Premium content from Motley Fool Hidden Winners UK
Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.
“Best Buys Now” Pick #1:
On the Beach (LSE:OTB)
Why we like it: “Recommending or buying a company that’s so badly affected by Covid-19 obviously has its risks. However we have undimmed optimism regarding On The Beach’s asset-light approach to providing British consumers — as well as an increasing number of Scandinavian consumers — and high street travel agents an online platform to book sun-soaked holiday options.
“As we don’t believe the pandemic will significantly alter consumer habits or make international travel overly difficult in the long term, then the overall industry should bounce back just fine. And with competitors by and large in worse shape than itself, there’s a chance growth accelerates for On The Beach coming out of this crisis. But even if the company just keeps growing as it was and gets back to reliably growing profits and cash flow, we think it’s an interesting option at present.”
Why we like it now: The short-term outlook for discretionary consumer spending is, to put it mildly, not great. So why are we putting forward On The Beach as a Best Buy Now? Because the company is cash-rich with net cash of £64.5m as of the end of its year-end in September, is bouncing back from the pandemic with FY22 seeing a return to positive cash flow and statutory profits (albeit at lower levels than pre-pandemic given the ongoing travel restrictions through much of that period), and as an asset-light platform is well positioned to trim expenditures and conserve cash if consumer demand really drops off a cliff. Taking into account its large cash balance, On The Beach’s enterprise value at the time of writing was only £230m – which could be an attractive price to pay if the group can return to pre-pandemic levels of profitability and continue on taking share from legacy travel agents in the long-term. On The Beach is certainly a riskier option right now but for members who can tolerate and afford that heightened risk, we believe it’s worth taking a closer look at this month.
