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Hostelworld was created to provide an affordable online global distribution channel for hostels and budget accommodation providers. The company is designed for a customer base that is not well served by the broader online travel agency (OTA) universe. Frequent customers of hostels, known as “hostellers’”, generally enjoy the affordability, environmental sustainability, and sense of community that a hostel provides; amenities that are not found at most hotels. Prior to the company’s founding, frequent budget conscience travellers had to depend solely on word of mouth. Traditional OTA’s overlooked this segment of the market for many years, unable to understand how to appeal and service it.
The company launched its website in 1999, providing one of the first online booking platforms and back-end property management systems specifically for hostels. Previously, there was no technology solution that enabled hostellers to make secure confirmed payments via the internet as well as review properties. Over the next several years Hostelworld expanded its platform by making two key acquisitions and strategic changes in its revenue model. The company’s market-leading platform covers 36,000 properties across approximately 170 countries. Combined with over ten million customer reviews, Hostelworld is the pre-eminent hub for hostellers. The strategic changes in the revenue model allow the company to provide a lower cost distribution channel for accommodation providers versus other major OTAs.
We have followed Hostelworld since its initial public offering (IPO). We recently increased the size of our investment for the following reasons:
- Valuation – We initially invested in Hostelworld after the company’s IPO in 2015, the stock having sold off after the Paris terrorist attacks. Recently, the stock has sold off significantly again. Concern surrounding an accounting change, new management, and a general sell off in small cap companies allowed us to purchase shares at an attractive valuation; paying less than 10x cash earnings for a company with no debt, a 7% dividend yield and a strong balance sheet.
- Competitive advantage – Hostelworld’s platform has huge volume of free traffic driven by its unique brand and shopping experience. Over time this has allowed Hostelworld to capture ~50% of the hostel bookings in the OTA market. Shopping for a hostel is different than a hotel. The user experience has been difficult to imitate on Bookings.com or any other existing competitor’s platform. Additionally, Hostelworld has access to exclusive inventory driven by operating the leading customer management systems for Hostels. This advantage adds a unique product offering with a high barrier to entry.
- Growth – Historically, the travel industry grows at a rate of 1.5x GDP. Hostels are growing faster than hotels and the industry as a whole. Hostelworld’s market share and brand loyalty position it well to capture this continued growth.
- Management –New management is focusing on driving customer experience and expanding the competitive advantage in the Hostel space. The new CEO has identified his exact strategy and seems poised to execute against it. We believe that in the long-term this will help to accelerate growth and add to the sustainability of the earnings.
This stock is currently held by our Global Small Companies Fund.
This report has been prepared by Pengana Capital Ltd (ABN 30 103 800 568, Australian Financial Services Licence No. 226566) (“Pengana”). This report does not contain any investment recommendation or investment advice and has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on the information in this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs.
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