Description

Note: Amounts above in Euros (reporting currency) except for Share Price, which is in Pounds

Summary

In the wake of the success of BenHillGriffin’s recent Expedia pitch and rhianik’s TRIP write-up, I wanted to posit an additional OTA idea seemingly left behind by Mr. Market that I believe will be a significant beneficiary from the post-COVID travel boom. 

Hostelworld Group plc (“Hostelworld,” “HSW” or the “Company”) is a small cap, UK-listed booking OTA focused on hostels. Hostelworld currently trades at ~6x 2019 EBITDA and a TEV roughly flat to where it stood 12/31/19 in contrast to nearly all other OTAs that now trade above pre COVID valuations. 

At current prices, I believe HSW offers a ~2x return over the next 2-3 years as travel snaps back (particularly among the Company’s clientele, which skews younger) and the Company’s multiple re-rates or is bought out.

Background

I will refer you to coyote’s2017 pitch for the Company’s history and a more fulsome business history to keep this succinct.

Hostelworld is the leading OTA among hostels worldwide with nearly 7 million bookings in 2019. Since coyote’s 2017 write up, the Company changed CEOs, hiring Gary Morrison from Expedia, who refocused the Hostelworld around a more mobile-centric strategy to improve the app booking experience, which contributed to some choppiness in its 2017 – 2019 financial results.

HSW is Euro-centric as roughly half of its bookings (by destination) are in Europe / the UK so it has been particularly hard hit by COVID restrictions / quarantines. The Company raised ~₤14mm of equity in June ’20 as well as €30mm of debt in February ’21 leaving it with €38mm of cash as of 3/31/21 compared to a monthly current cash burn of €1.6mm, which should enable HSW to make it to the other side of COVID under almost any currently conceivable circumstances. With that risk off the table, I believe HSW offers compelling upside to what I believe will be a post COVID travel boom.

Thesis / Why the Opportunity Exists

1.   HSW Has Good Product in Niche Where OTAs Provide Significant Value to Hostel Owners

The hostel market is extremely fragmented, with the largest consolidators owning less than 40 properties with most hostels still independently owned / unfranchised. As a result, at a blended ~16% take rate for 2019 for an incredibly fragmented customer base, I believe HSW provides good value to hostel owners.

In terms of its product / interface, I believe HSW compares favorably to BKNG. Below is a hostel specific search in Barcelona’s Gothic Quarter for a weekend in August to give an example, but in short think that Hostelworld tends to have more inventory than BKNG.

2.   Pent-up Demand Among HSW’s Customer Base

HSW’s customer base skews extremely young with roughly half of its customers 25 or younger. I believe this cohort is probably the most anxious to get back to travel once restrictions ease. Given this and the aforementioned choppiness in the Company’s 18/19 results, I think it is reasonable, if not, slightly conservative to believe that 2022 exceed those in 2019.

3.       OTAs have High Flow-Through Margins and 2022 Should Beat 2019

Prior to COVID, HSW had gross margins (net revenue minus marketing) of ~60%. As most other costs are relatively fixed (as are some marketing expenses), I estimate that ~70% of incremental revenue flows through directly to EBITDA. HSW also undertook a number of cost containment measures during the pandemic. Given this dynamic, I expect 2022 EBITDA to be greater than 2019 EBITDA.

4.   HSW is Cheap

At 7.5x TEV / 2022E Unlevered FCF, I believe HSW is unsustainably cheap. OTAs at scale generally trade at mid double digit EBITDA multiples due high FCF conversion and secular growth trends within travel. While I believe HSW certainly merits some discount to the BKNGs or EXPEs of the world given its lower growth, niche focus, I do not think ~6x EBITDA is appropriate (I model 8x in my Base Case, which I still believe is somewhat conservative given the free cash flow characteristics of the business).  

5.   Company Worth More to a Strategic than Standalone Public Company

Stating the obvious, HSW is micro-cap UK listed company so is somewhat of an orphan in the public markets. While HSW has very high penetration within its relatively small hostel niche market, there is not a whole lot of inherent growth. Consequently, HSW really has no business being public and makes more sense in PE hands (i.e., more leverage to juice FCF yields) or really in the hands of a strategic, like EXPE. I estimate that if EXPE (or another strategic) were to buy HSW at 8.0x pre-synergy EBITDA this would really look more like ~5.5x to the strategic buyer. Put simply, I think the Company is worth more to someone else than it is to its current shareholder base today.

Risks

1.       Prolonged European Lockdowns / Travel Quarantines

While I believe that HSW has more than enough liquidity to get through 2021 at the status quo, I do anticipate some recovery in 2H ’21 travel. To the extent that COVID travel restrictions in the EU continue into 2022, it would adversely affect my thesis.

2.       BKNG Improves Hostel-specific Product

While I think HSW currently has more hostel inventory than BKNG and arguably a better mobile customer experience, one should never underestimate BKNG as a competitor.

3.       Capital Allocation / Governance

While the CEO came from Expedia (what I believe to be the natural permanent home for HSW), without a large shareholder driving the bus, there is always the risk that management prefers a steady paycheck within a small public company vs a transaction that might be in the best interests of shareholders but put them out of a job

4.       ABNB

While Airbnb represents a threat to almost all established hospitality players and one could certainly argue that HSW’s young customer base would be more comfortable than older demographics in booking non-traditional accommodations, I believe HSW’s price point (think €15-20/night for a shared room) is less expensive than Airbnb. I think that HSW’s 22-year-old customers ultimately graduate to Airbnb in their late 20s / early 30s.

Catalyst

End of European travel restrictions

Buyout / Merger

 Time