On the Beach is an online holidaymaker website established in 2004 by Simon Cooper. It controls 20% of online short-haul beach holiday market.
On the Beach IPO
In 2015, the company listed in the stock market, it did a placing of 52.1m shares at £1.84 per share. The Offer is expected to raise £90.2 million of net proceeds, of which £6.4 million is for the Company and £83.8 million is for selling shareholders.
Update on annual results
You can find the Preliminary Results HERE.
So, On the Beach reported group revenue rising to £83.6m from £71.3m, an increase of 17.2%. Profit before tax rose to £21.1m from £16.9m. Net profit grew by 26% to £18m.
It also announced an increase in dividend to 2.8 pence per share up from 2.2 pence per share, an increase of 27%. The dividend is covered over 4 times net earnings.
On the Beach has a valuation of £550m in the market, giving it a PE Ratio of 31 times earnings, slightly ahead of earnings and dividend growth.
More details and interpretation of today’s annual results are found in the following section below.
On the Beach Group in Numbers
I think investors like their information quick and informative. Below are some numbers you may find interesting:
-Cash in hand amounts to £33m, not £71.6m (as claimed on the balance sheet) because £38.5m is restricted cash under “Trust.” It becomes unrestricted when holidaymakers begin their travel.
-Cash in hand accounts for 6.3% of MKT. CAP.
-The company has a brand value of £23.5m, along with goodwill of £31.62m. Brand value depends on operational performance, same with goodwill.
-Their propriety website technology has a valuation of £13m.
-Marketing costs as % of revenue peaked in 2014 at 52.8%. Today’s marketing costs of £40.27m accounts for 48% of sales.
– On the Beach’s daily unique visitors increased by 13% to 66m from 58.1m. Five years ago, it was half that size.
Concern about On the Beach receivables and payables numbers
This could be my imagination, but On the Beach receivables and payables data doesn’t conform to the change in working capital movement in the cash flow statement.
Here is a “copy and paste” number from their balance sheet:
|Trade and other receivables||56,508||29,933|
|Trade and other payables||89,453||55,865|
|Corporation tax payable||2,406||3,647|
Now, look at the cash flow statement:
|(Increase)/decrease in trade and other receivables||(9,589)||247|
|Increase in trade and other payables||10,950||1,999|
Receivables didn’t increase by £9.6m. Instead, it rose by £26.5m. For payables, the balance sheet shows a net increase of £32.3m, instead, of increasing by £10.9m in the cash flow statement.
Also, they should have added a provision increase to cash flow of £7m.
The cash flow statement should look (approximately) like this:
1). (Increase)/decrease in trade and other receivables: (26,500);
2). Increase in trade and other payables: 32,300;
3). Increase in provision: 7,000.
(N.B.: Figures in 000’s)
Cash flow before working capital shows £28.5m, then operating cash flow should be approximate: £36.57m, instead of £25.1m and represent an increase from £20m last year.
The reason I’m mentioning this because, in their annual report 2016, the change in receivables and payables correspond accurately with its movement in the cash flow statement. Here is their Annual Report.
The movement in receivables and payables fluctuate wildly during the year because in their interim they report receivables amounting to £92m and payables at £114m. It makes this very hard for analysts to spot if they are artificially increasing sales through receivables.
On the Beach Operating Profit
Operating margin has rebounded as operating profit recover following the slump in 2014. Their latest result shows operating margin reaching 25.1%.
On the Beach Turnover and cash flow history
On the Beach see turnover steadily rising, but operating cash flow is struck around the same £20m level. I uncovered for this year, they understate operating cash flow.
Looking at their net borrowings, it improved from a combination of £6.4m raised from IPO and debt converting to shares. Now, it has net funds of £33m.
Risks and Outlook
There are quite a few risks investors need to worry about. Apart from website security and terrorism, as well as natural disasters, the two mains risk is a “Hard Brexit” and “Litigation with Ryanair”.
A hard Brexit might come without an agreement on aviation rights, therefore planes have no rights to fly to Europe. Although the risk is small if the event occurs then “it has a catastrophic impact on the business and the whole travel industry.”
Litigation with Ryanair is due to the air carrier attempts to stop online travel agents from booking and selling its flights. The company says if Ryanair prevails then it will have a material impact on sales and earnings.
Final Thoughts: On the Beach
It is hard to analysis where its market valuation should be, due to the volatility of the holiday sector.
But, at 31 times earnings I feel valuation level is fully priced in. However, since On the Beach has understated net cash flow, there could be some nice upside for shareholders.
We shouldn’t forget about the risks attached to On the Beach, especially the litigation from Ryanair that would have a material effect on earnings given the focus on short-haul flights from both organisations.
On the Beach is fairly valued in my opinion.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.