On the Beach taps into resilient holiday demand

On the Beach (OTB) investors will be sipping their piña coladas by the pool with a smile as they pore over the online holiday retailer’s latest annual results. The shares were marked up by over 15 per cent on the back of surging metrics, as consumers continue to view holidays as “sacrosanct” despite cost of living pressures. And investors can look forward to the planned reinstatement of the dividend in 2024. 

The total transaction value (TTV) of sales booked surpassed £1bn to hit a record level, with improved consumer demand evident across the business. It wasn't a surprise that holidaymakers are continuing to shell out on overseas trips with On the Beach, based on the pre-close update in September and strong results of late across the travel industry, but trading impressed nevertheless. The group enjoyed a 32 per cent increase in TTV for value three-star holidays and premium five-star holidays, and a 74 per cent TTV uplift for long-haul. Summer passenger numbers climbed 13 per cent. 

Positive momentum has continued after the year-end. TTV has risen by over a quarter, and the forward book sits at record levels with winter TTV up by more than a third year-to-date.  

The closure of the small international business during the year looks like a sensible move, given On the Beach's struggles in Norway and Sweden because of pandemic headaches and airline failures. The big growth opportunity for the group is in the higher-value areas of premium and long-haul, in markets such as Dubai, where inroads are being made. 

Elsewhere, there was positive news on marketing spend. This is an area that investors have had reasonable doubts about, with concerns over the sustainability of potentially soaring costs as the group scales up in premium and long-haul. Marketing costs against revenue came in at 38 per cent, below the group's historic run rate of 40 per cent and down from 45 per cent last year. 

The shares are valued at eight times forward consensus earnings, a sizeable discount to the five-year average of 20 times. Shore Capital analysts pointed out that the group's valuation represents a big discount to the wider online travel sector, but also noted that there is "increased competition and potential medium-term structural risk" to consider.

While the shares remain well below pre-pandemic highs of over 600p, the group is making progress. With a strengthening balance sheet and double-digit revenue growth, we think the valuation offers an opportunity. Buy. 

Last IC View: Buy, 112p, 16 May 2023