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Hostelworld

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Topidiotboy
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Hostelworld

#76524

Postby Topidiotboy » August 23rd, 2017, 1:04 pm

I am in Hostelworld from 160p. The share price felt like unbelievable value compared to fundamentals at the time, and is now at approx 338p, so has worked out very well for me.

I'd bought it and not paid much attention since, but the half year report has re-awoken my interest. It’s not the spectacular value it was when I bought it, but it still feels like the best bargain to be had amongst the shares I track.

NB I have used Euros at an exchange rate of 1.11 for my calculations.

I estimate Free Cash flow to come in at ~25m euros, against an Enterprise Value of 340m euros, so a 7.11% fcf/ev yield. It is forecast to pay a dividend of 4,2%.

What makes the share so appealing, is that it feels like a Rightmove of the future. Here is my understanding of its appeal:

Hostels are a highly fragmented business. Some of the largest operators such as Safestay and Generator only have about a dozen hostels each, whereas the Hostelworld site lists over 32,000 I believe.

Its business model is that for any booking, it takes a deposit from the purchaser, who will settle the balance with the hostel at the beginning of their stay. Hostelworld keeps the deposit, and this forms the charge to the hostel. Even if the customer does not turn up at the hostel to take their stay, they cannot get their deposit back.

The likes of Expedia etc cannot compete, because hotels have a very different way of managing beds to hostels. In fact Hostelworld have considered using their platform to expand into hotels, and found that it does not really work. The inverse is also likely to be true of hotel booking sites who try to advertise hostels. In fact if the big OTA’s wanted to get into this market, the most sensible strategy would be to buy out Hostelworld rather than start from scratch.

Its scale means there is no real alternative to Hostelworlds, so it does in effect have a monopoly on the online hostel booking market.

Because of its deposit based charging structure, as hostel prices increase in line with inflation so will the commission that Hostelworld takes. In the half year report 3% of revenue growth was attributed to this inflationary effect. Therefore the business model is such that with no growth in the number of bookings, prices can rise in line with global inflation.

However, there is scope for growth in bookings, and all the evidence points to the fact that demand for hostels is growing at a fair old click.

To summarise, the shares are cheap on a Free cash flow/Enterprise Value compared to the wider market, but the business is of a calibre that warrants it trading at a significant premium to the market. At this price it provides a nice market beating yield. It has fantastic ROCE, great operating margins, no competition worthy of the name and is in a structurally growing industry.

One thing to note here is that reported profits are significantly below free cash flow and have been since it came to market. This is likely to continue for a few years yet. This is largely due to the amortisation of domain names that the business owns. I can’t quite track the history of this from the reports, but I suspect it’s to do with the fact that it purchased competitors in the past and acquired these intangibles as part of the transaction. From a price to earnings perspective, it doesn’t look so good, but the free cash flow story provides a text book example of why one should not put too much faith in a single metric such as P/E.

I thought I would share this to get views of others who may have looked at it, and who can provide a more bearish view. I always like to balance my ideas with a bearish view, but with a small cap such as this I can find precious little comment from others on the internet, which makes me nervous that I may be missing something that is glaringly obvious to others.

The share is 3% of my portfolio now, and I plan to double it, unless one of you good people can persuade me otherwise.

dspp
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Re: Hostelworld

#76937

Postby dspp » August 25th, 2017, 8:33 am

This is an interesting one. I've looked through the recent reports and they've gone from loss making, via a equity issue, to profit. They are clearly in a growth stage. Divvis about balance cash generation. Nicely spotted.

So thank you. Regards, dspp

Topidiotboy
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Re: Hostelworld

#76955

Postby Topidiotboy » August 25th, 2017, 9:33 am

I have decided this morning to top up @ 318p. This is now 4.6% of my portfolio.

The price has fallen back from its 338p high, and may drift lower still, so I'm keeping some cash back in case a better opportunity arises ;)

jackdaww
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Re: Hostelworld

#77005

Postby jackdaww » August 25th, 2017, 12:28 pm

i also got into this just under 160p at a time i was looking favourably on neil woodfords picks.

so very pleased with its performance.

and dividends almost 9% not including the special .

having topsliced at365 , i may now buy in again .

hopefully a woodford blinder !

thanks to tib for the analysis.

a rare :D

pbyum
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Re: Hostelworld

#79538

Postby pbyum » September 6th, 2017, 5:34 pm

Also in courtesy of woodford, around 250s. Attracted by the surplus cash generation though growth seems pretty tepid, 2016 a rather low point for 2017 comparison. Hard to say without a longer listed history. However the financials look good, strategy also seems to make sense and like them giving cash back via the special rather than acquisition or other. Still, It is a small firm so my holding is speculative and correspondingly small.

