Partnership With Ryanair Will Improve Customer Experience And Expand Market Opportunities

Key Takeaways

• Strategic partnerships and technological upgrades are poised to enhance customer experience, increase market share, and improve revenue and margins.
  
• Product expansion and unique customer perks aim to boost market presence and brand loyalty, supporting sustainable growth and profitability.
  
• Volatility in booking values and reliance on partnerships, along with challenges in customer loyalty and market expansion, could pressure future revenue and net margins.

Catalysts

Operates as an online retailer of short haul beach holidays under the On the Beach brand name in the United Kingdom.

• On the Beach Group's strategic partnership with Ryanair has resolved long-standing litigation issues, granting secure access to essential airline seats. This is expected to enhance customer experience and operational efficiency, potentially increasing revenue and improving net margins.
  
• Significant technological upgrades, including smart caching and live pricing capabilities, are expected to expand the addressable market and improve customer satisfaction. This will likely drive revenue growth and potentially enhance net margins through operational efficiencies.
  
• Expansion of the company's product offering to include both beach and city destinations, as well as venturing into the Irish market, is expected to double the addressable market, capturing a greater share of the holiday wallet and driving revenue growth.
  
• The use of differentiated perks, such as airport lounge access and fast-track passes, aims to boost customer acquisition and retention, potentially increasing revenue and improving net margins through enhanced brand loyalty and premium offerings.
  
• On the Beach's capital-light and cash-generative business model, supported by a strong cash position and share buyback program, indicates potential for significant EPS growth, as well as strategic reinvestment into technology and expansion initiatives, which is likely to impact future earnings positively.

On the Beach Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming On the Beach Group's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.8% today to 20.4% in 3 years time.
• Analysts expect earnings to reach £37.1 million (and earnings per share of £0.24) by about January 2028, up from £20.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £44.9 million in earnings, and the most bearish expecting £33 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 20.6x today. This future PE is lower than the current PE for the GB Hospitality industry at 18.3x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

On the Beach Group Future Earnings Per Share Growth

Risks

• The significant volatility in average booking values (ABVs), especially deflation in the second half of the year due to excess capacity from low-cost carriers, could affect future revenue projections if this trend continues.
  
• The company's reliance on partnerships, highlighted by the previous challenges with Ryanair, introduces risks associated with maintaining these relationships, which can impact net margins if renegotiated on less favorable terms.
  
• Adjusted revenue per booking was slightly down compared to the previous year, potentially impacting net margins if this trend persists, despite efforts to drive efficiencies.
  
• Expansion into new markets, such as Ireland and city destinations, involves execution risk and could lead to higher expenses or lower-than-expected returns, affecting overall earnings.
  
• The company mentions frequent reacquisition of customers due to limited stickiness; 실패 in increasing consumer loyalty might lead to higher marketing spend and pressure on net margins.

Valuation

• The analysts have a consensus price target of £2.86 for On the Beach Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.0, and the most bearish reporting a price target of just £2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £181.9 million, earnings will come to £37.1 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of £2.58, the analyst's price target of £2.86 is 9.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.