Good morning!

07:48 - Agenda complete

13:30 - Report complete

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Spreadsheet accompanying this report: link (last updated to: 5th September).

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Companies Reporting

* Market caps at previous trading day’s close

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Graham’s Section:

Hostelworld (LON:HSW)

Up 5% to 123.6p - Trading Statement - Graham (I hold) - GREEN

At the time of publication, Graham has a long position in HSW.

This is an in line update that has been warmly received by the market, as they say:

Improved Q3 Trading and Solid YTD Performance

It appears that the market generally - and I - were concerned about the company’s ability to meet forecasts, given the extent of the seasonal H2 weighting that was baked into forecasts. (See here for our coverage of the interim results, when the company reported EBITDA of €7.4m vs. full-year forecast €19.9m). Today the company reports that the consensus EBITDA estimate is €19.8m, and it expects to hit this.

Some key points for Q3:

Q3 “generated revenue” +5% (number of bookings up 2%, average booking value up 3%). (NB. like other companies in the holiday sector, Hostelworld takes money in advance from travellers, but doesn’t book the revenue until later. This means that in any given period, actual revenue will depend on bookings made in prior periods. I think that “generated revenue” is supposed to show us the value of bookings made in the period itself, less cancellations.)

Elevate - the tool we discussed last time, that allows hostel operators to pay more for increased visibility - has boosted the commission rate year-on-year from 15.2% to 16.3%.

Another key KPI is direct marketing costs as a percentage of net revenue, and it falls to 47% (vs. 51% in H1 and 49% in Q3 last year).

Turning to year-to-date figures, revenue is broadly flat and EBITDA is down:

YTD Adjusted EBITDA for the period was €15.4m with a 21% margin (YTD 2024: €17.8m and 25%), reflecting planned investments in growth initiatives and the timing of deferred revenue.

So with the summer months out of the way, 78% of the full-year EBITDA forecast is in the bag. I guess there’s still the possibility of a profit warning at this late stage, but at least there are now strong limits on how severe a warning could be!

Net cash is €6.6m, up by half a million since the end of H1.

CEO Gary Morrison notes “the continued popularity of low-cost destinations”, which has been a headwind here for some time. At least hostel travellers are continuing to travel, even if they are remaining extremely budget-conscious! He concludes:

Looking ahead, we are on schedule to launch our social network monetisation and the provision of budget accommodation initiatives in the fourth quarter. The timely delivery of these foundational initiatives is a key step towards delivering our growth strategy, as set out at our Capital Markets Day.

Graham’s view

I think there’s a view among some investors that Hostelworld should be substantially more successful than it already is. From my point of view, having a small stake in this, I do see untapped potential. I definitely see it as a growth opportunity rather than a boring value play (even if it’s rated as a value stock) and I have no real interest in the dividend.

Having said that, I am of course delighted that the company is now in strong enough financial shape to afford dividends and buybacks. But if management could identify more high-return investments in terms of developing its app and its capabilities, I would be even happier!

The year-on-year downturn in EBITDA doesn’t particularly concern me - I’m happy to give management the benefit of the doubt on the investments that they are making in their new social network and in expansion to other types of budget accommodation. As the risk of a profit warning should hopefully have receded, I’ll tentatively upgrade this to GREEN.

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Mark’s Section:

Intercede (LON:IGP)

Down 10% at 158p - Trading Update, New Contract awards and Renewals - Mark - AMBER/RED

When Roland looked at the Final Results from this identity verification specialist in June, revenue was down double-digits and adjusted EPS down significantly. However, this was actually slightly ahead of expectations, as FY24 benefitted from a large one-off license sale. The company did communicate that this contract was an exceptional order and deemed 'one-off' at the time, and the broker’s forecasts reflected this. However, looking at the price chart during that reporting period, I’m not sure that message really landed with investors:

At the time of this year’s Final Results, their broker upgraded FY26 EPS estimates to 5.5p, and today they say:

Given the underlying momentum being seen by the Group, the Board remains confident in the Group's short, medium and long-term growth trajectory and maintains that full-year financial performance will be in line with current market expectations.

