The Investment Column: InterContinental a nice place to rest your head

Carluccio's; Alexon
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The Independent Online

Our view: Buy

Share price: 937.5p

InterContinental Hotels Group (IHG) is a hotel giant, running seven hotel chains, including Holiday Inn and Crowne Plaza. Despite being in the thick of any terrorist-induced turmoil, the company has shrugged off the impact from the Middle East conflict and the recent bomb plot in London. Last month it checked in a 30 per cent jump in first-half profits. Its London hotels were in high demand in August from travellers stranded after their flights were cancelled in the heightened security alert.

Andrew Cosslett, the chief executive, tends to be sanguine about long-term impact, arguing that since 9/11 the travel sector has bounced back quicker and quicker from each new threat.

IHG's strategy of selling hotel assets to focus on management contracts and franchising has reaped rewards for investors, who have been handed the £2.75bn proceeds from the sale of 175 properties. This leaves the group owning only its flagship sites in London, Paris, New York and Hong Kong with the rest of its hotels being franchised or managed.

Yesterday brought more good news when the group released August room yield data (revenue per room, or revpar, which is a key performance measure) for its US operations ahead of a hotel owners' conference. All of its brands showed strong growth during the month, with InterContinental's revpar up 7.8 per cent; Crowne Plaza up 11.1 per cent; Holiday Inn up 6.7 per cent and Holiday Inn Express up by 9.4 per cent. The figures will go some way towards reassuring investors who fear the US consumer is running out of steam. America is IHG's most important market and makes up the lion's share of group profits at 70 per cent.

The company has set itself an ambitious target of adding a net 50,000 to 60,000 rooms by the end of 2008. But with 130,000 rooms already in the pipeline, that target looks a formality. Analysts see double-digit earnings growth continuing for some time yet. The shares, which trade at 10.3 times 2007 forecast earnings, do not look overpriced.


Our view: Buy

Shares: 159p

The high-street graveyard is littered with chains that grew too fast and became naff as rapidly as they became hip. Carluccio's, the Italian restaurant and retail chain, is trying to avoid that trap by opening just five new outlets per year. So far, so successful: yesterday's trading statement showed revenues this year had climbed 24 per cent. It expects profit before tax to top expectations.

Antonio Carluccio, the Italian chef who started the chain with his wife, Priscilla, still oversees the menu, despite turning 70 next year. That said, the brand has developed its own strengths and should not necessarily suffer when Mr Carluccio does finally call it a day.

Group sales are split: about 78 per cent of revenues come from its 27 restaurants while the rest comes from its high-end retail food range. Most of the outlets are situated in London and the South-east, and the brand has a long way to go before it reaches saturation point. The shares have already added more than 35 per cent since coming to the market last December, making it one of the more successful Aim floatations of the last year. So long as management continues to deliver as it has done over the past 12 months there is certainly more upside left.

The shares are not cheap - trading on more than 30 times forecast 2006 earnings, falling to 27.3 times 2007 estimates, according to numbers from house broker Altium Securities. Priced to perfection perhaps, but the company has spurned growth for growth's sake and, with no debt on the balance sheet, investors who can see past the entrée should get snacking.


Our view: Sell

Shares: 127.5p

Anyone trying to understand why shares in Alexon have been off investors' shopping lists would soon find outif they've seen some of its recent collections. Its brands, which include Eastex, Bay Trading, Dash and Dolcis, all seem to have been left behind by competitors. The group likes to think that by having a diverse portfolio - its clothes cater for the young, the middle aged and even men - it is shielded from fashion disasters.

Yet in reality, all of its brands are also-runs on the UK high street. Yesterday the group opted to call time on its newest chain, Mandolin, which launched only last year.

Seymour Pierce cut its pre-tax profit forecast by £2.5m to £9.5m ahead of Alexon's trading update next week. In the past this column has advised holding the shares in the hope of a private equity bid. The chances of that look slimmer than this season's pencil skirts. Sell.