Online travel agent Hostelworld (LON: HSW) recovered strongly in the first half of 2022 and bookings are getting back to pre-Covid levels. Hostelworld is moving towards sustained profitability and the profit will rise rapidly once the group passes breakeven.
In the six months to June 2022, revenues were €28m and the reported pre-tax loss was €14.7m. The comparatives are relatively meaningless because of the Covid restrictions in force during the first half of 2021. All regions are recovering with central America most far advanced and already ahead of booking levels in 2019.
There was a small cash inflow from operating activities. Capitalised development costs increased from €756,000 to €2.26m. Net debt was €6.5m at the end of June 2022.
Hostelworld generates revenues by taking a 15% commission on a booking, which is the same as the deposit. There were 16,300 hostels that produced at least one booking in the period, down 8% on 2019. There were 2.1 million net bookings in the first half.
Deferred revenues increased by €5.4m because of holidays booked that are yet to be taken with customers using the free cancellation policy option. This will unwind in the second half. That was part of the reason that marketing costs increased as a percentage of revenues. These costs have already been expensed.
Once a customer is gained then they can be highly valuable and generate additional revenues without the marketing costs. This will help to reduce the marketing costs as a percentage of revenues from 70% to nearer 50%, which is still higher than previously.
The sharp recovery in bookings is an indication of customer loyalty. Investment in social media should help to retain more customers.
Recovery
Operating costs are lower than in 2019 and holding these down will mean that more of the additional revenues after marketing costs will fall through to profit.
The momentum has continued into the second half and Hostelworld has been EBITDA positive in June and July. There will still be a full year loss, though.
The share price has dipped 4.6% to 89.5p, although it is still 30% higher than at the start of the year.
Numis forecasts a 2023 pre-tax profit of €5.4m, which is lower than some other forecasts, and that could double the following year. That would put the shares on a prospective 2024 multiple of 13. On this basis, profit would be rising much faster than revenues, indicating the operational gearing and potential for further profit growth.
