Berenberg upgrades Hostelworld on back of fx gains

2nd Feb 2017 09:00

(ShareCast News) - Berenberg upgraded Hostelworld to 'hold' from 'sell' and raised the price target from 206p to 210p. Despite the likelihood of the company to struggle for growth in the short term, the fall in the pound has provided a "significant valuation tailwind", according to the broker. Last week's trading update also showed slight improvement in trend.Group bookings in the second half show a clear improvement, up 2% compared to a 4% fall in the first half.The bank was initially concerned that the rise in bookings was mainly due to the poor sales performance of its competitors. However, data showed that its "recapture rate" improved from 74% in the first half to 126% in the second half, showing that the company's organic growth outlook may beat previous expectations. Group booking growth estimates for 2017/18 have been revised up as a result of this, from 0%/1% to 2%/3%.The decline in average booking value (ABV) was also less severe than the broker expected. The estimate for the full year 2016 decline in ABV has been reduced from 8% to 5%. The 2017 and 2018 forecasts remain unchanged at 5% and 3% respectively, due to the greater weighting towards lower value regions and increased mobile penetration, where fewer nights are booked per transaction.Mobile penetration has increased to 49% in 2016 up from 41% in 2015, driven largely by the company's mobile app. This has led to a cut in the bank's marketing spend, to 41% of sales from 42.5%, estimates as the app gets rid of the need for customer clicks on Google Adwords."On our updated numbers, Hostelworld remains a modestly declining business at the top line. However, with momentum improving, we see limited downside with the stock trading at 11.1x 2017 P/E with a 6.7% 2017 dividend yield and 10.1% free cash flow yield," said the broker.The broker raised its earnings per share estimates by 6% for 2017 and 4% for 2018.Hostelworld's share price rose 3.88% to 207.75p at 0944 GMT on Thursday.