Hostelworld Group Plc

Hostelworld Group Plc (LON: HSW) is an FTSE All-Share listed Company, which is engaged in online hostel-focused booking platform internationally. It was founded in 1999, and presently, it connects with 17,700 hostel properties in more than 179 countries.

Rationale for Valuation – Sell at GBX 52.00

• The Company’s profitability margins and Return on equity remained in the negative zone from the last two periods.
• The stock has underperformed the index (FTSE All-Share) during the last year period and delivered a negative return of 64% in the last year.
• As travel restrictions have tightened globally, HSW saw demand level off and decrease in bookings at the end of August 2020.
• The outlook for the travel industry looks dim for the rest of the year. Therefore, the Company expects any recovery to be muted.
• The Company’s EV/EBITDA, Price/Earnings and Price/Cash Flow multiples are in negative zone as compared to the industry multiples.
• From the technical standpoint, the 100-day simple moving average price is currently at GBX 63.53, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company is exposed to the foreign currency risk since its primary operating currency is Euro, and the strengthening of the US dollar can cause a financial risk.
• The performance is also exposed to negative economic growth, rising unemployment rates, weakening currencies, and higher taxes or tariffs.
• COVID-19 pandemic associated restrictions will continue to impact the demand in the short-term.

Trading Update (as on 15 October 2020)

• The Company witnessed a modest recovery in domestic bookings in late June 2020 and short-haul bookings into Europe in July 2020 and early August 2020.
• However, at the end of August 2020, the Company has shown a deterioration in bookings and demand level off, due to the tightening of travel restrictions globally.
• Led by adverse foreign exchange movements, it also saw a greater than expected decline in ABVs.
• On 9 October 2020, the net cash decreased to €22.6 million as compared with the previous period (30 June 2020: €29.4 million) and is expected to reduce further in the last quarter.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

For the rest of the year, the Company believes that it does not expect an improvement in the macro travel environment. Hence, the Company’s recovery will be muted until the normal travel patterns resume.  Based on the uncertainty and the current visibility of forward-looking bookings, HSW expects full-year net bookings to be in the range of 20 - 22% of FY19 and net revenue to be in the range of 16 - 18% of FY19. The prolonged impact of the COVID-19 outbreak continued to affect its financial results, plans, operations, outlook, goals, reputation, liquidity and stock price. The profitability margins have remained stagnant or declined. Moreover, the US dollar appreciation can further translate into unfavourable operating results.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Hostelworld Group at the current price of GBX 52.00 (as on 15 October 2020, before the market close at 8:05 AM GMT+1), while we will look forward to reinvest at the right time when the market dynamics become favourable.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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