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Re: Hostelworld

#96505

Postby markLDN » November 17th, 2017, 1:59 pm

Sometimes I think my investment brain is permanently turned off even though I read about investing ideas everyday. Thanks so much for writing this post and alerting me to the fact that Hostelworld is a public company.

What follows is my anecdotal experience with HostelWorld and some comments on the financials. It is a very lazy write-up but I hope it adds something to the conversation.

My first experience with booking hostels began with HostelBookers probably 10 years ago while in university and then at some point (probably after HW's buyout) I found myself using HostelWorld. However, I have been using it extensively for the last year as my girlfriend and I quit our jobs and travelled around the world. So that is my background. I note that had we invested when we first started using it in earnest our investment would have nearly doubled.

As a heavy user we are very happy with the product though certainly found drawbacks to how Hostels are rated and displayed - wished it to be more specific. But the important point you all probably want to hear is why we used HostelWorld as opposed to other services like Booking.com or AirBnB. The reality is that we used a combination of all of the above plus one more method. HostelWorld would be used initially to get an idea of what was available. We'd then check Booking.com to see alternatives and frequently found either a better priced option (we always targeted low-cost first over amenities) or the sometimes the same option. The benefit of using Booking.com over HW for the same hostel was that Booking.com didn't require a deposit (which gave us greater flexibility). A final technique of ours involved not booking anything at all and just showing up. In Central and South America (where we did all our travelling) you frequently found that there were hostels not listed on any website and these offered significant savings versus booking with HW (potential area for future HW growth).

To a lesser extent we used AirBnB, but it is still very much a competitor to HW as hostels do list on there to an extent. However the majority of listings are your standard type of hosts: owner-operated flat sharing or the less intimate "asset manager". We didn't go for these primarily because it required arranging a specific time to meet-up for the key exchange. In my opinion AirBnB is a confused business. It is not transparent whether you are booking into someone's apartment, a hostel, a hotel or an externally managed property.

Having spent the afternoon looking through financials and the prospectus, my thoughts are as follows:

Revenue Growth: I like HW because it focuses on the frugal traveller and I expect this area to grow, both in terms of more people converting to this lifestyle and more people desiring to spend their disposable income on experiences rather than consumer goods. Therefore I believe HW's future success relies on their ability to attract new customers to their platform through marketing and retain them through continuing improvements in the product. In terms of growth via expanding commissions I would propose caution as HW must not turn its suppliers off of the product given the wide array of competitors vying for their business. Furthermore, I don't see significant growth coming from market penetration - I don't see how you could compete in the hostel business in NA or Europe without already being on the platform and any unserved hostels in cheaper countries won't really add much to the top line. Revenue growth is backed up by inflation however and it's great that HW's commissions will grow automatically as hostel owners put up their prices. See Appendix 1 for some anecdotal comments on revenue from data I recorded while travelling.

Competition: AirBnB and Booking.com are definite competitors but HW is differentiating itself continually. I especially am interested in their app's new chat and notice board features. The ability to chat with other guests in the hostel you are staying at is very novel indeed and super valuable when trying to make new friends / organise outings. I would use the platform more for this feature alone if it requires a booking to access. The translation feature I am not so sure about as Google Translate pretty much owns the market here - I would worry about how much HW is investing in this product.

Future Tax Concerns: HW list in their prospectus a significant risk that tax law is changed such that services are deemed to have taken place in the country where the hostel is located and thus tax would need to be paid locally. I don't know much about taxing e-commerce companies but I know it gets talked about a lot these days and at present e-commerce companies are said to be in a grey zone whereby they are paying less tax than some believe they should be. This would have huge compliance and liability implications for a company like HW should the laws change.

Marketing: HW invests 40-45% of revenue in marketing, having steadily increased from 27% in 2012, by far its largest cost of doing business. I suppose this should be expected to stay high as long as the likes of AirBnB, Booking.com and other OTAs (Online Travel Agents) are spending huge amounts on their own marketing initiatives. I imagine though this number should come down as the company figures out the most effective means of getting new customers buying into the platform. It fell in the latest period so that is reassuring.

Dividend: What a great dividend, 4.1%! The payout policy is 70-80% of Profit After Tax and they grew PAT by 20% in 2016 after taking out IPO costs. They paid a special dividend in 2016 due to having excess cash on hand and I wonder if this should be seen as returning unused IPO capital rather than a sign of extraordinary cash generation. Can anyone comment?

Conclusion: I am going to open a very small position in HW and add to it opportunistically.

