Shares in online package holiday firm On The Beach (OTB) moved almost 2% higher to 442p in afternoon trading despite the company recording a 26% drop in full year pre-tax profit.
Impacted by the demise of rival Thomas Cook, pre-tax profit for the year to 30 September on a GAAP (generally accepted accounting principles) basis dropped from £26.1m to £19.4m, hit by one-off costs associated with helping customers organise alternative travel arrangements.
Revenue grew by just 1% to £90.3m, and basic earnings per share on a GAAP basis fell by 26% to 12p. The total dividend was left unchanged at 3.3p.
But the hit was already flagged to the market in a trading update last month, with the company and investors looking more towards the opportunity provided by Thomas Cook’s collapse.
On The Beach’s chief financial officer Paul Meehan told Shares the firm has an ‘unprecedented opportunity’ to grow as it targets the 2.5m package holiday customers who had originally booked with Thomas Cook.
He added, ‘We’re increasing our marketing spend materially in the first quarter of next year, advertising at a time when we wouldn’t spend ordinarily.’
Going forward, the company’s earnings are likely to be better in the second half of its 2020 financial year rather than the first half.
That’s because seat prices on flights along Thomas Cook routes have gone up markedly since its collapse, putting some holidaymakers off along with continued Brexit uncertainty, while the firm is also set to increase marketing costs in the near term.
Meehan added that seat prices are expected to normalise in around 4-6 months, and also added that a clean Brexit could give the firm a ‘material benefit’ due to the potential strengthening of the pound.
‘FAIR STRATEGY, BUT NOT THE ONLY ONE’
AJ Bell investment director Russ Mould said the company’s plan to spend more on marketing and keep its prices competitive – in order to scoop up more customers and take advantage of the ‘once in a lifetime opportunity’ to grab some market share – is a ‘fair strategy’, but cautioned that it won’t be the only player with this idea.
Mould said, ‘We already know that airlines have been racing to increase capacity to capitalise on this opportunity and so holiday sellers will naturally be doing the same.
‘For example, EasyJet (EZJ) has already flagged that it will give its package holiday business another push.
‘On The Beach will have to spend money to make money which is likely to see its costs go up in the short-term.
‘The key measures of success will be the time it takes to make a return on this investment and whether it can hold on to any new customers beyond a single holiday booking.’