Good interims and an acquisition have underpinned prospects at On the Beach (LON: OTB).
Management describe the first half as ‘solid’ with revenues up 7 per cent and profits ahead 28 per cent. Booking growth strengthened towards the end of the period to March and this has continued. Accordingly the second half should produce a stronger performance, helped by favourable comparators and the fact that both airlines and hoteliers released capacity later than usual.
As an online travel agency which doesn’t own any inventory, the company is able to react quickly to conditions, managing its marketing expenses and volumes to optimise performance. On the Beach continues to take share from traditional packaged tour operators and the recently announced acquisition of Sunshine.co.uk will add further scale to the business. Being internet-based, the company has high operational gearing and margins improved 5 percentage points in the UK segment to reflect this. The business model continues to look very attractive.
Walking on Sunshine
Given the company’s sophisticated marketing systems and their success in acquiring customers, acquisitions aren’t required to keep the growth story on track. Sunshine.co.uk is costing £12 million and generated EBITDA of £1.6 million last year, so the price looks sensible and the deal will be earnings enhancing. It brings 200,000 customers to add to the 1.2 million being served by On the Beach and will no doubt benefit from access to improved technology post-deal. The real attraction though is likely to be the immediate boost to the scale of the group. This will further strengthen On the Beach’s hand in forming direct partnerships with hoteliers and other suppliers to raise margins.
Still a ‘Buy’
The shares have performed well after a period of scepticism relating to last year’s challenging conditions. The fact that On the Beach performed robustly in the wake of 2016’s terrorist events, sterling devaluation, and the disruption to the market from the failure of competitor Lowcost Travel, justifies the rerating. Following post-deal upgrades the shares trade on a current year p/e of 21, falling to 15.9 times in September 2018. This looks good value and they remain on the buy list.