The Hostelworld share price (LON:HSW) fell over 15% in morning trade today as it released its preliminary results. We would instinctively think that travel-related companies may be badly hit by the ongoing coronavirus crisis. Whilst many companies have played a straight bat and given the ‘cannot be quantified’ statements, Hostelworld have been one of the first to put some numbers behind it.
Hostelworld are a well-known brand in the travel industry. They operate through three websites, the standard Hostelworld but also Hostelbookers and Hostels.com which were acquired in 2003 and 2013 respectively. As their name implies, they specialise in the booking of hostels around the world. They do not own hostels themselves, but rather act as an online booking platform. This has proven to be a solid enough niche in the same way that AirBnB have made private rental homes their own.
Shareholders may disagree, especially longer-term ones. Originally listed in 2015, the current share price is under half of its original price. 2017 was a better year for the Hostelworld share price as it surged to over 400p but a series of profit warnings has hit this badly. Even prior to the coronavirus news the share price was languishing away and had managed to almost halve in 2019.
What’s gone wrong at Hostelworld?
The bad news comes as Hostelworld reports its preliminary results. This covers the period of 12 months to 31 December 2019, so these numbers will not be tainted by recent events. There is a lot to pick through here but the key points are:
- Full year revenue declined by 2%, but H2 saw a pickup
- Average Net Booking Value increases by 3%
- Cancellations up sharply to 9.3m EUR (from 5.5m EUR)
- Operating costs flat, but marketing costs up to 41% of revenues
- Adjusted EBITDA falls 9%
Of real interest to investors was how the coronavirus was affecting the company, which offers hostels in every part of the world. The first part is as we might expect:
As the Coronavirus has spread from region to region, we have observed a material reduction in bookings and an increase in marketing cost as a percentage of net revenue. This has been driven by a significant reduction of bookings from free channels, an increase in longer lead time cancellations across all channels and an increase in investment in paid channels to partially offset the bookings decline in free channels.
Fair play to the company for having a go at quantifying what this may mean:
Given that the depth and duration of the virus outbreak is impossible to forecast at this time, we are unable to calibrate its effect for the balance of the year; however, if near term trends were to persist to the end of March we estimate the impact to EBITDA to be in the range €3m to €4m for Q1’20. With continued tight cost control and our strong cash generative characteristics, the Group remains resilient in volatile market conditions.
This is a significant hit considering that adjusted EBITDA came to 20.5m EUR for the whole of 2019. And arguably the effect of the virus is fat-tailed. Even if it the outbreaks cease this week (this seems unlikely) the fear of travelling may persist for some time. And with hostel bookings of lower value than hotels, this may lead to them being more disposable.
Hostelworld: Where is the growth?
Originally IPO’ing at 185p, Hostelworld had an exciting future. The public offering raised 180m EUR for the company as it sought to grow further and grow revenues. As we can see from the subsequent results, this clearly has not happened:
Revenue has stayed pretty flat at around the 80m EUR mark, and this in an environment where costs are increasing. A look at the cashflow chart also reveals that the raise didn’t really prioritise growth: the bulk of the funds were used to clear past debts. Additionally heavy dividends were also paid out. Some 62.7m EUR in cash has been repaid to shareholders since IPO. With relatively little investment in their products, it is not a surprise that things have not moved on.
There is a large gap between the statutory profit and the company preferred measure, adjusted EBITDA. The acquisitions have led to a large goodwill and intangibles balance on the Hostelworld balance sheet. Some 12.2m EUR of intangibles was amortised over the year. Curiously, domain names are the main intangible asset and are amortised on a period of 8-20 years. Given that the carrying value of these names is almost 100m EUR, there is still some way to go.
Either way, the effect of this means that Hostelworld generates far more cash than its statutory profit implies. The cashflow statement from last year is quite explicit on this: cash balances increased by over 4m EUR despite paying out dividends of over 16M EUR. That dividend policy has changed since today’s update and the current year total is 8.4c.
There is no debt at Hostelbookers and the company has a net cash balance. The large cash pile as we can expect balances out current liabilities and more, so there is not an urgency about the situation, just yet.
A watermark for revenues
Whilst depreciation of intangibles is not an immediate cash cost, the expenses the company incurs are. From the annual report these are detailed as such:
It does not seem likely that many of these will be that variable, at least in the short term. These form the major chunk of expenses for the company (dividends being discretionary and being variable with profit). It would take a very large downturn in bookings to wipe out revenues, although this may not be totally discounted yet at this stage.
Is the Hostelworld share price good value?
Hostelworld has been a cash machine in the last few years, paying back most of its profits back to shareholders at the expense of investing in projects that would allow it to grow revenues. As a result, the Hostelworld share price has pivoted to a much lower value. Today the market cap is £89m sterling, which is quite impressive if we may assume that the coronavirus is a blip and that things end up being how they were.
There are some obvious threats on the horizon for Hostelworld. It is certainly feasible that in future the traditional travel portals end up featuring hostels as well. If tourism drops permanently it may be the case that hotel prices at the low end drop, which devalues some of the hostel advantage. It is easy to see hotels in affected countries price aggressively in the short-term to try and win back custom.
There may also be the case that the hostel trend, which involves sharing a room with many strangers is devalued itself and the health aspect means that people would be willing to pay the premium to have a room on their own on health grounds.
The lack of growth in some aspects is a self-inflicted error. Dividends were paid out, and as the CEO said in the last report they suffered from underinvestment. Static revenues is not so much because of the market, but because competitors were gaining their share. It is fairly easy to search for a hostel on Booking or Trivago after all.
The intent has changed with a new ‘Roadmap for Growth’ and a cut in dividend. Details on this are scant, but with a focus on ‘multi-destination’ customers there may be scope for expansion into more activity-type holidays. The site also promises ‘improved localisation’ although what this means and whether it’ll be costly to implement is not yet known.
Given the strong balance sheet and strong cash generation I am quite bullish on Hostelworld despite the bad news flow against it. It has realised it needs to evolve a little which is better late than never. I do believe the impact of Coronavirus will be worse than the base case they have given though, and a better entry point will exist. 4/5.