However, put into context, the in-line they refer to is another declining EPS figure:

When they refer to “underlying momentum” they presumably want investors to infer some kind of positive movement, rather than a continuation of the overall trend in this H1 update for declining revenue:

The Group expects revenues for H1 FY26 to be approximately £8.21 million (H1 FY25: £8.54 million), representing a year-on-year decrease of 3.9% or a decrease of 4.2% on a constant currency basis.

SaaS Revenue:

As Roland also pointed out in his review of the Final Results, there is some attempt to move to a more subscription-based revenue model, which may dampen short-term revenue, at the benefit of a more sustainable ongoing sales. Today’s trading update shows some sign of this:

Reported revenues includes licence revenue which increased by 65.5% to £1.44 million (H1 FY: £0.87 million) and comprises perpetual licence income of £1.08 million (up 63.6% from H1 FY25: £0.66 million) and subscription licence income of £0.36 million (up 71.4% from H1 FY25: £0.21 million).

But the numbers here are absolutely tiny. That’s an annualised subscription licence income of £0.72m, versus a market cap of over £100m at last night’s close. I also can’t help feeling that 2025 can’t be the first time they realised that there may be some benefit to a SaaS revenue model. Microsoft made the shift to SaaS 14 years ago, in 2011. Many software companies followed this trend and started moving customers to a subscription model a decade ago.

Current trading:

Some of this weakness is put down to:

…temporary delays in some contract awards, primarily attributable to the US federal market. These delays, combined with adverse exchange rate movements and changes in revenue mix, have particularly affected reported US dollar revenues in Q2 of the period.

This is understandable, with the political environment in the US, now is not a good time to be reliant on US government contracts. However, I’m not sure I get the FX point. Most companies with significant dollar revenues but reporting in sterling have nominal movements in revenue greater than constant currency movements. Here constant currency has declined more than reported currency, suggesting that they have actually benefitted from currency movements.

This is also a contract update. They list 11 contract wins or renewals but the average contract value is just $240k. Q2 contract wins and renewals work out to be just 13% of FY26 forecast revenue. This might be quite reasonable if these are all subscription licence income, but the above figures suggest that very few of them will be. Their broker, Cavendish, also points out that a higher H2-weighting is required:

Revenue of £8.2m for 1H26 represents 44% of FY expectations (1H25: 48%), leading to free cash generation of £0.9m, representing 42% (1H25: £-0.7m; 2H25 £+2.9m) of the £2.2m forecast for FY26E, excluding settlement of £1.8m cash relating to the growth scheme award, which vested in July.

Share awards:

Just looking at that share award briefly, it seems the Group CEO received:

· The payment of £1.8 million gross in cash; and

· The issue to Mr Van de Leest of 743,095 ordinary shares in Intercede Group plc, based on the closing share price of an Intercede Share of 173.5p on 7 July 2025, being the day before receipt of the put option (the "New Ordinary Shares").

The criterion for this award appears to have been entirely based on share price, so he was the big winner from shareholders’ exuberance around the one-off $6.6m order in 2024, as it made him £3.09m!

Forecasts:

Looking further out, Cavendish see revenue growth finally being reflected in an EPS forecast rising to 7.4p in FY28, but I rarely put much faith in forecasts that far in the future. All the academic evidence suggests that they are little better than guesswork out that far.

Balance sheet:

When it comes to the balance sheet, things look better:

As at 30 September 2025, gross cash balances stood at £17.8 million (30 September 2024: £16.2 million), which includes the payment of £1.8 million on the vesting of a share award as announced on 22 July 2025. Cash balances were £18.7 million as at 31 March 2025. The Group continues to operate with no debt.

Like many software companies, they run with negative working capital, but not exceptionally so. At the year end, there was around £8m of deferred revenue, but as long as revenue doesn’t decline too quickly, this is likely to remain around this level, meaning this cash is available for acquisitions that may improve their growth credentials. However, they have not been short of cash in the past, and have not found something that is the right fit:

Valuation:

A forward P/E of 30 on 2027 EPS would be punchy for any company, let alone one reporting declining H1 revenue:

Taking account of today’s 10% fall in share price and if I adjust the c.20% of the market cap in cash, this comes out as an adjusted P/E of around 21. However, this still looks materially overvalued for a company with negligible forecast EPS growth. They need to be significantly exceeding market expectations to justify this rating, and in-line with a higher-than usual H2 weighting just doesn’t cut it.

