The Investment Column: Hilton is not worth risk as it quits hotels

Barratt's good for long term; Investec still has growth prospects
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The Independent Online

For the past few years, it has been a bad time to be a hotelier and a great time to be a bookie. Now that looks to have been reversed. Which is unfortunate for Hilton, since it is about to stop being the former to concentrate on the latter.

Hilton has the non-US rights to the iconic hotels brand and also owns Ladbrokes, which has raked in cash since Britons caught the gambling bug and new fixed-odds terminals became popular in its stores.

In May, Hilton's hotels reported solid results and Ladbrokes took a bath when a string of favourites came in, and the story was the same again yesterday. Punters - particularly high-rollers staking more than £10,000 over the phone - took it to the cleaners again in the four months to the end of September.

This is not good news at all for Hilton shareholders. Talks over a sale of its improving hotels, which trade under the Hilton, Scandic and Conrad brands, to America's Hilton Hotels Corporation are slated to be completed by the end of December. Should David Michels, the chief executive of the British company, pull off such a deal, Hilton investors would be left with a stand-alone Ladbrokes.

Putting the freak success of punters aside, a more plausible explanation for profit shortfalls may lie with burgeoning online betting exchanges. The likes of Betfair and others have squeezed margins very hard indeed for the traditional bookies in the past few years. Don't expect that to let up. It now takes only a few big winners before Ladbrokes, William Hill and Paddy Power take the red pen to forecasts. The long-term story looks poor.

As for the short term, the shares could receive a fillip when Hilton tells us how it will return proceeds from the hotels sale. The worry, though, is that the mooted price tag of £3.6bn might not be achieved because of pensions and tax issues.

It is difficult, even if a full price is achieved, to see the remaining Ladbrokes - as measured on the sort of earnings multiple Gala paid for rival Coral - pushing Hilton shares much higher than they are now. Avoid.

Barratt's good for long term

There was a boardroom reshuffle at Barratt Developments yesterday. Why?

Shareholders were told that three divisional heads had been promoted to "more strategic executive roles". Coming a week after Persimmon, Barratt's rival in the housebuilding industry, said it was planning to buy Westbury, industry experts think that Barratt might be clearing executive desks for an acquisition or acquisitions of its own. After all, this is an industry blighted by planning delays and volatile land prices, where the purchase of a rival with a strong bank of suitable land could be a lucrative short-cut to growth.

Of course, David Pretty, Barratt's chief executive, is no size queen, and there will be deals only if he is sure he can sweat another company's assets better than their existing owners. Similarly, there is no point stepping up the building rate now, when house price inflation is close to zero and the consumer is difficult to predict. The annual shareholder meeting yesterday was told Barratt has so far pre-sold 60 per cent of the homes it is forecast to sell in the current financial year - good, but not the 70 per cent it can usually boast at this stage.

With a re-rating of the housebuilders finally under way, Barratt is the sort of high quality, geographically diverse, business to buy for the long term.

Investec still has growth prospects

Investec is one of several South African companies to have listed on London's stock exchange in the past decade as part of their strategy of expanding aggressively overseas.

The company is a financial services giant at home, where it is a stockbroker, banker and asset manager for private clients, while in the UK it is best known as an investment bank.

It is boom time for the investment banking arm at the moment, thanks to mergers and acquisitions activity and its own growing client list, and profits were up 124 per cent in the six months to 30 September. With some 29 per cent growth in the private client businesses and 57 per cent in asset management, the overall pre-tax, pre-exceptionals profit figure for the group was £182m, more than three times last year.

The outlook? Just as good, with the emerging South African economy roaring away, no sign of a peak in the investment banking market, and plenty of acquisition opportunities for a company with a growing reputation in the City. The shares have a dividend yield of 3.3 per cent and are still a buy.

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