Gradual progress and no dividends. Why are brokers tipping this small-cap FTSE share as a purchase?

It’s not typically I see a small cap on the FTSE All-share index get tipped by big-name brokers like Deutsche Financial institution. However this up-and-coming Dublin outfit has been popping up on my radar all week, so I needed to get the lowdown.

Hostelworld Group (LSE: HSW) is a youth-focused journey firm primarily based in Eire with a tiny £168.7m market cap. Up by solely 2.2%, progress this 12 months has been sluggish. But brokers out of the blue determined it was the inventory of the week.

I’m on a mission to seek out out why.

A small participant with a far-reaching influence

Though small in measurement by inventory market requirements, Hostelworld is wildly in style among the many travelling youth of right this moment. It’s one of many largest hostel reserving apps on this planet, with 16,500 listings in 180 international locations globally.

Earlier this week, I seen three main brokers had put in ‘buy’ scores on the inventory. These had been Deutsche Financial institution on 12 October and Shore Capital and Canaccord Genuity, three days later. For such an unknown small-cap share, that caught my consideration. I discover it uncommon for prime brokers to tip small-cap shares.

Constructive outcomes

The explanation rapidly turned apparent. On 8 October, Hostelworld launched a constructive earnings report for the primary half of 2024, with web bookings up 9% 12 months on 12 months and an 88% improve in adjusted EBITDA. The corporate’s social community continues to carry out properly, contributing to a major discount in advertising and marketing bills as a share of income. Regardless of a slight decline in common web reserving worth, it stays assured in its enterprise mannequin and future progress prospects.

This robust monetary efficiency, coupled with its distinctive market place, is probably going a motive for the sudden curiosity from brokers.

Dangers and ratios

The web journey market is extremely aggressive, with gamers like Reserving.com and Expedia providing comparable providers. Elevated competitors might result in value strain and lowered market share. Moreover, financial downturns can negatively influence journey spending, resulting in decrease demand for hostel lodging. This might adversely have an effect on its income and profitability.

Checking like-for-like metrics, Hostelworld seems to outshine Reserving.com in terms of worth. It has a trailing price-to-earnings (P/E) ratio of 13.2 in comparison with Reserving’s 29.1 and is undervalued by virtually 60%. Reserving is just undervalued by 40%. Airbnb, one other competitor, has a P/E ratio of 17. 

Moreover, its stability sheet is squeaky clear, with no debt, €5m in money, and €62m in fairness. Reserving.com, however, is drowning in $16.8bn of debt and has unfavorable fairness. After all, it’s quite a bit smaller than most of its rivals so these comparisons must be taken with a pinch of salt. On the plus facet, low-cap shares often have the potential to make bigger features as the value is simpler to maneuver.

My verdict

I believe Hostelworld, as a pacesetter in a distinct segment market with no debt and robust earnings, might develop to change into a key participant within the journey business. There could be some hurdles alongside the best way and sudden journey disruptions are a key threat to contemplate.

General, I believe its prospects look nice. If journey continues to develop unhindered, it ought to have a vivid future. Sadly, it isn’t listed on my dealer platform but in any other case I might purchase the inventory right this moment.