Macdonald has room for growth

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The Independent Online
Reservations about the lacklustre regional hotel sector have tainted sentiment surrounding Macdonald Hotels, the Scottish-based group which floated at 145p in March last year. The group's shares hit a 231p high in February before falling to 167p, prompted in part by the house broker Cazenove downgrading full-year forecasts.

But the first full-year results yesterday helped restore some faith in the group. Operating profit for the year to March grew 26 per cent to pounds 10m, on turnover ahead 26 per cent to pounds 41m. Macdonald's shares closed 9p higher to 176.5p.

The group's strength is its ability to spot hotels with development potential. It looks for three or four-star hotels with plenty of undeveloped land, buys them cheap and adds rooms. With costly facilities like restaurants, car parks and lobbies already in place, the group can make a staggering 20 per cent return on capital on extensions, compared with around 12 per cent for a new hotel.

The group says that even without acquisitions, the development potential of its existing hotels would allow it to increase its bedroom capacity by over 50 per cent. Macdonald has also proven it is a keen bargain hunter, buying new hotels at around pounds 33,000 per room, roughly half the going rate.

The group bought five in the year, raising its room stock to 1,420, and with pounds 13.2m of development and refurbishment, it spent almost pounds 20m in the year. Despite that, the balance sheet looks healthy. Over half the group's capital spending costs were financed by pounds 11m of operating cash flow and although gearing is 37 per cent, interest is covered 9.5 times by operating profit.

The group has also protected itself against a hike in interest rates over the next five years by capping pounds 25m of borrowings at 9 per cent interest.

Paul Heath at UBS has increased his profit forecast from pounds 9.2m to pounds 10.5m. On a forward p/e ratio of 13, the shares stand at an 8 per cent discount to the hotels sector. They deserve better. Good value.