Appendix 1

As mentioned I have been doing a lot of travelling over the last year and kept fairly detailed data on where my money went. Looking at the file I was surprised to see that out of 190 nights of travelling in Central and South America we had only used HW to book 20 night's worth of accommodation, putting only £45 worth of deposits into HW's pockets. During the write-up of this post I asked my girlfriend why we didn't use HW more and we figured that we eventually ended up using it to discover potential places to stay but in the end would just arrive in town and ask around for the best price. Perhaps we are representative of a very small segment of traveller who always tries to get the lowest price. HW definitely wins out in terms of convenience offered but then again maybe it isn't the monopoly everybody thinks it is.

GrandOiseau
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Re: Hostelworld

#96513

Postby GrandOiseau » November 17th, 2017, 3:04 pm

They could do with monetising those walk in referrals but I am not sure if it's possible.

Maybe using a discount code (real or fake) that the punter needs to quote perhaps tied to an HW id. Otherwise just becomes a reference site like markLDN used it for mostly.

markLDN
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Re: Hostelworld

#96841

Postby markLDN » November 19th, 2017, 4:50 am

GrandOiseau wrote:They could do with monetising those walk in referrals but I am not sure if it's possible.


I think the key is enhancing the app such that it adds enough value to convince people not to do walk-ins (or use an alternative booking service for that matter). As mentioned, I think I am an outlier in terms of the effort I put in to save a buck so I don't think my behaviour is representative of the general traveller population. I am still travelling at the moment and will try out this new chat feature next chance I get.

Topidiotboy
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Re: Hostelworld

#131185

Postby Topidiotboy » April 10th, 2018, 1:29 pm

Full year results. Free Cash Flow has come in at 21.5m Euros. So at 3.75p a share, I make this a 5.61% FCF/EV yield. Factor in my previous comments and my faith in its ability to continue to grow thanks to its business model, and I feel that its still a low price. Some level of discount is warranted as its a small cap, but I feel that fair value is about the £4.50 mark. A nice dividend, and accumulation of cash on the balance sheet suggests there may be more special dividends in future.

This is one to keep an eye on, as the share price can be quite volatile, and the opportunity to buy at even lower prices may present itself.

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Re: Hostelworld

#168829

Postby WickedLester » September 25th, 2018, 1:48 pm

Does anyone know why this has fallen so far recently? I bought a few today for the dividend and cash flow. I can't imagine offering a refund for cancellations is a deal breaker.

It looks cheap to me. What do others think?

Lester

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Re: Hostelworld

#168862

Postby scottnsilky » September 25th, 2018, 3:05 pm

I've been dithering over Hostelworld myself, it's on a watchlist of mine and down 40% so far. No idea why, it seems a solid enough business. I think IC has it as a buy. Share price up a bit today though.
dp

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Re: Hostelworld

#179201

Postby Topidiotboy » November 9th, 2018, 2:34 pm

When I last topped up, this was 4.6% of my portfolio, but now its 2.4%. My portfolio has risen about 10%, so the HSW share price since then has not filled itself with glory. I have hung on since, and have no intention of selling.

As I look through the media reports on why the share price has fallen, it appears that disappointing sales volumes and the change in management are the key factors that have depressed the share price.

The change in management is always tricky, so I think a degree of pull back is justified for this reason.

Flat volumes are never ideal either, but I think it’s worth deconstructing and offering some insight. Hostelworld is a cyclical business, and volumes of people who travel and stay in hostels will fluctuate. 2018 has been a difficult year for the following reasons:

• The World Cup has impacted on demand as people have preferred to stay at home and enjoy the party rather than travel.
• Hot weather in Northern Europe has also impacted demand as people choose not to travel and stay at home. This particularly impacts the late market, where people make last minute decisions to travel. It’s easy to understand why a group of friends from London planning a city break to Amsterdam, would choose instead to have stayed in London this summer.

The likes of TUI, Ryanair and Easyjet have felt the same impact, and so it’s easy to buy in to the idea that these forces will impact Hostelworld also.

At the half year stage, adjusting for accounting changes as a result of moving to a model that allows customers to cancel and reclaim their deposit, revenues were slightly up. Profit at the half year would also be slightly higher, and to support these assumptions we can see that Free Cash is slightly higher.

In summary, volumes may come in flat for the full year but the reasons are highly credible in my view.

We need to see what happens in the full year, but it is not a massive stretch of the imagination to think that volumes will rebound next year, and the share price with it. At the current share price FCF/EV is 11%, for a business that will probably have lumpy rates of growth, but a trend for growth nevertheless. So I’m continuing to hold.

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Re: Hostelworld

#179248

Postby jackdaww » November 9th, 2018, 5:02 pm

i sold out in august at 270.

bought back in today at 196 .

