potential to scale very quickly, which could make current assumptions look ‘highly conservative’.
He currently forecasts £33.6m adjusted pre-tax profit in 2018 (2017: £28.5m), rising to £41.2m in 2019 and £49.6m in 2020. (LMJ)