I’ve seen On The Beach (LSE: OTB) as a tempting growth stock for a while now. I like simple, straightforward, business models that cater to high demand. Want a holiday on the beach? No need to investigate general packages to see which are best suited. Just head for On The Beach — the clue is in the name.
But there’s been a problem. Well, more than one. Firstly, On The Beach shares suffered from that oh-so-common growth stock bubble. When its shares hit a high in 2018, they were trading on a trailing price-to-earnings ratio of 35. For some growth stocks, that can be cheap. But, while I like the approach, this is just a company that’s hit on a slightly different way of selling holidays.
The share price fell back. And then 2020 and the Covid-19 pandemic arrived. Growth shares in general suffered, with those in the travel business hit especially hard. At one point in March, the OTB price had dropped more than 70% year-to-date. But I think those who bought in the summer made a canny move.
Second growth stock run?
Since November, the OTB share price has rebounded strongly, and we’re now looking at a more modest loss of 25%. We’re likely to see more short-term pain as European travel restrictions continue to bite. But I’m convinced On The Beach is a long-term growth stock selling at a bargain price now.
Before I explain why, let’s first have a look at full-year results delivered Thursday, and get them out of the way. The numbers were, in a word, horrible. But they were far from unexpected.
In adjusted terms, revenue fell 52%, with pre-tax profit down 98% to just £0.6m. In GAAP terms, it’s even worse, with revenue down 76% and a pre-tax loss of £46.3m. The differences in accounting approaches, including adjusting for the impact of Covid-19 and other one-offs, means it’s hard to take much away from these figures. Well, except it’s not what growth stock investors back in 2018 were expecting.
Liquidity status
But right now, for me, it’s all about the balance sheet. On that score, I reckon chief executive Simon Cooper sums up the company’s key strength when he speaks of “The flexibility and asset light nature of our business model together with our recently strengthened balance sheet.”
OTB raised £65.1m from a share placing in May. That left the company with net cash and equivalents of £51m at 30 November (excluding ring-fenced customer prepayments). It also has an undrawn £75m credit facility. How long might all of that last? The company puts its monthly cash burn at £2m in the complete absence of revenue. That indicates no problems on the survival front for the foreseeable future.
The question for me is, do I expect On The Beach to get back to profit before its cash runs out? And my answer is a huge yes. I’m seeing a very tempting growth stock here, with an attractive business model, and the financial strength to see it comfortably through the crisis. It’s on my shortlist of ISA candidates.
