On the Beach, Treatt, Marston’s

BUY: On the Beach (OTB) 

A distribution agreement with Ryanair is a big deal for the business, writes Christopher Akers.

On the Beach lost over a tenth of its value after it published interim figures, as investors took fright at muted budget holiday growth of 1 per cent.

Given that the shares jumped this week, however, the effect is largely neutral. Plus, growth is generally strong: the online beach holiday retailer achieved a record total transaction value (TTV) last year, and forecasts “another record summer” ahead as demand for its premium and long-haul travel options strengthen markedly. 

The performance supported the reinstatement of the dividend. This was expected but still backs up the thesis that things are moving in the right direction for the company. 

Group-wide TTV rose by 22 per cent to £598mn in the six months to March 31, helped by a 15 per cent rise in customer bookings and higher prices. Summer forward order TTV is up by more than a fifth against last year. It seems that post-pandemic demand has normalised at higher levels.

TTV was up 41 per cent in the higher-margin, premium holiday division, helping it take 34 per cent of the business-to-consumer sales mix. Long-haul TTV soared by 61 per cent. On the other hand, cost of living pressures suppressed value holidays growth. 

A distribution agreement with Ryanair, signed in February, removes a drag factor on the valuation and ends a long-standing legal dispute between the two companies. On the Beach customers now have “free and fair access to Ryanair’s seat supply”, meaning they can benefit from additional flight capacity. 

Elsewhere, the company announced a rejig of its smaller business-to-business operations amid stiff competition. It will move to a single brand and platform under the Classic Collection moniker. 

The shares trade at 11 times forward consensus earnings, a material discount to the five-year average of 20 times. We remain of the view that a re-rating is in order.

BUY: Treatt (TET)

As macro issues subside, the group is looking forward to an even stronger second half, writes Jennifer Johnson.

After a subdued start to the current financial year, flavour and fragrance specialist Treatt is on the up. Customer destocking and declining sales volumes defined the first quarter, but order patterns normalised in the three months to the end of March. Cost discipline meant that pre-tax profits ticked upwards in the first half, even as revenue dipped overall.

With around 50 per cent of group sales, citrus remains Treatt’s single-largest category. However, turnover here declined by 7.2 per cent as prices remained stubbornly high, particularly in orange oil. Meanwhile, the group’s “premium” categories — a cohort that includes tea and health and wellness — saw sales growth of 6.5 per cent in the first half. 

Management said it continues to expect strong performance from the division, which often sees its strongest performance in the second half. “The company has a solid order book . . . and is seeing a material step-up in pipeline opportunities,” said analysts with broker Peel Hunt. “The latter reflects a return to more normal product innovation (post the inflation spike) and the improved reputation of Treatt.” 

The group’s operating profit margin improved by 120 basis points on the same period last year, which management said reflects cost discipline and its self-help measures. Net debt was roughly flat at just over £10mn, though this figure is likely to shrink this year as receivables convert to cash on the balance sheet.

According to Peel Hunt, Treatt’s closest competitors currently trade on around 19 times consensus forward earnings and the sector leaders at 36 times. This makes the group’s own 20.5 multiple look like a good deal given its growth characteristics. We would argue that its recent record of increasing profits and managing spending against tough market conditions make this a price worth paying.

HOLD: Marston’s (MAR)

Prospects are encouraging for the all-important summer trading season, writes Mark Robinson.

Judging by the share price response, Marston’s interim numbers were not enthusiastically received by the market. Commenting on the results, the pubco’s newly installed chief executive, Justin Platt, pointed out that like-for-like sales growth of 7.3 per cent outperformed the wider market and that a “number of ‘must-not-miss’ major sporting events” hold promise for the second half.

He also hailed the 22 per cent uplift in pub operating profit as added proof that trading is heading in the right direction. The comments are certainly justified, but the company’s debt pile remains the major stumbling block where retail investors are concerned, and the eye is drawn to the cash flow statement and the accompanying realisation that interest obligations and securitisation repayments accounted for the bulk of the £81.9mn cash outflow from financing activities.

Marston’s was not the only pub operator whose balance sheet came under additional strain due to the pandemic. Prior to news of the outbreak, its net debt was equivalent to 172 per cent of net assets, so a debt reduction plan was already in place. The pub chain knocked a further £24.5mn off the principal during the period under review, although the relative proportion has ballooned out to 256 per cent. Management still hopes to reduce net debt (ex-lease liabilities) to below £1bn by 2026, but that seems somewhat ambitious.

Perhaps the most encouraging feature of the results was the 170 basis point increase in the underlying pub operating margin to 12.3 per cent. Ongoing efficiency programmes are having the desired effect despite input inflation and wage growth. That’s welcome progress, but the overriding debt issue explains why the shares trade at a monumental discount to net assets. It will take more than a good run by the England football team to alleviate pressures on that front.