The Investment Column: It's check-out time for hotel shares

York shareholders could pay dearly for setbacks - Smoking ban drags on Imperial Tobacco shares
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The Independent Online

Is it time to check out of hotel company shares?

Is it time to check out of hotel company shares?

We ask because we have been broadly in favour of holding them through 2004, as the industry snapped back from the effects of recession, terrorism, war and epidemic. But now, CSFB, which boasts the City's most respected leisure sector analysts, is advising clients to "underweight" the hotels sector.

The share prices of Hilton, InterContinental Hotels, De Vere and Whitbread have been at five-year highs now that the high-spending business traveller is re-emerging and hotels are getting booked up again for corporate conferences. At the same time, the debt-fuelled Western consumer spending splurge continues, with holidays back at the top of the shopping list.

CSFB's caution is based on valuation measures including the ratios of market capitalisation to stated asset values and sales. These are close to all-time highs, relative to the market. Only Millennium & Copthorne, heavily exposed to the Asian market, got a kind word from CSFB yesterday. Asian hotels are seeing more visitors now than their historical average. Elsewhere, occupancy rates are still below average, despite improvements since the trough and the leap in profits this caused in 2004. A consumer slowdown will be a drag from here. Investors could be disappointed if they believe hotels will easily be able to raise prices this year, outside major centres such as London and New York. Hilton is at particular risk of disappointing, CSFB says.

The bull case would be that valuations are justified because of the industry restructuring which is seeing many operators, notably InterContinental and Whitbread, selling their hotel assets to concentrate on running, rather than owning, them. This makes them more fleet of foot, better able to expand, and frees up billions to return to shareholders.

These financial restructurings, though, are not new, and their fruits can be overestimated. Now seems a good time to follow CSFB and take profits.

York shareholders could pay dearly for setbacks

The City never forgets, but it might forgive. Terry Sadler, the medicines entrepreneur whose last venture, Bioglan, went bust in 2002, is back with another company specialising in skin treatments. York Pharma floated at 25p with "friends and family" shareholders last April, having bought a fungal cream it hopes to get approved in Europe next year. By last month, fund managers were willing to back a £2.5m fundraising at 80p, to push the product through regulators.

York could do with a little less hype if Mr Sadler is to triumph. Its broker reckoned the cream will end up selling £150m a year for hard-to-treat infections. This guess might turn out true, but there is so much to prove that to use it to argue the share price should be 1,600p (which it did) is voodoo economics.

Yesterday, York paid £5m with its inflated shares (up 10p to 110p) for Molecular SkinCare, a private company with treatments for psoriasis and to repair the skin barrier, damage to which might cause eczema. Both products are yet to prove themselves in the clinic.

York has £5m in the kitty to fund these projects for a year or so, but shareholders will pay a heavy price for setbacks. Avoid.

Smoking ban drags on Imperial Tobacco shares

While the millions who smoke Regal, Embassy or John Player cigarettes may not reap much in the way of health benefits from their manufacturer, Imperial Tobacco, shareholders in the company were yesterday told they are to be rewarded for their investment.

Having hooked customers means tobacco companies rake in cash. In Imperial's case, this is six times as much as it needs to cover its interest bill, so it plans to buy back £450m of its own shares. Only £200m will be spent this year, though - a hint that an acquisition may still on the cards. This is likely to be a smaller takeover, perhaps a cigarette paper business, or a loose tobacco company, rather than a seriously earnings-boosting deal. Shame. One of the few ways for a cigarette company to keep growing is through buying another one, but with tobacco stocks looking quite expensive, acquisition bargains have been scarce.

Since Imperial will cancel the shares it buys back, it will push up earnings per share by more than 2 per cent, and this will certainly prop up the share price. But it won't be enough to propel it to new highs.

Smoking bans are gathering momentum in Europe, and although the ban in the UK (only in pubs with food) is less severe than had been anticipated, it is yet another blow. Further tax rises in Germany, Imperial's second market after the UK, will also hit volumes, and risky price increases will be the only way it can sustain profitability.

Without an acquisition or a breakthrough in emerging markets such as Eastern Europe or China, the company could be running out of air. Given its dividend is less than 4 per cent, the shares should be avoided.

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