Mark’s view

What starts as an in line trading update gets worse as you go through it, and I can see why the shares are down 10% today. This is not a terrible company; it has genuinely good products in an in-demand area, and a strong balance sheet. It is no surprise that this is a top-quartile Quality Rank stock. However, it appears to be struggling to generate enough contract wins or ongoing SaaS revenue to generate bottom-line growth. As such, it looks to be overvalued on a forward P/E of around 30. Investors appear to have got a little carried away after a big one-off deal in 2024 generated exceptional profits and this has yet to meaningfully revert to a valuation based on the underlying trend. Something the very low Value Rank confirms:

When Roland looked at this in June, it had a Momentum Rank of 69 and was classified as a “High Flyer”. However, with that Momentum Rank dropping to 45, and likely to drop further after today’s price action is assimilated, and now classified a “Falling Star” it makes sense to take a more negative view of AMBER/RED.

Polar Capital Holdings (LON:POLR)

Up 5% at 567p - AuM Update - Mark - AMBER/GREEN

With both of this week’s quarterly updates from Impax and Liontrust (see DSMRs here & here) not being particularly well-received by the market, lots of eyes were on this morning’s Polar Capital AUM update:

With net outflows of just £58m at Polar, versus £1.09bn for Liontrust and £1.4bn for Impax (both around 5% of AUM), investors have certainly maintained a higher view of Polar’s funds. And you can certainly see why. Whereas Impax offset the outflows with a roughly 4% investment performance, and Liontrust 5%, Polar generated almost double that at 9%.

Short-term performance isn’t just important for AUM flows (despite much evidence that it damages long-term returns, fund investors continue to largely invest on short-term performance), it generates performance fees. These make asset managers geared plays on the underlying assets, and it is good news for shareholders that performance fees are rising strongly:

It is Polar’s technology focus that is again leading to these strong returns, with the NASDAQ being the strongest index in the last quarter by some margin:

Research provider, Equity Development update their forecasts in response to this, saying:

We upgrade our FY26 and fY27 forecasts due to:

• The jump in AUM over H1-26 being higher than originally forecast, and

• Mark to market performance fee profits being higher than originally forecast.

They increase their FY26 EPS estimate by a whopping 40% to 57.2p, and lift their FY27E EPS by 24% to 55.6p. To be fair, they appear to be a little behind the consensus:

But this is still a big upgrade and means the P/E here is now around 10. This makes them look more favourable on a sector comparison

Their P/E is in line with the sector but they have better growth and profitability metrics.

There are a couple of reasons for caution. The first is that both the market cap and EV appear large compared to the AUM:

At around 2.5x higher than Liontrust and Impax, this means they are more reliant on performance fees or higher management fees as they are on roughly the same P/E ratio. This may be a fair reflection of their better recent underlying performance. Although, it must be noted that until recently, Impax was the stock market darling that was at a premium to the sector on these types of metrics.

Which brings us to the second bear point, which is that markets tend to be cyclical, and the current outperformance of large-cap tech is by no means guaranteed in the future. The tech sector P/S is looking pretty punchy at the moment on 8x sales:

If this reverts to the recent mean, it will mean a painful performance period for Polar’s funds, no matter how well run they are. But for the moment, momentum is with the sector and as former Citigroup CEO Chuck Prince said in 2007 "While the music plays, keep dancing". Today’s AUM update suggests that Polar will still be dancing for some time yet.

Mark’s view

The strength of the EPS upgrade today makes it tempting to upgrade our view here. After all, it is now trading on a sector average rating but with what seem much better near-term prospects. What moderates my view is the nagging thought that the performance here is as much about the sector their funds find themselves in rather than any endogenous characteristics. The AUM/Market Cap metrics suggest that it won’t all be as rosy, if (when) tech stocks face any moderation in valuation. There are few signs of any storm clouds on the horizon, though, so it makes sense to remain mostly positive. AMBER/GREEN