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Re: Hostelworld

#210411

Postby westmoreland » March 26th, 2019, 3:01 pm

hostelworld should learn from just eat and make it so that the price hostels charge direct is no different then on their platform. this takes away the incentive that people have to shop around by going direct. perhaps they don't yet have the clout to force operators to do this? if clicks are to be reliably converted into cash, this is essential.

eBay is a very similar business model, taking a commission for organising a transaction. IIRC they now force sellers of 'collection only' sales to pay commission, and with car sales, they charge £15 to list, which is probably 10 times the standard listing fee. the problem has obviously been how to prevent people bypassing the eBay listing and paying cash in person, avoiding the fees. according to markLDN this is easy to do, and you make a saving doing so. clearly people booking hostels are very price conscious, so this if they can sort this out they could grow the number of paying transactions significantly.

it's also essential that HW take a long term approach and keep commission increases to the bare minimum until their service is essential.

on their capital markets day, they show how the number of hostels using 3rd party platforms has increased to 50% in H1 2018, compared to 33% in H2 2015, which is a worrying trend if it continues.

there are a number of very attractive qualities about this business, but a lot of risks too.

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Re: Hostelworld

#210699

Postby westmoreland » March 27th, 2019, 1:26 pm

from my research on reddit travelling forums, it seems that the clued up travellers do use hostelworld to find the right hostels, see if the reviews are up to scratch, then see if they can get a better price going direct.

apparently the extensive reviews are an extremely valuable feature on HW.

Hostelworld reviews are invaluable. I also usually do a search for hostel recs on reddit for each city I'm visiting. Especially for bigger cities, you'll see a number of past posts mentioning the same few hostels and you can get a pretty good sense of the vibe and how those hostels compare to each other.


Hostels are great. I just go by the rating on Hostelworld and pick something super well-reviewed and I've had mostly great experiences and a couple fine but not extraordinary ones. No horror stories.


Stay away from hostels with reviews that say hot water ran out or long wait times. 24hr front desk is a plus. Hostels that provide towels daily are another plus. Curtains and safes are another star. Bike rentals seal the deal with me depending on location.


Pretty much just make sure to avoid party hostels if that is not something you are interested in. Read reviews and you can typically get a feel for what to expect. Hostels next to the big nightlife areas in a city for example probably will be louder and have more disturbance.


airbnb doesn’t allow you to anonymously post reviews without your name or picture being shown while on the other hand Hostelworld lets you have the option of what you want. Why would I want others forever knowing where I have stayed and when I stayed there ?? Airbnb doesn’t easily allow you to remove reviews either if at all I’m not sure exactly and idk if Hostelworld has the same policy on that front either

dspp
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Re: Hostelworld

#210713

Postby dspp » March 27th, 2019, 1:53 pm

Yes, and you can see the same dynamic on booking.com vs (say) Best Western.

It is a pretty standard tension in the market, and until/unless the intermediary gains market dominance as a platform the ability (and desire) of both ends to bypass the intermediary is a business risk.

regards, dspp

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Re: Hostelworld

#210819

Postby scottnsilky » March 27th, 2019, 5:36 pm

This might be slightly off topic, but I booked a private room in a hostel in Valletta on Hostelworld, it had rave reviews, but I was very disappointed with the property. I've just checked the price of a room in April and it's outrageous, about 3 times what I paid 6 months ago.

HSW has been on my watch list for some time, so far I haven't bought.

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Re: Hostelworld

#211101

Postby westmoreland » March 28th, 2019, 3:14 pm

dspp wrote:Yes, and you can see the same dynamic on booking.com vs (say) Best Western.

It is a pretty standard tension in the market, and until/unless the intermediary gains market dominance as a platform the ability (and desire) of both ends to bypass the intermediary is a business risk.

regards, dspp


just eat avoid the 'standard tension' by forcing takeaways to charge the same price off the app. right move and auto trader avoid it by charging a monthly fee per estate agent / dealer, and don't take commission on sales AFAIK.

i'm surprised hostelworld haven't discussed the issue at all, anywhere. they are obviously aware of it. as i said, the solution is to make hostels charge the same price off the app.

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Re: Hostelworld

#303655

Postby WickedLester » April 27th, 2020, 5:57 pm

Is anyone still holding these? I still have some and am sitting on a substantial loss unsurprisingly.

But what does the future hold for them? The market cap is now just over £60m which would leave them looking absurdly cheap if normality returns to budget travel later this year. They still held 20m Euros cash at the end of March so no immediate liquidity worries and as I understand it a large proportion of their costs is marketing so it should be fairly easy to cut this. They may not return to previous levels of cash generation as I also understand that they have suffered from underinvestment in their platform and are now trying to rectify this.

Are they worth buying more of for recovery or will travel be subdued for an extended period of time so that they face a cash crisis?


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