Canaccord warns Safestay's EBITDA conversion 'not where it should be'

Analysts at Canaccord Genuity reiterated their 'buy' rating on a 50p target price on hostel operator Safestay on Wednesday, but warned that revenue-to-underlying earnings conversion was still "not where it should be".

Canaccord said Safestay's interims and recent announcements showed that revenues were growing "as expected", after "finally" deploying the proceeds of the group's successful December rights issue, with a 24% increase in turnover to £8.1m for the first half.

However, the Canadian broker said conversion to EBITDA was still lagging behind, leading the analysts to downgrade their EBITDA estimates by roughly £0.4m in order to reflect higher property, utility and maintenance costs, a delay in the conversion of Safestay's Brussels venue and higher customer acquisition costs.

Canaccord also noted that the adoption of IFRS 16 had inflated Safestay's interim EBITDA result by £1.15m, but reduced interim pre-tax profits by £300,000 due to offsetting higher depreciation and interest costs.

"At yesterday's close, Safestay was trading on an EV/EBITDA of 11.8x for FY19E falling to 10.7x for FY20x. Our 50p target price is based on a 20% discount to the adjusted NAV of 63.5p/share including the new valuation of the crown jewel, Elephant & Castle hostel of £26m, an increase of £10m, equivalent to an increase of 15.5p."