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Hostelworld to expand beyond hostels

Hostelworld Group said that it would expand beyond hostels and into experiences, as it reported adjusted Ebitda down 9% for the full year to €20.5m.

The company said that it had increased its focus on M&A opportunities in the past six months and built an extensive pipeline of potential targets as it looked to execute this strategy.

Gary Morrison, CEO, said: “Following the group’s return to growth in 2019, I see significant opportunities to build a broader catalogue of experiential travel products beyond hostel accommodation.

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“These types of experiences may include opportunities to study, work or volunteer abroad, with hostel stays featuring as part of an extended itinerary. Our research would also suggest that this market is very fragmented, with many different marketplaces and business models.

“With the group’s deep knowledge of experiential travellers built up over 20 years, our trusted brand, and a loyal and relevant customer base, I believe we are uniquely positioned to help both our existing customers and new experiential travellers.

“The group sees significant potential for the further deployment of capital to enhance future growth through both organic and inorganic investment opportunities. As a result, the board has taken the decision to rebase the dividend policy. A rebased progressive dividend with a pay-out of between 20% to 40% of Adjusted Profit After Tax will enable investment in organic and inorganic opportunities which should see shareholder return increase in the medium to long term.”

The company reported a 2% drop in full-year net revenue, to €80.7m, but a 6% increase in second-half revenue. Full-year net bookings declined by 5% with a return to net bookings volume growth during the second half, driven by a 1% increase in the final quarter.  

During the year Hostelworld made investments in two companies: Australia-based Goki and Counter, who provide tailored guest management, property management and payment solutions for the hostel industry, respectively.

The CEO said: “In addition to competition for customers, there was a marked increase in cost-per-click inflation, throughout 2019. This rising cost base was managed through a reduction in brand marketing spend, and disciplined control of operating expenses.

“During 2019, we started to implement several initiatives outlined in our Roadmap for Growth. We have rebuilt the core sort order ranking algorithm from a largely static ranking to a more dynamic, granular ranking algorithm that takes into account more variables such as differing search characteristics observed on desktop versus mobile web demand.”

Commenting on COVID-19, the company said: “While we entered 2020 with positive momentum, trading since late-January has been challenged by the outbreak of the COVID-19 virus which is having a significant impact on global travel demand, within Asian markets and more recently within the European market.

“Given that the depth and duration of the virus outbreak is impossible to forecast at this time, we are unable to calibrate its effect for the balance of the year; however, if near term trends were to persist to the end of March we estimate the impact to Ebitda to be in the range €3m to €4m for Q1 2020. With continued tight cost control and our strong cash generative characteristics, the group remains resilient in volatile market conditions.”

The platform said that the hostel market was expected to remain “highly fragmented with a growing supply base of high-quality accommodation, particularly in Europe and Asia”. Overall, the underlying annual global growth rate for the category was expected to be around 5% through to 2022. Within this market, online distribution will remain key for hostel owners; with the share of bookings made through OTAs such as Hostelworld expected to grow and account for 68% of all bookings by the end of 2020.

Insight: This week we saw enthusiasm for the hostel sector running high, with a report from Christie & Co pointing to a dynamic and adaptable sector which could constantly reinvent itself to keep the attention of the guest in a way which the hotel sector finds more challenging. And investors can’t get enough of those bunk beds.

All these beds need to find their way to market of course and Hostelworld has been the one to push it, now taking a leaf from Expedia’s book and getting into experiences. The OTA has since pulled back to its core business under chairman Barry Diller, who wanted to experience better profits.

At Hostelworld the company is looking at a market which trades on experience like no other – the whole point of the traditional backpacker is the search for meaningful antics. Hostel users have since broadened into families, even business travellers, but the expectation remains that it won’t just be a bunk and a shower on offer. Hostelworld may find itself in competition with the properties themselves, who have extensive experience in these matters.

As the sector grows it will also be looking to build brands, with the hope that direct booking will follow. In a market which relies more on world of mouth and social media than the traditional hotel sector, there is the scope here to protect against OTA dominance while the market is enjoying rapid growth.

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