Small Cap Value Report (9 Dec 2015) - OTB, IMO

9th Dec '15 by Paul Scott

20 comments 17481 reads

Good morning!

Apologies for the formatting problems today, a gremlin crept in somewhere. I've corrected the whole article manually, and it's just gone haywire again, so am giving up for the day now. EDIT: Ed has rescued it since, thanks Ed!

On the Beach (LON:OTB)

On The Beach (LON:OTB)

Results y/e 30 Sep 2015 - this company is an online travel agent, serving mainly the UK market, offering short haul beach holidays in Europe, and N.Africa, their website is here. The Prospectus says that OTB has 17% market share of the UK packaged holiday market, with its largest competitors being TUI and Thomas Cook.

The company's shares were floated by Numis on the UK main market on 28 Sep 2015 in a placing at 184p per share.

Unfortunately, the net proceeds of the placing, £90.2m, went mainly (£83.8m) to selling shareholders, the bulk of which was a Private Equity firm called Inflexion. Management also top-sliced their holdings as set out in this table from the Prospectus:

Note that the Chairman cashed in most of his chips (highlighted above). The other Director sales appear to be more reasonable, and personally I don't have a problem with Directors top-slicing their personal shareholdings in an IPO. The founder CEO, Simon Cooper, still holds 10.9% of the company, which all the other Directors combined also holding 10.9%, so 21.8% in total held by Directors - that seems to me about the optimum level - plenty of skin in the game, but not outright control.

The company received £6.4m proceeds from the placing, although this seems to have been raised to mainly cover fees of the IPO. Can you believe that Inflexion had the temerity to charge the company a £903k "exit fee" as part of the IPO process?!

Not only this, but Inflexion boast on their own website that they made a 3.6x return on their investment in OTB, in just 23 months of ownership. Normally, I wouldn't touch any recent issue where the proceeds raised went to pay off a Private Equity owner, as the track record of such floats has been so disastrous. PE is a scourge in my view, and they often leave behind all sorts of problems, dress up a…

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Fangorn

9th Dec '15

The most immediate nasty would be

"This company is an online travel agent, serving mainly the UK market, offering short haul beach holidays in Europe, and N.Africa"

Pretty sure "holidaymakers from UK" wont be hitting North Africa in anywhere near the same numbers as the Islamic problem becomes more prevalent - even a supposedly safe destination such as Turkey is now under the microscope.

But North Africa!

"Algeria, Egypt, Libya, Morocco, Sudan, Tunisia"

Plenty of Islamic extremism in all of those. All on my bargepole list - much to my dismay(Egypt being a place I went to as a baby)

What percentage of their business is to North Africa vs Europe? Presumably its a 20/80% split.

cig

Do they pre-buy capacity before they sell it? If they're merely acting as agent, a change in the mix of what they sell should not have a negative impact.

Chris Johnson

The steep fall in traffic rankings over recent months is (I imagine) just seasonal, as the main peak season will be over the summer.

Feedback from my wife (ex-travel agent) is that peak interest for holidays is after Christmas running through to Easter. Then at the end of the summer when thoughts turn to winter sun/skiing. So I would expect to see the web traffic pitch up in the new year.

Paul Scott

Formatting problems - I'm aware, and am trying to fix now. Pls bear with.

P.

laurie

Here is an interesting article concerning the difficulties being experienced by OTAs:
http://www.tnooz.com/article/dark-days-for-online-travel-agencies/
It mentions Expedia as an illustration of the problems with the OTA business model. Please note that this article was written more than two years ago. In the past two years Expedia has grown earnings and its share price has doubled.

danchamp

...as it already claims to have 17% market share...

Surely that's not correct?

With £63m revenue that would make the UK market for packaged holidays worth just £371m. Thomas Cook turnover is over £8bn, presumably mostly in the UK.

Leven

The big problem with PE floats, is that things are often not as good as they seem, and some kind of bombshell drops typically 6-18 months after the float, and you think to yourself, ah that's why they sold

This is well worth a read...

https://foragerfunds.com/bristlemouth/dick-smith-i...

Apologies for replying to myself, having looked a little deeper. They appear to earn a lot of their revenue from affiliate or commission models. On their website they say:

"And we'll send over 1 million beach loving sun-seekers on holiday in 2015"

And furthermore, they say they are not a package holiday company:

"As an online travel agent, we don't sell package holidays, we let you build your own by giving you access to a wide range of cheap flights, hotels and transfer suppliers, saving you money."

Which explains the £63 average revenue per customer, but doesn't tally with the statement from the prospectus.

andrea34

On a totally unrelated matter, is anyone tempted to gamble small amounts of cash on any oil stocks at the moment? I've been watching, for example, Premier Oil drop like a bomb from about 350p in August last year to 55p now. I know a lot of them are quite debt-laden, and cutting costs at the moment too, two unit trusts have recently reduced in PMO which might not be a good sign. Anyway, just wondering...

JohnEustace

I'm keeping disciplined on resource stocks and staying well clear. It's been the easiest way to outperform the indices this year. Commodity cycles tend to last years so in my view of things there will be plenty of time to get back on board when the commodity prices show proper signs of recovery. Oil hit new lows yesterday. A lot of capacity will need to go off stream before the price comes back.

