Six Continents a long-haul bet

Courts; Alba
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The Independent Online

The market liked yesterday's results from Six Continents, the hotels group which changed its name from Bass in July, though in truth they were a mixed bag.

Full-year profits of £742m, before exceptionals, were ahead of most expectations. But it was ironic that the two divisions which got the group out of the drink were Britvic, which it was trying to sell earlier this year, and pubs, which the City has regarded as non-core.

The hotels division, which includes Inter-Continental and Holiday Inn, has had a terrible time due to the terrorist attacks of 11 September. This is most acute in the group's upscale hotels where revenue per available room is down by 30 to 40 per cent.

The question for investors is how much of this bad news is already priced into the shares. In fact the shares have been discounting the gloom since September when they hit a low of 548p. They have surged since then as the market has looked through the downturn towards the recovery.

But Tim Clarke, the chief executive of Six Continents, says it could take another six months for long-haul travellers to return. And when questioned on acquisition plans, Sir Ian Prosser, its chairman, says that hotels groups' asset prices do not yet reflect the downturn. If that is the case then Six Continents' assets are likely to feel the pain over that period too.

It is true that Six Continents has the firepower for deals that would position it well for the upturn. It also has the brands and scale to fare better than most. But while the US market is improving, the picture is cloudy elsewhere. The management is coping with the slump by reducing costs and using the quieter trading spell to spend about £600m on hotel refurbishment this year.

That could take until 2003 in upmarket hotels. Assuming profits of about £620m this year, the shares – up another 31p to 734.5p yesterday – trade on a forward price-earnings ratio of 15. That looks up with events.


Investors taking a first look at Courts might be surprised to find the furniture stores group is not exclusively, or even mainly, a UK chain. Only 40 per cent of sales are from these shores, and none of the operating profits. Shareholders must be ready to take on the risks of investing in the retail trade in economies as far flung as Barbados, Malaysia and Mauritius.

And those risks are increasing. Interim results yesterday missed City forecasts, Courts said, because "overseas markets experienced a difficult first half as the worldwide recession deepened". Sales fell £15m to £309.5m, and the group slumped to a £1.4m pre-tax loss. Its overseas businesses tend to be tourist economies, where the locals are only likely to feel poorer as the slump in travel bites. Only partly mitigating the declines in these economically sensitive regions, Fiji is showing a strong recovery following last year's attempted coup d'état.

There is no relief in the UK, at least not yet. Courts has achieved the planned £10m of cost savings by getting rid of 15 per cent of its staff, but could only say that like-for-like sales were "slightly ahead" of a year ago. The group is racing on with store revamps and the introduction of a new computer system by Christmas.

The festive period is crucial all round. If there is a sustained consumer downturn in the UK, or even a slowdown in the housing market, Courts is going to have to run much faster just to stay still. And it is too early to tell whether a recent uplift in bookings in South East Asia will be maintained. ING Charterhouse's lowered forecasts, of £30m profit this year and £36m next, could still be threatened as customers draw in their horns and refuse to take on credit purchases.

Down 8p to 217.5p, the shares trade on a prospective p/e of more than 20 times, which is far too racy. Sell.


"Prudent", was Alba's word for yesterday's £17.85m write-off of its Bush Internet business. It sounded like a good idea at the time: a TV which buyers connect to the mains, aerial and telephone socket and which comes with built-in internet portal. But it hasn't sold and production is ceasing, resulting in a massive loss. In all, two years' profit has been squandered.

Hey, ho. Alba is not alone in having made internet mistakes and the investors who bought in when the shares hit their high of £12 must have long since written off their investment, too. What matters now is that the ongoing business stays robust. Results for the six months to 30 September, unveiled yesterday, prove it is.

It's business making tellies, videos, hairdryers and electric blankets can grow at close to 10 per cent a year, and the group's balance sheet is not so shot that it can't take on an acquisition or two next year. At 412.5p, Peel Hunt calculates the underlying business is valued at 9 times 2003 earnings. That's good value.