RBC initiates coverage on On the Beach with “outperform” rating

Investing.com -- RBC Capital Markets has initiated coverage on On the Beach Group Plc (LON:OTB) (OTB) with an "outperform" rating, highlighting its differentiated package holiday offerings and growth in both core beach and emerging city break segments, in a note dated Tuesday.

Shares of the UK-based travel retailer were up 5.7% 04:57 ET (09:57 GMT). 

Analysts cited OTB’s market share gains from legacy tour operators. ATOL license renewals rose 10% year-over-year, compared to 3% for the U.K. market and flat growth for TUI (LON:TUIT). 

OTB holds 7% of ATOL licenses, behind Jet2holidays (21%), TUI U.K. (17%), LoveHolidays (15%), and easyJet (LON:EZJ) Holidays (9%).

OTB’s extensive accommodation options remain a key differentiator. For a one-week August trip to Turkey, OTB lists 870 four- and five-star hotels, compared to 220 for Jet2, 330 for TUI, and 1,400 for LoveHolidays. 

RBC forecasts a 12% CAGR in beach revenue between FY24 and FY27. The company recently entered the city break market, expanding its addressable customer base by 23 million. RBC projects city revenue to grow at a 43% CAGR from FY25 to FY27. 

Hotel inventory has increased from 9,000 to 23,000, with technology upgrades enabling rapid scaling. Automation and AI have reduced hotel onboarding time by 99%.

A partnership with Ryanair secures airline seat supply, supporting OTB’s goal to double holiday sales value and grow adjusted EBITDA by 2.6 times from FY24 levels. 

RBC estimates a 13% overall revenue CAGR from FY24 to FY27, with adjusted EBITDA growing 20% annually and adjusted EPS increasing at a 24% CAGR.

The company trades at 5.8 times FY26 estimated adjusted EBITDA, a 35% discount to peers, despite stronger EBITDA growth. 

RBC assigns an 8 times multiple, resulting in a price target of 340p, compared to the current 263p share price. 

RBC’s discounted cash flow model, using a 10.5% weighted average cost of capital and 2% terminal growth rate, yields a valuation of 325p.

According to RBC, OTB’s capital-light model offers a broad range of flight and hotel combinations from over 47 airlines and 23,000 hotels. 

Approximately 70% of revenue comes from 500 hotels. Direct hotel contracting allows better pricing and customer service. 

Free perks, including lounge access and security fast track, drive customer retention, with 55% of bookings from repeat customers.

OTB’s app contributes to customer loyalty, with higher rebook rates than desktop users. The app accounts for half of mobile bookings. 

RBC sees further opportunity in personalization and loyalty initiatives to increase customer engagement.

International expansion remains a focus, with Ireland launched in 2024 and potential growth into Central Europe. 

RBC notes limited tour operator competition and strong low-cost airline presence in target markets like Poland, Austria, and the Czech Republic.

B2B operations under Classic Collection Holidays aim to capture customers using high street agents. RBC forecasts B2B revenue to grow from £11 million in FY25 to £13.9 million in FY27.