Buy Hostelworld for the millennial appeal

The Dublin-domiciled company offers budget-conscious travellers the choice of over 36,000 properties in over 170 countries through its booking platform. Management is focused on growing the core Hostelworld.com brand, which following 13 per cent sales growth last year accounts for 93 per cent of total revenue, compared with 87 per cent a year earlier. Sales through other brands are falling and overall net revenue rose 10 per cent in 2017 on a constant-currency basis. 

The focus on the core brand is helping push down marketing as a percentage of net revenue, which fell from 41 per cent in 2016 to 38 per cent last year. Meanwhile, brand recognition has been improving, which has helped reduce the proportion of bookings that come from paid-for sources from 39 per cent to 37 per cent. 

At the same time as sharpening its brand focus, Hostelworld has been offering new booking options to boost growth. A non-refundable, lower-rate booking option was introduced last year and free-cancellation is now being introduced following a European trial earlier this year. 

While the higher booking rates from free-cancellation are expected to be earnings enhancing in the medium term, a downside (albeit a somewhat cosmetic one) is that revenue will not be recognised until the booking-cancellation date has passed, which will knock reported earnings this year (see table) but not cash receipts.

Hostelworld customers put down a deposit on bookings that represents Hostelworld’s revenue, with the hostel paid by the guest when they arrive. This model keeps working capital requirements low and cash conversion high (81 per cent of cash profits became free cash flow last year) and supports a generous dividend policy of paying out three-quarters of post-tax profit.

Investment in technology is important to keep up with the expectations Hostelworld's young tech-savvy clientele. Indeed, customers now do more than half their booking on mobile devices, although this tends to drive down nights per booking. To keep at the cutting-edge, the company has recently announced a €1m investment to open a technology development centre in Portugal. 

As attractive as the market opportunity may be, Hostelworld's business is not without risk. Activity tends to be seasonal, with the most bookings made between May and August, and only shortly before a trip. Currency is also an issue, with average bookings earlier this year adversely impacted. Meanwhile, external events can have a major impact on business – a decline in bookings following terror attacks in Paris and Brussels prompted a bruising profit warning in 2016. Last month's planned departure of chief executive Feargal Mooney after 16 years in the role is also of note, but his replacement Gary Morrison brings plenty of relevant experience from top management jobs at Expedia.