Better in my view to look for the beneficiaries of cheaper oil - airlines for example.

Good point re pre buying capacity before they sell it. have to say I don't know the answer to that.

Perhaps something PP could elaborate on given his review of the travel agent.

I missed it earlier, but it is already in the news release and quoted by Paul above: "As an OTA we have no commitments to flight or hotel capacity and are well positioned to react quickly to changes in consumer demand."

Isn't their revenue commission/markup only, rather than the gross holiday prices?

Indeed, but surely footfall to the online site will still be impacted by all the negativity surrounding extremism in North Africa? I certainly wouldnt go there now being a white Christian despite wanting to return to Cairo. Simply not safe.

People can just go somewhere else or not at all if their budget offered up the possibility of a cheap holiday to North Africa,but restricted say one to southern Europe?

Not really a fan of travel agents or airlines for that matter. It's extremely competitive as well isn't it? I tend to go to the same places over and over so approach the companies direct(after having perused various website offerings)

Rusty2

I'm not a fan either and seeing Thomas Cook shares its a risky sector, if the trouble in north Africa/Middle East gets worse it may put people off going abroad altogether, there has been a surge in UK holidays in recent years. I never use Travel agents, I just book a flight and go. Now I tend to book more direct with the airlines as the price difference is now usually small.

Share the same sentiments and act similarly. Why bother going via a travel agent if the price is almost identical after talking direct to a couple of airlines.

Days of travel agents is numbered,as indeed it is for many "middlemen" - technology is seeing to that.

Thanks John; I think you are right, it's just another falling dagger but for sector reasons, I think I heard someone say oil could go as low as $20 at some point... in which case it's got a long way to go.

Airlines, ha, I've been watching WIZZ for a while... and I have some FLYB too (though sadly bought above current level).

gus 1065

Hi Andrea and John.

I have taken a more contrary view on the oil and gas sector and made some small investments in a range of companies. My approach has been to target a limited group of prospects and invest a sum that I am comfortable writing off in the hope of one or more multi bags over a 2 to 3 year period that will hopefully see us back into an oil and gas price upswing and give me a decent return in the long run. I expect some of these to tank completely so this approach is not for the faint hearted, especially if you might need the cash at short notice.

I do my own research but am by no means an expert. I also value some of the better blogs, such as Malcy's here on Stockopedia. Ideally, l am looking for prospects with low or no gearing, strong and well regarded management and a good USP that sets them apart from their peers. Given current POO, low cost production (or well hedged future sales at a price compatible with their cost base in the case of £ENQ) are essential. Many of these stocks have very poor Stockopedia rankings and there is a lot of Internet chatter on "the next big thing", that I try not to get sucked in by.

I am currently holding Pantheon Resources (LON:PANR), Falcon Oil & Gas (LON:FOG), Ithaca Energy Inc (LON:IAE), Sound Energy (LON:SOU), and UK Oil & Gas Investments (LON:UKOG). I also have long term holdings in BP (LON:BP.), BG (LON:BG.), and (for my sins) Glencore (LON:GLEN) which I have had for several years - so long in fact that some are still in small profit taking in to account LT dividends (most definitely not £GLEN). Adding to the mix, l have holdings in some of the oil and gas service companies including Petrofac (LON:PFC) and Getech (LON:GTC) and a legacy position in EnQuest (LON:ENQ) that was split out of Petrofac a few years ago.

The current star is Pantheon Resources (LON:PANR) (you may have seen my post earlier today) although given this stock's meteoric recent rise there may be some pullback, especially if some of their current drilling activities get anything other than stellar results. In aggregate this mixed bag is just about net up at the moment but I fully expect to have to be in for the long haul. As you can imagine, with this lot I often find myself hiding behind the sofa when looking at the MtM valuations.

Last but not least, I have recently put on some airline exposure through my NAPs portfolio - as pointed out elsewhere a natural beneficiary of low oil prices and arguably at risk to international travel due to political unrest in the ME that might in turn cause rising oil prices. These appear to be a good counter balance to oil exposure.

All told, maybe it would have been easier just to have invested in an index tracker fund!?

An interesting sector and as you say several cratered share prices. Lots of low hanging fruit - the hard part is telling the good from the rotten.

Good luck with whatever you decide to do

Gus.

(As apparent in the text, I hold long positions in all of the named stocks).

10th Dec '15

The intermediary does add some value compared to direct booking: price comparison in one place and someone to sue domestically for hotel bookings (compared to booking with some unknown foreign website who maybe has no actual hotel or poorer than advertised service). And it saves the user having to go to an airline comparison website, a hotel comparison site, and then book 3 things separately (flight, hotel, transfer) on 3 websites with disparate cancellation terms and payment arrangements. If they're not too greedy on commission there's a place for that.

Maybe depends how you travel. I just book and go. No transfers just jump on the bus. I don't spend my money on mid to high range Hotels. I don't like to book ahead I want to be flexible with my itinerary. More people are doing this now, I've always done it. Yes for family holidays maybe an agent can be good but more people are going independent now.

Small Cap Value Report (9 Dec 2015) - OTB, IMO

On The Beach (LON:OTB)

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Paul Scott

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