Hostelworld Group — Backpacking them in

Research: Consumer

Hostelworld Group — Backpacking them in

Hostelworld’s pioneering and fast-evolving ‘social’ strategy is delivering aplenty. Material outperformance of the hostel market (FY23 bed nights sold up 30% vs industry 8%) and low-cost acquisition and retention of high-value customers (over a million social members after just 18 months) confirm the success of the company’s app-centric model, which taps into the social media habits of its target demographic to mutual benefit. With reducing marketing percentage of revenue on track to meet the FY25 low-end target of 45% (48% in H223), the boon of higher leverage from an asset-light platform may be reinforced by the move to cloud-based hosting, development of complementary acquisition channels and use of AI. FY23 EBITDA of €18.4m clearly ahead of €17.5–18.0m guidance and a ‘strong start to 2024’ suggest company targets of c 20% EBITDA margin on c €106m revenue in FY25 are well in hand.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Consumer

Hostelworld

Backpacking them in

Travel and leisure

QuickView

29 April 2024

Price

159p

Market cap

£196m

£0.86/€

Share price graph

Share details

Code

HSW

Listing

LSE

Shares in issue

123.6m

Business description

Hostelworld operates the leading global online booking platform focused on the hostel market, capitalising on demand from its target 18–35 years old demographic for a social travel experience. The company has hostel partners in over 180 countries and sold almost 23m bed nights in 2023.

Bull

High brand awareness among customers and owners of hostels in the growing global market of experiential travel.

Market share gains, valuable repeat business and low cost of customer acquisition driven by unique app-centric ‘social’ strategy.

Asset light and cash generative with newly completed debt refinancing.

Bear

Economic uncertainty tempered by value offer and leisure bias of hostel sector.

Industry susceptibility to geopolitical concerns and unforeseen events, but global spread and niche business.

Intense competition or change in search engine algorithms, mitigated by strong market position.

Analysts

Richard Finch

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Hostelworld’s pioneering and fast-evolving ‘social’ strategy is delivering aplenty. Material outperformance of the hostel market (FY23 bed nights sold up 30% vs industry 8%) and low-cost acquisition and retention of high-value customers (over a million social members after just 18 months) confirm the success of the company’s app-centric model, which taps into the social media habits of its target demographic to mutual benefit. With reducing marketing percentage of revenue on track to meet the FY25 low-end target of 45% (48% in H223), the boon of higher leverage from an asset-light platform may be reinforced by the move to cloud-based hosting, development of complementary acquisition channels and use of AI. FY23 EBITDA of €18.4m clearly ahead of €17.5–18.0m guidance and a ‘strong start to 2024’ suggest company targets of c 20% EBITDA margin on c €106m revenue in FY25 are well in hand.

‘Social’ strategy has an ‘incredibly long runway’

Notwithstanding hostels’ broadening appeal as a value offer for families and business travellers, growth from Hostelworld’s millennial/Gen Z core (c 80% of custom) is being sharply accentuated by the company’s social network on its mobile apps, launched in H122. Capitalising on demand for a social travel experience, its provision of customer access via chat groups to fellow travellers at the same hostels and cities has helped drive a significantly higher booking frequency and app usage for follow-on bookings (2x and 3x respectively) compared to non-social members. Consequent marketing efficiency, boosted by social member word of mouth recommendation, is optimising the cost of customer acquisition, while growing engagement through richer content (eg traveller profiles and hostel events (Linkups)) is boosting recurring revenue. 2024 promises ‘more of the same’.

Clear pay-off in H223

With H123 year-on-year comparisons flattered by the resumption of cross border travel post COVID-19, H223 nonetheless continued to endorse the ‘social’ model. Buoyant trading (bookings up c 15%) drove 14% net revenue growth (higher but for an adverse sales mix), with conversion to a near-doubling of EBITDA margin to 28% helped by app-led marketing savings (costs % per revenue 48% vs 51% in H1). Associated strong cash flow saw net debt down by a quarter from June 2023.

Valuation: Promising

Market recognition of Hostelworld’s prospects (forecasts well ahead of guidance) seems deserved. On 11x FY24e EV/EBITDA, it differs from a classic online travel agency, with its social strategy and customer retention characteristics akin to a platform business.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA*
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

EV/EBITDA*
(x)

12/22

69.7

1.3

(6.8)

(6.0)

0.0

192.0

12/23

93.3

18.4

12.2

9.9

0.0

13.0

12/24e

103.0

21.4

16.0

13.0

0.0

11.0

12/25e

114.0

25.0

20.0

16.0

0.0

9.1

Source: LSEG and company-compiled consensus. Note: *Excluding exceptionals.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

Exclusion of liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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