On The Beach Group PLC (LON:OTB) has a disruptive business model with a robust balance sheet, Jefferies said as it initiated its coverage of the stock with a ‘buy’ recommendation and a 500p target price.
Jefferies said the online beach holiday company’s earnings (EBITA) per customer is 44% higher than the average of rivals such as TUI AG (LON:TUI) and Thomas Cook Group PLC (LON:TUI).
OTB also sets itself apart from peers with a more flexible cost base and more consistent cash generation, Jefferies said, although the broker estimates that underlying EBIT margins are similar.
READ: On the Beach profits shine despite impact of hot weather and World Cup on demand
“In a challenging environment, a disruptive business model with a robust balance sheet and surplus cash generation warrants a premium versus peers,” Jefferies said.
Risks facing On The Beach
However, Jefferies said risks remain in the business model longer term due to fast-growing online competitors such as Love Holidays, which the investment bank thinks is making material progress.
Jefferies also sees the flight component of the business as a key margin risk. Other risks facing the business include airlines expanding package offerings, lack of content control, loss of discounting by hoteliers given no pre-payments, consumer downturn and Brexit leading to deferred bookings.
“However, we think that OTB's continued investment in technology, as well as growth into new products and distribution streams, will mitigate these risks over the short/medium term,” Jefferies said.
On The Beach enters offline market through M&A
In August last year, OTB announced that it had agreed to buy luxury holiday operator Classic Collection Holiday for £20mln. The deal sees OTB enter the offline travel booking market.
READ: On the Beach buys luxury holiday firm Classic Collection Holidays for £20mln
Jefferies estimates that management expectations imply a 1.9% market share for Classic Collection package holidays in the offline market by the fiscal year 2021.
“We view the offline market as ripe for disruption given tension between large tour operators and independents, as well as a regulation squeezing independent's margins,” Jefferies said.
“We also estimate that OTB will be sitting on 2.2x net cash (£120mln) by FY21E, leaving the door open to further M&A or distribution to shareholders.”
Jefferies thinks the company’s entry into the offline market and its push into long-haul travel will support growth.
Long-haul travel market 'attractive'
On the long-haul travel market opportunity, the broker believes declining fares, capacity growth and a focus on 'experience' travel provide an attractive backdrop.
“OTB can unlock the opportunity by converting current long haul traffic, developing hotel relationships and bringing the margin back into the airline segment of the package,” Jefferies said.
“Our scenario analysis suggests current website traffic looking for long haul holidays represents a £7mln EBIT opportunity, 23% of 2018 adjusted EBIT.”
In mid-morning trading, shares in OTB rose 0.7% to 442.5p.