Hostels operator Safestay (LON: SSTY) made substantial progress in 2019 and it was set to reap the benefits this year before the COVID-1 lockdown across Europe.

Safestay will have to change some of the things it has done in the past to adapt to different conditions after the lockdown. For example, rooms of four beds will only be rented to parties that come together and will not be shared with strangers. Cleaning regimes have been upgraded.

It will take a long time to rebuild capacity utilisation and full utilisation will not be possible.

There are plans to reopen hostels on a staggered basis. this could start in the next few weeks.

2019

Safestay ended 2019 with 20 hostels across 12 European countries. They have 4,900 beds and more bookings were coming directly through the Safestay website. Occupancy was 77.3% last year.

New sites include Pisa, Venice, Berlin, Athens and Warsaw.

In 2019, revenues increased by one-quarter to £18.4m and 49% of this comes from outside of the UK. There was a small pre-tax loss and Safestay would have been likely to move into profit this year if it were not for COVID-19. In reality, the loss will be higher this year and profit could be at least two years away depending on the recovery.

Finance

Net debt was £65.8m at the end of 2019. Stripping out IFRS 16 leases of £25.8m and finance leases of £22.4m, the bank debt was £17.7m. The debt facility has been increased to £22.9m, lasting until January 2025, and a £5m overdraft secured.

That additional headroom does not seem much but Safestay boss Larry Lipman believes that the government financial help with furloughing employees means that this will be enough cash until trading gets up and running again.

Some capex can be delayed. There are two sites not in operation yet. Liberum believes that net debt will be £26.3m by the end of 2019. More funds may be required if the recovery is slower than expected.

Unsurprisingly, the share price has more than halved to 15.5p since the middle of February. That is less than one-third of the NAV of around 56p a share. A large proportion of that NAV is due to the Elephant & Castle site, which was revalued last year.

Consolidation

Larry Lipman believes that there will be consolidation opportunities brought about by COVID-19.

Issuing shares at the current share price would significantly dilute NAV. There could be other ways of financing the opportunities or Safestay could manage, rather than acquire, sites.

As long as Safestay survives the difficult trading conditions and trading rebounds the share price will be attractive. There is uncertainty, though, so the shares remain speculative at the moment.