Gamble of the week: bargain of a hotel play

published 29 October 2010

I regularly play tennis against two friends who work in the hotel industry, and their mood has become ever-more sanguine over the past 18 months. Occupancy levels and room rates have perked up. And this improving trend, which began in London, is gradually filtering its way down through the country especially in the tourist hot spots of Bath, Bristol, Oxford and Cambridge.

What's surprising, though, is that this trend has not yet been reflected in the shares of Peel Hotels, which have underperformed operators such as Intercontinental Group by 50% and the wider travel and leisure sector by 35% this year.

This looks unfair and here's why. Firstly, demand is picking up at Peel's nine four-star freehold hotels. In total, these offer 732 rooms, sited in provincial towns such as Carlisle, Leeds and Nottingham. For the 28 weeks to 22 August, turnover increased by 15% to £8.3m, driven by a slow recovery in corporate bookings, a rise in people remaining in Britain for their holidays, and the acquisition of the Norfolk Royale in Bournemouth for £8.25m. On a like-for-like basis, sales increased by 4.4% with revenue per available room (REVPR) up by 6%, occupancy by 11.4%, and average room rates down by 4.8%.

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To me, the lower prices are not too worrying because on the whole they reflect a successful marketing campaign in February, which attracted more British holidaymakers who chose to stay at home. Better still, the pound's relative cheapness compared to the majority of the world's currencies augurs well for an uptick in overseas traffic too.

Next, although net debt stands at a hefty £14.2m, the balance sheet remains strong, with tangible net assets of £23.7m (worth 169p per share), equivalent to a comfortable gearing level of 60%. This could also fall shortly, since the company is in the process of selling properties in Wallingford and Newcastle.

Finally, assuming REVPR continues to harden, founder and chairman Robert Peel who owns a 39% stake and is a veteran of the industry believes the board may recommend paying a "modest dividend" later this year. All told, Peel looks like a solid asset play and, as such, I would value the stock at around 135p a share, or 80% of tangible net assets.

Sure, there is a danger of another slump in Britain, given the government's belt-tightening. Yet this, along with tough regional competition, is more than discounted in the beaten-up rating.

Do note, however, that liquidity in this stock can occasionally be poor. So if you wish to buy, I would advise being patient to avoid pushing up the price.

Recommendation: SPECULATIVE BUY at 80p (market cap £11.2m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.