1 British stock to buy for the travel recovery

Paul Summers picks out his favourite British stock to buy for the inevitable return to normality in the battered and bruised travel sector.

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Companies in the travel and leisure sector have performed strongly since news of successful vaccines first emerged last November. Even so, I think new risk-tolerant, long-term investors like myself could still do well in this sector. With this in mind, here’s my favourite British stock to buy now for the inevitable recovery.  

Dire numbers

Today’s interim results from On the Beach (LSE: OTB) have been greeted with a shrug of the shoulders from the market. Considering the ongoing uncertainty regarding the pandemic, that’s to be expected. Yesterday’s news that the final stage in Boris Johnson’s roadmap would be delayed was always likely to make investors jittery over what the next few months could bring for any company in this space.

Predictably, OTB’s actual numbers weren’t great either. Despite knowing that international leisure travel would technically receive the green light on 17 May, travellers have been behaving cautiously. This, combined with “a significant number of cancellations” due to the extended lockdown, had a “material impact” on trading. 

All told, revenue in H1 tumbled 79% to £4.4m over the six months to the end of March. An adjusted pre-tax loss of £9.5m was also reported.

None of this should come as a surprise to holders. After all, the number of European destinations prepared/permitted to welcome UK tourists back seems to change on a weekly basis. Factor in the costs of getting pre-flight coronavirus tests and potential disruption caused by local curfews and it’s understandable that people are holding back.

So why is this the best British stock to buy?

But there are a few reasons why I think OTB is the best British stock buy in this sector. First, there’s its financial position. At the end of March, the company had £30m in its coffers (and an undrawn revolving credit facility of £75m). Importantly, this excluded cash received from customers. This is ring-fenced in a separate account — an arrangement likely to be well-received by both investors and holidaymakers. If confidence is to return, transparency is key.

Second, last month’s decision to stop selling holidays set to depart before the beginning of September was another prudent move, especially as the company believed any upside from bookings would be “marginal” and offset by disruption caused by cancellations. Again, by focusing on helping those with existing bookings, OTB is likely to win loyalty from customers. I suspect this will serve it well once restrictions are completely lifted.

Third, there are already signs that 2022 could be a great year for the company (assuming things do return to normal, which isn’t guaranteed). Sure, the number of bookings remains stubbornly low. However, OTB did say they were “significantly ahead of normal trading patterns”, albeit partly caused by the early release of flights by airlines.

Lastly, I remain a big fan of the company’s flexible business model. Its relatively small amount of cash burn and online-only presence allows OTB to remain nimble, even in troubled times. 

Positive outlook

Like many in the travel sector, OTB remains in a sticky patch. But despite deciding against issuing guidance for its full-year, CEO Simon Cooper remains bullish on OTB’s prospects. Today, he said the steps taken to respond to the Covid-19 fallout should help to position it “very strongly for successful and sustained growth.”

Based on my analysis, I can’t argue with that.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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