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It’s not usually I see a small cap on the FTSE All-share index get tipped by big-name brokers like Deutsche Financial institution. However this up-and-coming Dublin outfit has been popping up on my radar all week, so I needed to get the lowdown.
Hostelworld Group (LSE: HSW) is a youth-focused journey firm based mostly in Eire with a tiny £168.7m market cap. Up by solely 2.2%, development this yr has been gradual. But brokers instantly determined it was the inventory of the week.
I’m on a mission to search out out why.
A small participant with a far-reaching impression
Though small in measurement by inventory market requirements, Hostelworld is wildly widespread among the many travelling youth of right now. It’s one of many largest hostel reserving apps on the planet, with 16,500 listings in 180 international locations globally.
Earlier this week, I seen three main brokers had put in ‘purchase’ rankings on the inventory. These had been Deutsche Financial institution on 12 October and Shore Capital and Canaccord Genuity, three days later. For such an unknown small-cap share, that caught my consideration. I discover it uncommon for prime brokers to tip small-cap shares.
Constructive outcomes
The explanation rapidly grew to become apparent. On 8 October, Hostelworld launched a optimistic earnings report for the primary half of 2024, with web bookings up 9% yr on yr and an 88% enhance in adjusted EBITDA. The corporate’s social community continues to carry out nicely, contributing to a major discount in advertising bills as a share of income. Regardless of a slight decline in common web reserving worth, it stays assured in its enterprise mannequin and future development prospects.
This sturdy monetary efficiency, coupled with its distinctive market place, is probably going a motive for the sudden curiosity from brokers.
Dangers and ratios
The web journey market is very aggressive, with gamers like Reserving.com and Expedia providing comparable providers. Elevated competitors might result in value stress and lowered market share. Moreover, financial downturns can negatively impression journey spending, resulting in decrease demand for hostel lodging. This might adversely have an effect on its income and profitability.
Checking like-for-like metrics, Hostelworld seems to outshine Reserving.com in terms of worth. It has a trailing price-to-earnings (P/E) ratio of 13.2 in comparison with Reserving’s 29.1 and is undervalued by virtually 60%. Reserving is simply undervalued by 40%. Airbnb, one other competitor, has a P/E ratio of 17.
Moreover, its steadiness sheet is squeaky clear, with no debt, €5m in money, and €62m in fairness. Reserving.com, alternatively, is drowning in $16.8bn of debt and has destructive fairness. After all, it’s lots smaller than most of its opponents so these comparisons must be taken with a pinch of salt. On the plus facet, low-cap shares often have the potential to make bigger positive factors as the worth is simpler to maneuver.
My verdict
I feel Hostelworld, as a frontrunner in a distinct segment market with no debt and powerful earnings, might develop to turn into a key participant within the journey business. There can be some hurdles alongside the way in which and sudden journey disruptions are a key danger to contemplate.
Total, I feel its prospects look nice. If journey continues to develop unhindered, it ought to have a vivid future. Sadly, it isn’t listed on my dealer platform but in any other case I’d purchase the inventory right now.
