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Why I’d buy this multibagging stock that’s returned 50% p.a.

Rooms belonging to budget hotel brand easyHotel (LSE: EZH) might appeal to penny pinchers, but the company’s shares certainly do not qualify as cheap. 

At the time of writing, shares in easyHotel trade at a forward P/E of 227, making them one of the most expensive stocks trading on the London market. 

However, despite the company’s eye-watering valuation, I believe that it could be a great investment. 

Charging ahead

Since the end of 2015, shares in easyHotel have surged by more than 50% per annum on the back of the company’s rapid expansion. 

Today the group reported that revenue for the period to 30 September had risen to £8.4m (beating estimates of £7.8m), up 39.7% year-on-year and up 53% since 2015. Adjusted EBITDA expanded 48%. 

Unfortunately, earnings per share fell by 50% to 0.7p, but this was mainly due to just over £600k of hotel pre-opening and other exceptional costs. In this case, adjusted EBITDA growth is a much better reflection of the rapidly growing business’s true expansion. 

Even though easyHotel’s revenue is multiplying, the company’s income statement does not do it justice. The real value is to be found in the balance sheet and cash flow statement. 

Indeed, for the year to September, the firm generated £2.2m in cash from operations including financing costs. This robust cash flow helped fund management’s expansion plans. £23m was spent during the period buying property and expanding the group’s activities. At the end of the period, the group had £51m of property and £33m of cash. 

Net asset value per share at the end of the period was 72p, and on this basis, the shares look to be relatively undervalued. Its hotel peer group trades at an average price-to-book value of two, 18% more than the company’s current multiple of 1.7 times. 

Growth ahead 

Over the next few years, its growth should take off. The company has invested millions in new hotels over the past 12 months. The business currently has a total development pipeline of 921 owned rooms and 1,798 franchised rooms to add to the existing portfolio of 598 owned rooms and 1,750 franchised rooms. Since the last financial year ended, management has added another 464 rooms to the pipeline. 

As these come on-line, easyHotel’s revenue, profit, and cash generation will explode, and that’s why I like the look of the shares. 

Even though the group might look expensive on an earnings basis today, its rapid expansion promises healthy returns for investors in the future. The group is already highly cash generative, and when growth slows, this cash generation should translate into shareholder returns. 

If the company paid out all of its cash generation to investors, based on last year’s figures, the shares would yield 1.8%. However, as the hotel portfolio doubles in size over the next few years, this could rise to 4% or 5%. These are only rough estimates, but they show easyHotel’s growth potential. That’s why I’d buy the shares today. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.